UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934

For the quarterly period ended~~March 30,~~September 28, 2007

Commission File Number:001-9249

	GRACO INC.
	(Exact name of registrant as specified in its charter)

Minnesota		41-0285640

(State of incorporation)		(I.R.S. Employer Identification Number)

88 - 11th Avenue N.E.
Minneapolis, Minnesota		55413

(Address of principal executive offices)		(Zip Code)

(612) 623-6000

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

Yes

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large Accelerated Filer X Accelerated Filer Non-accelerated Filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

~~66,520,000~~62,893,000 shares of the Registrant’s Common Stock, $1.00 par value were outstanding as of ~~April~~October 18, 2007.

GRACO INC. AND SUBSIDIARIES

INDEX

			Page Number
PART I	FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Consolidated Statements of Earnings	3
		Consolidated Balance Sheets	4
		Consolidated Statements of Cash Flows	5
		Notes to Consolidated Financial Statements	~~6-12~~6-13


	Item 2.	Management's Discussion and Analysis
		of Financial Condition and
		Results of Operations	~~13-15~~14-17

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	1618

	Item 4.	Controls and Procedures	1618


PART II	OTHER INFORMATION

	Item 1A.	Risk Factors	1719

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	1719

	Item 4.	Submission of Matters to a Vote of Security Holders	1720

	Item 6.	Exhibits	1820



SIGNATURES


EXHIBITS

	PART I
Item 1.
	GRACO INC. AND SUBSIDIARIES
~~Item 1.~~	CONSOLIDATED STATEMENTS OF EARNINGS
	(Unaudited)
	(In thousands, except per share amounts)

	Thirteen Weeks Ended					Thirteen Weeks Ended				Thirty-nine Weeks Ended
	March 30, 2007			March 31, 2006		Sep 28, 2007		Sep 29, 2006		Sep 28, 2007		Sep 29, 2006

Net Sales	$	197,495		$	192,216	$	207,270	$	202,199	$	636,149	$	613,047

Cost of products sold		92,633			88,989		96,624		95,588		298,409		286,263

Gross Profit		104,862			103,227		110,646		106,611		337,740		326,784

Product development		8,272			7,212		7,087		7,487		22,903		22,237

Selling, marketing and distribution		29,263			27,942		30,382		29,081		91,562		87,547

General and administrative		15,240			13,421		14,641		15,039		44,938		43,516

Operating Earnings		52,087			54,652		58,536		55,004		178,337		173,484

Interest expense		258			125		1,034		342		1,934		656
Other expense, net							39		170		25		179

Other expense (income), net		(106	)		5
Earnings Before Income Taxes							57,463		54,492		176,378		172,649

Earnings before Income Taxes		51,935			54,522
Income Taxes							18,200		17,100		59,200		58,500

Income taxes		18,200			19,100

Net Earnings	$	33,735		$	35,422	$	39,263	$	37,392	$	117,178	$	114,149

Basic Net Earnings per Common Share	$	.51		$	.52
Basic Net Earnings
per Common Share						$	0.61	$	0.55	$	1.78	$	1.68

Diluted Net Earnings per Common Share	$	.50		$	.51
Diluted Net Earnings
per Common Share						$	0.60	$	0.54	$	1.75	$	1.65

Cash Dividends Declared per Common Share	$	.17		$	.15
Cash Dividends Declared
per Common Share						$	0.17	$	0.15	$	0.50	$	0.44

See notes to consolidated financial statements.

	GRACO INC. AND SUBSIDIARIES
	CONSOLIDATED BALANCE SHEETS
	(Unaudited)
	(In thousands)

	March 30, 2007			Dec. 29, 2006					Sep 28, 2007			Dec. 29, 2006
ASSETS

Current Assets
Cash and cash equivalents	$	4,767		$	5,871				$	9,771		$	5,871
Accounts receivable, less allowances of
$6,100 and $5,800		142,137			134,105
$6,800 and $5,800										145,021			134,105
Inventories		87,366			76,311					77,592			76,311
Deferred income taxes		22,772			20,682					20,708			20,682
Other current assets		2,144			2,014					3,267			2,014
Total current assets		259,186			238,983					256,359			238,983

Property, Plant and Equipment
Cost		289,719			278,318					300,362			278,318
Accumulated depreciation		(156,579	)		(153,794	)				(162,937	)		(153,794	)
Property, plant and equipment, net		133,140			124,524
Total property, plant and equipment, net										137,425			124,524

Prepaid Pension		27,703			26,903					29,261			26,903
Goodwill		67,173			67,174					67,230			67,174
Other Intangible Assets, net		48,195			50,325					44,103			50,325
Other Assets		3,420			3,694					6,382			3,694
Total Assets	$	538,817		$	511,603				$	540,760		$	511,603

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
Notes payable to banks	$	33,361		$	18,363				$	17,324		$	18,363
Trade accounts payable		28,761			27,442					31,706			27,442
Salaries, wages and commissions		13,850			26,303					19,071			26,303
Dividends payable		11,006			11,055					10,503			11,055
Other current liabilities		53,994			45,766					41,794			45,766
Total current liabilities		140,972			128,929					120,398			128,929

Long-term Debt										85,680			–
Retirement Benefits and Deferred Compensation		37,011			36,946					38,009			36,946
Uncertain Tax Positions		5,800			—					5,200			–
Deferred Income Taxes		13,317			14,724					11,626			14,724

Shareholders' Equity
Common stock		66,536			66,805					63,485			66,805
Additional paid-in capital		140,676			130,621
Additional paid-in-capital										155,406			130,621
Retained earnings		139,645			138,702					65,813			138,702
Accumulated other comprehensive income (loss)				(4,857	)		(5,124	)
Cumulative translation adjustment		(67	)		(60	)
Pension liability adjustment		(5,073	)		(5,064	)
Total shareholders' equity		341,717			331,004					279,847			331,004
Total Liabilities and Shareholders' Equity	$	538,817		$	511,603				$	540,760		$	511,603

See notes to consolidated financial statements.

