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 September 27, 1996

Commission File Number:  1-9249


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


        Minnesota                                      41-0285640
- ------------------------                 ---------------------------------------
(State of incorporation)                 (I.R.S. Employer Identification Number)


     4050 Olson Memorial Highway
      Golden Valley, Minnesota                                            55422
- ----------------------------------------                              ----------
(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     X         No
                                         -------          -------

            17,099,116 common shares were outstanding as of October 25, 1996.





                               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


         Item 2.  Management's Discussion and Analysis
                     of Financial Condition and
                     Results of Operations                                  7-8



PART II  OTHER INFORMATION


         Item 6.  Exhibits and Reports on Form 8-K                            9


         SIGNATURES  10

         Sixth Amendment dated September 27, 1996
            to Credit Agreement between the Company and
            First Bank National Association                          Exhibit  4
         Computation of Net Earnings per Common Share                Exhibit 11
         Financial Data Schedule                                     Exhibit 27










                                            2







                                     PART I

                           GRACO INC. AND SUBSIDIARIES

                  Item I. CONSOLIDATED STATEMENTS OF EARNINGS

                                   (Unaudited)

                                                              Thirteen Weeks Ended                    Thirty-Nine Weeks Ended
                                                              --------------------                    -----------------------
                                                      Sept. 27, 1996       Sept. 29, 1995       Sept. 27, 1996        Sept. 29, 1995
                                                      --------------       --------------       --------------        --------------
                                                                         (In thousands except per share amounts)

                                                                                                                     
Net sales .....................................            $  97,680            $  94,797            $ 284,932             $ 293,726

      Cost of products sold ...................               47,704               48,510              140,697               149,497
                                                           ---------            ---------            ---------             ---------

Gross profit ..................................               49,976               46,287              144,235               144,229

      Product development .....................                4,714                3,557               13,566                11,419
      Selling .................................               21,624               21,982               62,714                65,740
      General and administrative ..............                8,316               10,263               29,996                32,345
                                                           ---------            ---------            ---------             ---------

Operating profit ..............................               15,322               10,485               37,959                34,725

      Interest expense ........................                  155                  596                  732                 2,025
      Other expense, net ......................                  310                  220                 (447)                  563
                                                           ---------            ---------            ---------             ---------

Earnings before income taxes ..................               14,857                9,669               37,674                32,137

      Income taxes ............................                4,700                3,100               11,900                11,600
                                                           ---------            ---------            ---------             ---------

Net earnings ..................................            $  10,157            $   6,569            $  25,774             $  20,537
                                                           =========            =========            =========             =========

Net earnings per common and
      common equivalent share .................            $     .58            $     .37            $    1.47             $    1.18
                                                           =========            =========            =========             =========

Cash dividend declared per
      common share ............................            $     .12            $     .11            $     .36             $     .32
                                                           =========            =========            =========             =========
                                                                                                                          

                 See notes to consolidated financial statements.





                                        3







                           GRACO INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                                 (In Thousands)

                                                                                 September 27, 1996      December 29, 1995
                                                                                 ------------------      -----------------
                                                                                        (Unaudited)
                                                                                                                 
ASSETS                                                                             

Current Assets:
      Cash and cash equivalents ............................................              $   7,401              $   1,643
      Accounts receivable, less allowances
         of $5,181 and $4,856 ..............................................                 76,744                 73,205
      Inventories ..........................................................                 48,319                 41,693
      Deferred income taxes ................................................                 10,609                 10,608
      Other current assets .................................................                  1,946                  1,333
                                                                                          ---------              ---------
            Total current assets ...........................................                145,019                128,482

Property, plant and equipment:
      Cost .................................................................                173,423                156,168
      Less Accumulated Depreciation ........................................                (87,586)               (79,310)
                                                                                          ---------              ---------
                                                                                             85,837                 76,858

Other assets ...............................................................                  8,883                 12,493
                                                                                          ---------              ---------

                                                                                          $ 239,739              $ 217,833
                                                                                          =========              =========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
      Notes payable to banks ...............................................              $   4,712              $   5,051
      Current portion of long-term debt ....................................                  1,865                  1,935
      Trade accounts payable ...............................................                 13,164                 13,849
      Customer advances ....................................................                  4,963                    803
      Dividends payable ....................................................                  2,053                  2,072
      Income taxes payable .................................................                  3,797                  4,229
      Other current liabilities ............................................                 48,559                 43,644
                                                                                          ---------              ---------
            Total current liabilities ......................................                 79,113                 71,583