	~~GRACO INC. AND SUBSIDIARIES~~
	CONSOLIDATED STATEMENTS OF CASH FLOWS
	(Unaudited)
	~~(In~~ (In thousands)

	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	March 30, 2007			March 31, 2006			Sep 28, 2007			Sep 29, 2006
Cash Flows from Operating Activities

Net Earnings	$	33,735		$	35,422		$	117,178		$	114,149
Adjustments to reconcile net earnings to net cash
provided by operating activities
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization		6,959			5,781			20,770			19,031
Deferred income taxes		(3,478	)		(1,706	)		(3,059	)		(5,975	)
Share-based compensation		2,218			2,164			6,297			6,508
Excess tax benefit related to share-based
payment arrangements		(848	)		(2,000	)		(4,154	)		(2,500	)
Change in:
Accounts receivable		(7,631	)		(6,471	)		(7,383	)		(3,965	)
Inventories		(10,985	)		(7,934	)		(907	)		(14,487	)
Trade accounts payable		1,711			4,906			(1,477	)		2,383
Salaries, wages and commissions		(12,469	)		(9,825	)		(7,697	)		(1,484	)
Retirement benefits and deferred compensation		(989	)		19			(1,848	)		299
Other accrued liabilities		9,281			11,883			6,150			2,328
Uncertain tax positions		5,800			—
Other		(165	)		50			(1,589	)		702
Net cash provided by operating activities		23,139			32,289			122,281			116,989

Cash Flows from Investing Activities

Property, plant and equipment additions		(13,267	)		(4,371	)		(28,207	)		(22,117	)
Proceeds from sale of property, plant and equipment		149			19			207			101
Investment in life insurance								(1,499	)		–
Capitalized software and other intangible asset additions								(43	)		(200	)
Acquisition of business, net of cash acquired								–			(31,067	)
Net cash used in investing activities		(13,118	)		(4,352	)		(29,542	)		(53,283	)

Cash Flows from Financing Activities

Borrowings on notes payable and lines of credit		29,415			4,333			100,210			42,834
Payments on notes payable and lines of credit		(14,476	)		(8,310	)		(101,914	)		(29,320	)
Excess tax benefit related to share-based payment
arrangements		848			2,000
Borrowings on long-term line of credit								85,680			–
Excess tax benefit related to share-based
payment arrangements								4,154			2,500
Common stock issued		8,355			10,200			22,545			11,540
Common stock retired		(23,985	)		(17,404	)		(164,910	)		(69,754	)
Cash dividends paid		(11,010	)		(9,922	)		(32,800	)		(29,679	)
Net cash provided by (used in) financing activities		(10,853	)		(19,103	)		(87,035	)		(71,879	)
Effect of exchange rate changes on cash		(272	)		(315	)		(1,804	)		(1,299	)
Net increase (decrease) in cash and cash equivalents		(1,104	)		8,519			3,900			(9,472	)

Cash and cash equivalents
Beginning of year		5,871			18,664			5,871			18,664
End of period	$	4,767		$	27,183		$	9,771		$	9,192

See notes to consolidated financial statements.

GRACO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The consolidated balance sheet of Graco Inc. and Subsidiaries (the Company) as of ~~March 30,~~September 28, 2007 and the related statements of earnings for the thirteen and thirty-nine weeks ended September 28, 2007 and September 29, 2006, and cash flows for the ~~thirteen~~thirty-nine weeks ~~then~~ ended September 28, 2007 and September 29, 2006 have been prepared by the Company and have not been audited.

In the opinion of management, these consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of Graco Inc. and Subsidiaries as of ~~March 30,~~September 28, 2007, and the results of operations and cash flows for all periods presented.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Therefore, these statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2006 Annual Report on Form 10-K.

The results of operations for interim periods are not necessarily indicative of results that will be realized for the full fiscal year.

2.	The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

Thirteen Weeks Ended
March 30, 2007 March 31, 2006

Net earnings available to common shareholders $ 33,735 $ 35,422

Weighted average shares outstanding for basic
earnings per share 66,667 68,428

Dilutive effect of stock options computed using the
treasury stock method and the average market
price 1,048 1,121

Weighted average shares outstanding for diluted
earnings per share 67,715 69,549

Basic earnings per share $ .51 $ .52

Diluted earnings per share $ .50 $ .51

	Thirteen Weeks Ended				Thirty-nine Weeks Ended
	Sep 28, 2007		Sep 29, 2006		Sep 28, 2007		Sep 29, 2006

Net earnings available to common shareholders	$	39,263	$	37,392	$	117,178	$	114,149

Weighted average shares outstanding for basic
earnings per share		64,797		67,576		65,836		68,042

Dilutive effect of stock options computed using the
treasury stock method and
the average market price		921		1,135		998		1,151

Weighted average shares outstanding for diluted
earnings per share		65,718		68,711		66,834		69,193

Basic earnings per share	$	0.61	$	0.55	$	1.78	$	1.68

Diluted earnings per share	$	0.60	$	0.54	$	1.75	$	1.65

Stock options to purchase ~~948,000~~1,043,000 and ~~1,000~~1,030,000 shares ~~are~~were outstanding as of September 28, 2007 and September 29, 2006, respectively, but were not included in the ~~2007 and 2006 calculations~~computations of diluted earnings per share ~~respectively,~~ because ~~they~~the effect of including them would have been anti-dilutive.

3.	Information on option shares outstanding and option activity for the ~~thirteen~~thirty-nine weeks ended ~~March 30,~~September 28, 2007 is shown below (in thousands, except per share amounts):

Option
Shares Weighted
Average
Exercise
Price Options
Exercisable Weighted
Average
Exercise
Price

Outstanding, December 29, 2006 3,956 $ 24.79 2,272 $ 16.94
     Granted 539 41.36
     Exercised (114 ) 11.44
     Canceled (19 ) 35.57
Outstanding, March 30, 2007
4,362 $ 27.14 2,620 $ 19.91

	Option Shares			Weighted Average Exercise Price		Options Exercisable		Weighted Average Exercise Price

Outstanding, December 29, 2006		3,956		$	24.79		2,272	$	16.94
Granted		648			41.23
Exercised		(779	)		19.63
Canceled		(371	)		39.01
Outstanding, September 28, 2007		3,454		$	27.51		2,278	$	21.44

The aggregate intrinsic value of exercisable option shares was ~~$50.7~~$40.5 million as of ~~March 30,~~September 28, 2007, with a weighted average contractual term of ~~5.2~~4.8 years. There were approximately ~~4.3~~3.4 million vested share options and share options expected to vest as of ~~March 30,~~September 28, 2007, with an aggregate intrinsic value of ~~$54.9~~$42.1 million, a weighted average exercise price of ~~$26.81~~$27.23 and a weighted average contractual term of ~~6.5~~6.0 years.

Information related to options exercised in the first ~~three~~nine months of 2007 and 2006 follows (in thousands):

Thirteen Weeks Ended
March 30, 2007 March 31, 2006
Cash received $1,305 $3,409
Aggregate intrinsic value 3,407 6,359
Tax benefit realized 1,200 2,300

	Thirty-nine Weeks Ended
	Sep 28, 2007	Sep 29, 2006
Cash received	$15,290	$4,516
Aggregate intrinsic value	16,625	8,204
Tax benefit realized	6,200	3,000

The Company recognized year-to-date share-based compensation of ~~$2.2~~$6.3 million in ~~both the first quarter of~~ 2007 and ~~the first quarter of~~$6.5 million in 2006. As of ~~March 30,~~September 28, 2007, there was ~~$13.2~~$10.6 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of ~~2.4~~2.2 years.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions and results:

Thirteen Weeks Ended
March 30, 2007    March 31, 2006
Expected life in years 6.0    6.3
Interest rate 4.6% 4.6%
Volatility 26.2% 27.8%
Dividend yield 1.6% 1.4%
Weighted average fair value per share $12.05    $12.81

	Thirty-nine Weeks Ended
	Sep 28, 2007	Sep 29, 2006
Expected life in years	6.0	6.3
Interest rate	4.7%	4.6%
Volatility	26.1%	27.8%
Dividend yield	1.6%	1.4%
Weighted average fair value per share	$12.01	$12.97

Under the Company’s Employee Stock Purchase Plan, the Company issued 202,000 shares in 2007 and 204,000 shares in 2006. The fair value of the employees’ purchase rights under this Plan was estimated on the date of grant. The benefit of the 15 percent discount from the lesser of the fair market value per common share on the first day and the last day of the plan year was added to the fair value of the employees’ purchase rights determined using the Black-Scholes option-pricing model with the following assumptions and results:

Thirteen Weeks Ended
March 30, 2007    March 31, 2006
Expected life in years 1.0    1.0
Interest rate 4.9% 4.6%
Volatility 24.4% 24.0%
Dividend yield 1.6% 1.4%
Weighted average fair value per share $9.79    $10.18

	Thirty-nine Weeks Ended
	Sep 28, 2007	Sep 29, 2006
Expected life in years	1.0	1.0
Interest rate	4.9%	4.6%
Volatility	24.4%	24.0%
Dividend yield	1.6%	1.4%
Weighted average fair value per share	$9.79	$10.18

4.	The components of net periodic benefit cost for retirement benefit plans were as follows (in thousands):

Thirteen Weeks Ended
March 30, 2007 March 31, 2006
Pension Benefits
Service cost $ 1,479 $ 1,440
Interest cost 2,882 2,608
Expected return on assets (4,800 ) (4,175 )
Amortization and other 255 192
Net periodic benefit cost (credit)
$
(184 )
$
65

Postretirement Medical
Service cost $ 150 $ 250
Interest cost 300 420
Amortization and other (50 ) 186
Net periodic benefit cost
$
400
$
856

	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	Sep 28, 2007			Sep 29, 2006			Sep 28, 2007			Sep 29, 2006

Pension Benefits
Service cost	$	1,231		$	998		$	4,211		$	4,072
Interest cost		2,855			2,597			8,622			7,815
Expected return on assets		(4,496	)		(3,923	)		(14,096	)		(12,273	)
Amortization and other		204			524			749			815
Net periodic benefit cost (credit)	$	(206	)	$	196		$	(514	)	$	429

Postretirement Medical
Service cost	$	75		$	195		$	375		$	695
Interest cost		360			351			975			1,191
Amortization		(518	)		151			55			416
Net periodic benefit cost (credit)	$	(83	)	$	697		$	1,405		$	2,302

In June 2007, the Company paid $1.5 million for contracts insuring the lives of certain employees who are eligible to participate in certain non-qualified pension and deferred compensation plans. These insurance contracts will be used to fund the non-qualified pension and deferred compensation arrangements. The insurance contracts are held in a trust and are available to general creditors in the event of the Company’s insolvency. Cash surrender value of $1.4 million is included in other assets in the consolidated balance sheet as of September 28, 2007.

5.	Total comprehensive income was as follows (in thousands):

Thirteen Weeks Ended
March 30, 2007 March 31, 2006

Net income $ 33,735 $ 35,422
Foreign currency translation adjustments (7 ) 515
Pension liability adjustment, net of tax (9 ) (19 )
Comprehensive income
$
33,719
$
35,918

	Thirteen Weeks Ended					Thirty-nine Weeks Ended
	Sep 28, 2007			Sep 29, 2006		Sep 28, 2007			Sep 29, 2006

Net income	$	39,263		$	37,392	$	117,178		$	114,149
Foreign currency translation adjustments		88			30		202			1,770
Pension liability adjustment, net of tax		40			3		121			(53	)
Hedge gain (loss), net of tax		(56	)		–		(56	)		–
Comprehensive income	$	39,335		$	37,425	$	117,445		$	115,866

Components of accumulated other comprehensive income (loss) were (in thousands):

	Sep 28, 2007	Dec 29, 2006

Cumulative translation adjustment	$ 142	$ (60)
Pension liability adjustment	(4,943)	(5,064)
Hedge gain (loss)	(56)	–
Accumulated other comprehensive income (loss)	$ (4,857)	$ (5,124)

The Company has three reportable segments: Industrial, Contractor and Lubrication. The Company does not track assets by segment. Sales and operating earnings by segment for the thirteen and thirty-nine weeks ended ~~March 30,~~September 28, 2007 and ~~March 31,~~September 29, 2006 were as follows (in thousands):

Thirteen Weeks Ended
March 30, 2007 March 31, 2006
Net Sales
Industrial $ 105,065 $ 100,160
Contractor 69,751 74,352
Lubrication 22,679 17,704
Consolidated
$
197,495
$
192,216
Operating Earnings
Industrial $ 34,418 $ 32,083
Contractor 17,027 21,042
Lubrication 3,064 4,755
Unallocated corporate (2,422 ) (3,228 )
Consolidated
$
52,087
$
54,652

	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	Sep 28, 2007			Sep 29, 2006			Sep 28, 2007			Sep 29, 2006

Net Sales
Industrial	$	107,791		$	101,149		$	327,137		$	305,864
Contractor		76,649			78,659			240,631			249,518
Lubrication		22,830			22,391			68,381			57,665
Consolidated	$	207,270		$	202,199		$	636,149		$	613,047

Operating Earnings
Industrial	$	37,597		$	31,233		$	111,570		$	95,795
Contractor		21,016			21,199			66,662			71,762
Lubrication		2,584			4,747			7,844			13,968
Unallocated corporate		(2,661	)		(2,175	)		(7,739	)		(8,041	)
Consolidated	$	58,536		$	55,004		$	178,337		$	173,484

7.	Major components of inventories were as follows (in thousands):

March 30, 2007 Dec. 29, 2006

Finished products and components $ 51,909 $ 44,969
Products and components in various stages
of completion 29,795 26,841
Raw materials and purchased components 36,188 35,258

117,892

107,068
Reduction to LIFO cost (30,526 ) (30,757 )
Total
$
87,366
$
76,311

	Sep 28, 2007			Dec 29, 2006

Finished products and components	$	53,075		$	44,969
Products and components in various
stages of completion		25,361			26,841
Raw materials and purchased components		30,036			35,258
		108,472			107,068
Reduction to LIFO cost		(30,880	)		(30,757	)
Total	$	77,592		$	76,311

8.	Information related to other intangible assets follows (dollars in thousands):

Estimated
Life (Years) Original
Cost Amorti-
zation Foreign
Currency
Translation Book
Value
March 30, 2007
Customer relationships and
    distribution network 4 - 8 $ 26,102 $ (8,272 ) $ 4 $ 17,834
Patents, proprietary technology
  and product documentation 5 - 15 22,243 (5,261 ) 4 16,986
Trademarks and trade names 3 - 10 4,684 (1,582 ) 13 3,115

53,029

(15,115 )

21

37,935
Not Subject to Amortization:
Brand names 10,260 — — 10,260
Total
$
63,289
$
(15,115 )
$
21
$
48,195
December 29, 2006
Customer relationships and
  distribution network 4 - 8 $ 26,102 $ (7,335 ) $ 6 $ 18,773
Patents, proprietary technology
  and product documentation 5 - 15 22,243 (4,443 ) 5 17,805
Trademarks, trade names and
  other 3 - 10 5,114 (1,641 ) 14 3,487

53,459

(13,419 )

25

40,065
Not Subject to Amortization:
Brand names 10,260 — — 10,260
Total
$
63,719
$
(13,419 )
$
25
$
50,325

	Estimated Life (Years)	Original Cost		Accumulated Amortization			Foreign Currency Translation		Book Value
September 28, 2007
Customer relationships and
distribution network	4 - 8	$	26,102	$	(10,156	)	$	50	$	15,996
Patents, proprietary technology
and product documentation	5 - 15		22,243		(6,902	)		25		15,366
Trademarks, trade names
and other	3 - 10		4,684		(2,233	)		30		2,481
			53,029		(19,291	)		105		33,843
Not Subject to Amortization:
Brand names			10,260		–			–		10,260
Total		$	63,289	$	(19,291	)	$	105	$	44,103

December 29, 2006
Customer relationships and
distribution network	4 - 8	$	26,102	$	(7,335	)	$	6	$	18,773
Patents, proprietary technology
and product documentation	5 - 15		22,243		(4,443	)		5		17,805
Trademarks, trade names and
other	3 - 10		5,114		(1,641	)		14		3,487
			53,459		(13,419	)		25		40,065
Not Subject to Amortization:
Brand names			10,260		–			–		10,260
Total		$	63,719	$	(13,419	)	$	25	$	50,325

Amortization of intangibles was $2.1 million in the ~~first~~third quarter of ~~2007.~~2007 and $6.3 million year-to-date. Estimated annual amortization expense is as follows: $8.2 million in 2007, $7.8 million in 2008, $6.9 million in 2009, $5.8 million in 2010, $4.9 million in 2011 and $6.4 million thereafter.

9.	Components of other current liabilities were (in thousands):

March 30, 2007 Dec. 29, 2006

Accrued insurance liabilities $ 7,959 $ 7,833
Accrued warranty and service liabilities 6,380 6,675
Accrued trade promotions 5,113 7,265
Payable for employee stock purchases 1,069 5,846
Income taxes payable 16,971 3,920
Other 16,502 14,227

$53,994
$45,766

	Sep 28, 2007	Dec. 29, 2006

Accrued insurance liabilities	$ 8,048	$ 7,833
Accrued warranty and service liabilities	6,666	6,675
Accrued trade promotions	5,071	7,265
Payable for employee stock purchases	4,364	5,846
Income taxes payable	474	3,920
Other	17,171	14,227
Total	$41,794	$45,766

A liability is established for estimated future warranty and service claims that relate to current and prior period sales. The Company estimates warranty costs based on historical claim experience and other factors including evaluating specific product warranty issues. Following is a summary of activity in accrued warranty and service liabilities (in thousands):

Thirteen Weeks
Ended
March 30, 2007 Year Ended
Dec. 29, 2006

Balance, beginning of year $ 6,675 $ 7,649
Charged to expense 991 4,442
Margin on parts sales reversed 758 1,944
Reductions for claims settled (2,044 ) (7,360 )
Balance, end of period
$
6,380
$
6,675

	Thirty-nine Weeks Ended Sep 28, 2007			Year Ended Dec. 29, 2006

Balance, beginning of year	$	6,675		$	7,649
Charged to expense		4,072			4,442
Margin on parts sales reversed		2,300			1,944
Reductions for claims settled		(6,381	)		(7,360	)
Balance, end of period	$	6,666		$	6,675

10.	Effective at the beginning of 2007, the Company adopted the provisions of FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” The adoption of FIN 48 resulted in no adjustment to beginning retained earnings.

At the beginning of 2007, the Company’s liability for uncertain tax positions was $5.5 million. Unrecognized tax benefits of $4.9 million would affect the ~~Company's~~Company’s effective tax rate if recognized. The Company records penalties and accrued interest related to uncertain tax positions in income tax expense. At the beginning of 2007, approximately $0.6 million was included in the liability for uncertain tax positions for the possible payment of interest and penalties. There were no significant changes in components of the liability in the first ~~quarter~~nine months of 2007.

With few exceptions, the Company is no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years prior to 2001. The Company’s U.S. income tax returns for 2004 and 2005 are currently under examination by the IRS. An estimate of the range of possible changes that may result from the examination cannot be made at this time.

Approximately $1 million of unrecognized tax benefits relate to items that are affected by expiring ~~statute~~statutes of limitations within the next 12 months.

11.

In July 2007, the Company entered into an agreement with a syndicate of lenders providing an unsecured credit facility for 5 years. The new credit facility provides $250 million of unsecured committed credit with an option for an additional $150 million. The facility is available for general corporate purposes, working capital needs, share repurchases and acquisitions. Borrowings under the facility bear interest at either the bank’s prime rate, the federal funds effective rate plus 0.5 percent or the London Interbank Offered Rate plus a spread of between 0.23 percent and 0.57 percent, depending on the Company’s cash flow leverage ratio (debt to earnings before interest, taxes, depreciation and amortization.) The Company is also required to pay a facility fee on the full amount of the loan commitment at an annual rate ranging from 0.07 percent to 0.15 percent, depending on the Company’s cash flow leverage ratio. The agreement requires the Company to maintain certain financial ratios as to cash flow leverage and interest coverage. The Company is in compliance with the covenants of the agreement.

Upon securing the new facility, certain committed lines of credit totaling $50 million were terminated. Additional uncommitted lines totaling $55 million expired at the end of July 2007. At September 28, 2007, the Company's various lines of credit, including the new facility, totaled $295 million, of which $193 million was unused.

In September 2007, the company entered into a pay-fixed, receive-variable interest rate swap contract that effectively fixes the rate paid on $40 million of variable rate borrowings at 4.73 percent plus the applicable spread (depending on cash flow leverage ratio) for a period of three years. The fair market value of the swap contract is included in other current liabilities. The contract has been designated as a hedge against interest rate volatility. Consequently, changes in the fair market value are recorded in accumulated other comprehensive income.

Item 2.
	GRACO INC. AND SUBSIDIARIES

	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

~~First quarter net~~Net earnings of ~~$33.7~~$39 million for the quarter were 5 percent ~~below~~higher than net earnings in the ~~first~~third quarter last year. ~~The decrease resulted from~~Sales of $207 million were 3 percent higher than the same period last year. Year-to-date net earnings of $117 million were 3 percent higher than last year and sales of $636 million were up 4 percent. Higher sales in Europe and Asia were offset to a great extent by lower ~~gross margin rate and higher expenses, which more than offset~~sales in the Americas.

Foreign currency translation rates had a favorable impact ~~of a 3~~on sales and net earnings. Translated at consistent exchange rates, net earnings and sales for the quarter were each up 1 percent. Year-to-date net earnings were down 1 percent ~~increase in sales.~~and sales increased 2 percent.

Results include the operations of Lubriquip, which was acquired in July 2006. ~~The integration~~Sales of Lubriquip ~~is on track for completion by the end~~products contributed approximately 2 percentage points of ~~the year~~year-to-date sales growth. Year-to-date costs and expenses related to moving and consolidation activities (including the consolidation of Gusmer operations ~~was competed~~completed in the first ~~quarter. Costs and expenses related to the integration and consolidation activities~~quarter) totaled approximately ~~$1 million in the first quarter of 2007.~~

Foreign currency translation rates had a favorable impact on first quarter sales and net earnings. Translated at consistent exchange rates, sales increased 1 percent and net earnings decreased 8 percent.$2 million.

Net Sales

Sales by reportable segment and geographic area were as follows (in thousands):

	Thirteen Weeks Ended		Thirteen Weeks Ended			Thirty-nine Weeks Ended
	March 20, 2007	March 31, 2006		Sep 28, 2007	Sep 29, 2006		Sep 28, 2007	Sep 29, 2006
By Segment
Net Sales
Industrial	$105,065	$100,160		$107,791	$101,149		$327,137	$305,864
Contractor	69,751	74,352		76,649	78,659		240,631	249,518
Lubrication	22,679	17,704		22,830	22,391		68,381	57,665
Consolidated	$197,495	$192,216		$207,270	$202,199		$636,149	$613,047

By Geographic Area
Americas¹	$120,546	$132,212		$124,373	$133,339		$386,400	$409,923
Europe²	49,377	39,546		53,109	43,334		161,154	128,234
Asia Pacific	27,572	20,458		29,788	25,526		88,595	74,890
Consolidated	$197,495	$192,216		$207,270	$202,199		$636,149	$613,047

¹	North and South America, including the U.S.

²	Europe, Africa and Middle East

Industrial segment sales increased 7 percent for both the quarter and year-to-date. Double-digit percentage growth in Europe and Asia more than offset the 5 ~~percent. A~~percent decrease in the Americas ~~was more than offset by double-digit percentage~~for both the quarter and year-to-date.

Contractor segment sales decreased 3 percent for the quarter and 4 percent year-to-date. Strong increases in Europe and Asia ~~Pacific.~~

~~Contractor segment sales decreased 6 percent. Segment sales in Europe increased 40 percent while sales~~ were ~~lower in the Americas and Asia Pacific. In the Americas, growth in the home center channel was~~ not enough to offset the ~~decline~~decrease in the Americas, where sales were down in both the home center and the professional paint ~~stores channel.~~store channels.

Lubrication segment sales increased 282 percent for the quarter and 19 percent year-to-date. The year-to-date increase is due to sales of Lubriquip products, acquired in mid-2006. ~~Sales~~Year-to-date sales in this segment increased in all geographic areas.

Gross Profit

Gross profit as a percentage of sales was ~~53.1 percent compared to 53.7~~53.4 percent for the ~~first~~quarter compared to 52.7 percent for the third quarter last year. Translated at consistent exchange rates, gross profit percentage for the quarter is virtually the same as last year.

Year-to-date gross profit percentage was 53.1 percent in 2007 compared to 53.3 percent in 2006. The decrease was due mainly to lower margin rates on Lubriquip products, consolidation costs and higher ~~production and~~ material costs, offset somewhat by the favorable impacts of currency translation and pricing.

Operating Expenses

Total operating expenses for the quarter increased ~~$4 million including approximately $1.5 million~~1 percent. Product development and general and administrative expenses were down slightly while higher selling, marketing and distribution spending was in line with the sales increase.

Year-to-date operating expenses increased 4 percent, mostly due to expenses related to Lubriquip. ~~The Contractor segment incurred approximately $1 million~~Operating expenses as a percentage of ~~expenses related to~~sales are about the ~~market testing of a new line of sprayers in the home center channel.~~same as last year.

Income Taxes

The effective income tax rate of 3532 percent for the quarter was 2 percentage points lower than the year-to-date rate. The lower rate in the quarter resulted from expiring statutes of limitations and a higher than expected benefit upon filing of prior year tax returns.

Effective tax rates were about the same as last ~~year’s rate~~year for both the ~~first quarter.~~quarter and year-to-date.

Liquidity and Capital Resources

~~Significant~~In the first nine months of 2007, the Company used cash from operations and borrowings to purchase and retire $165 million of Company common stock. Other significant uses of cash in the first ~~quarter~~nine months of 2007 included ~~$24 million for purchases and retirement of Company common stock, $13 million for capital additions and $11~~$33 million for payment of ~~dividends. During~~dividends and $28 million for capital additions.

In the first ~~quarter~~nine months of 2006, the Company used primarily cash from operations to purchase and retire $70 million of Company common stock. Other significant uses of cash in the first nine months of 2006 included ~~$17~~$31 million for ~~purchases and retirement~~the acquisition of ~~Company common stock and $10~~Lubriquip, $30 million for ~~dividends.~~payment of dividends and $22 million for capital additions.

~~At March 30,~~In July 2007, the Company ~~had~~entered into an agreement with a syndicate of lenders providing $250 million of unsecured committed credit with an option for an additional $150 million. The new credit facility will be used for general corporate purposes including acquisitions and share repurchases. Upon securing the new facility, certain committed lines of credit totaling $50 million were terminated. Additional uncommitted lines totaling $55 million expired at the end of July 2007.

At September 28, 2007, the Company’s various lines of credit, ~~totaling $145~~including the new facility, totaled $295 million, of which ~~$115~~$193 million was unused. Internally generated funds and unused financing sources provide the Company with the financial flexibility to meet liquidity needs.

Outlook

~~First quarter sales fell short of expectations due mostly to soft demand~~Management is optimistic about continued strength in the ~~North American Industrial~~Company’s international businesses and ~~Contractor businesses. Management expects~~remains cautious in its outlook for the Americas. Portions of the Company’s business that ~~2007 will continue~~have ties to the housing sector in the Americas are expected to be soft until market conditions improve.

In September 2007, the Company announced the launch of new paint sprayers in the home center channel. The new sprayers are expected to generate higher per-store net sales; however sales to home centers in 2008 are estimated to be approximately $7 to $8 million lower than 2007 due to a ~~challenging sales growth environment~~reduction in ~~North America. Spending~~the number of stores carrying the sprayers. Incremental expenses totaling approximately $5 million related to the launch and production of new units will be incurred over the ~~remainder~~next 15 months, including $0.5 million in 2007.

The integration of Lubriquip is on track for completion by the end of the year and the consolidation of Gusmer operations was completed in the first quarter. These integration activities will ~~be adjusted accordingly, however,~~improve the ~~Company will~~contribution of the acquired products.

Management believes it can continue to ~~invest for~~guide the ~~future~~business to higher sales and earnings by ~~funding~~making long-term investments in key growth ~~strategies.~~strategies including new product development, expanding distribution, entering new markets and pursuing strategic acquisitions.

SAFE HARBOR CAUTIONARY STATEMENT

A forward-looking statement is any statement made in this report and other reports that the Company files periodically with the Securities and Exchange Commission, or in press or earnings releases, analyst briefings and conference calls, which reflects the Company’s current thinking on market trends and the Company’s future financial performance at the time they are made. All forecasts and projections are forward-looking statements.

The Company desires to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 by making cautionary statements concerning any forward-looking statements made by or on behalf of the Company. The Company cannot give any assurance that the results forecasted in any forward-looking statement will actually be achieved. Future results could differ materially from those expressed, due to the impact of changes in various factors. These risk factors include, but are not limited to: economic conditions in the United States and other major world economies, currency fluctuations, political instability, changes in laws and regulations, and changes in product demand. Please refer to Item 1A of, and Exhibit 99 to, the Company’s Annual Report on Form 10-K for fiscal year 2006 for a more comprehensive discussion of these and other risk factors.

Investors should realize that factors other than those identified above and in Item 1A and Exhibit 99 might prove important to the Company’s future results. It is not possible for management to identify each and every factor that may have an impact on the Company’s operations in the future as new factors can develop from time to time.

~~Item 3.~~

~~Quantitative and Qualitative Disclosures About Market Risk~~

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There are no material changes related to market risk from the disclosures made in the Company’s 2006 Annual Report on Form 10-K.

~~Item 4.~~

~~Controls and Procedures~~

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

As of the end of the fiscal quarter covered by this report, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures. This evaluation was done under the supervision and with the participation of the Company’s ~~Chairman,~~ President and Chief Executive Officer, the Chief Financial Officer and Treasurer, the Vice President and Controller, and the Vice President, General Counsel and Secretary. Based upon that evaluation, they concluded that the Company’s disclosure controls and procedures are effective in gathering, analyzing and disclosing information needed to satisfy the Company’s disclosure obligations under the Exchange Act.

Changes in internal controls

During the quarter, there was no change in the Company’s internal control over financial reporting that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

~~PART II~~

~~OTHER INFORMATION~~

PART II OTHER INFORMATION

~~Item 1A.~~

~~Risk Factors~~

Item 1A. Risk Factors

There have been no material changes to the Company’s risk factors from those disclosed in the Company’s 2006 Annual Report on Form 10-K.

~~Item 2.~~

~~Unregistered Sales of Equity Securities and Use of Proceeds~~

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

On February 17, 2006, the Board of Directors authorized the Company to purchase up to a total of 7,000,000 shares of its outstanding common stock, primarily through open-market transactions. This authorization expires on February 29, 2008. On September 28, 2007, the Board of Directors authorized the Company to purchase up to a total of an additional 7,000,000 shares. This authorization expires on September 30, 2009.

In addition to shares purchased under the Board ~~authorization,~~authorizations, the Company purchases shares of common stock held by employees who wish to tender owned shares to satisfy the exercise price or tax withholding on option exercises.

Information on issuer purchases of equity securities follows:

Period                                     (a)
Total Number
of Shares
Purchased (b)
Average
Price Paid
per Share (c)
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs (d)
Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs (at
end of period)

Dec. 30, 2006 - Jan 26, 2007 133,600 $40.27 133,600 4,909,900

Jan 27, 2007 - Feb 23, 2007 170,000 $41.11 170,000 4,739,900

Feb 24, 2007 - Mar 30, 2007 283,800 $39.46 283,800 4,456,100

Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (at end of period)

Jun 30, 2007 – Jul 27, 2007	570,300	$39.45	570,300	2,464,500

Jul 28, 2007 – Aug 24, 2007	467,300	$40.36	467,300	1,997,200

Aug 25, 2007 – Sep 28, 2007	1,239,580	$38.98	1,239,580	7,757,620

	Item 4.		Submission of Matters to a Vote of Security Holders

None

	Item 6.		Exhibits

4.1

Credit ~~agreement~~Agreement dated ~~April 1, 2006,~~July 12, 2007, between the Company and ~~Wachovia~~U.S. Bank National Association, JPMorgan Chase Bank, N.A. ~~(Promissory Note~~, Wells Fargo Bank, National Association, and ~~Offering Basis Loan Agreement)~~Bank of America, N.A. (Incorporated by reference to Exhibit ~~4.1~~10.1 to the Company's Report on Form ~~10-Q for the thirteen weeks ended March 31, 2006.); as extended by letter from Wachovia Bank, N.A. to Graco Inc.,~~8-K dated ~~March 26,~~July 18, 2007.)

10.1

~~Stock Option Agreement. Form of agreement used for award in~~Restoration Plan (2005 Statement). Second Amendment adopted August 15, 2007 ~~of non-incentive stock options to executive officers under the Graco Inc. Amended and Restated Stock Incentive Plan (2006). Form of agreement for award made to Chief Executive Officer in 2007.~~

31.1

Certification of ~~Chairman,~~ President and Chief Executive Officer pursuant to Rule 13a-14(a)

31.2

Certification of Chief Financial Officer and Treasurer pursuant to Rule 13a-14(a)

Certification of ~~Chairman,~~the President and Chief Executive Officer, and the Chief Financial Officer and Treasurer pursuant to Section 1350 of Title 18, U.S.C.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

			GRACO INC.


Date:	~~April~~October 24, 2007	By:	/s/~~David A. Roberts~~Patrick J. McHale
			~~David A. Roberts~~Patrick J. McHale
			~~Chairman,~~ President and Chief Executive Officer
			(Principal Executive Officer)


Date:	~~April~~October 24, 2007	By:	/s/James A. Graner
			James A. Graner
			Chief Financial Officer and Treasurer
			(Principal Financial Officer)


Date:	October 24, 2007	By:	/s/Caroline M. Chambers
			Caroline M. Chambers
			Vice President and Controller
			(Principal Accounting Officer)

	Estimated Life (Years)	Original Cost		Amorti- zation			Foreign Currency Translation		Book Value
March 30, 2007
Customer relationships and
distribution network	4 - 8	$	26,102	$	(8,272	)	$	4	$	17,834
Patents, proprietary technology
and product documentation	5 - 15		22,243		(5,261	)		4		16,986
Trademarks and trade names	3 - 10		4,684		(1,582	)		13		3,115
			53,029		(15,115	)		21		37,935
Not Subject to Amortization:
Brand names			10,260		—			—		10,260
Total		$	63,289	$	(15,115	)	$	21	$	48,195

December 29, 2006
Customer relationships and
distribution network	4 - 8	$	26,102	$	(7,335	)	$	6	$	18,773
Patents, proprietary technology
and product documentation	5 - 15		22,243		(4,443	)		5		17,805
Trademarks, trade names and
other	3 - 10		5,114		(1,641	)		14		3,487
			53,459		(13,419	)		25		40,065
Not Subject to Amortization:
Brand names			10,260		—			—		10,260
Total		$	63,719	$	(13,419	)	$	25	$	50,325

	Thirteen Weeks Ended March 30, 2007			Year Ended Dec. 29, 2006

Balance, beginning of year	$	6,675		$	7,649
Charged to expense		991			4,442
Margin on parts sales reversed		758			1,944
Reductions for claims settled		(2,044	)		(7,360	)
Balance, end of period	$	6,380		$	6,675

Period	(a) Total Number of Shares Purchased	(b) Average Price Paid per Share	(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (at end of period)

Dec. 30, 2006 - Jan 26, 2007	133,600	$40.27	133,600	4,909,900

Jan 27, 2007 - Feb 23, 2007	170,000	$41.11	170,000	4,739,900

Feb 24, 2007 - Mar 30, 2007	283,800	$39.46	283,800	4,456,100

UNITED STATESSECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

GRACO INC. AND SUBSIDIARIES

INDEX

Results of Operations

Net Sales

Gross Profit

Operating Expenses

Income Taxes

Liquidity and Capital Resources

Outlook

SAFE HARBOR CAUTIONARY STATEMENT

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

Changes in internal controls

PART II OTHER INFORMATION

Item 1A. Risk Factors

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

SIGNATURES

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION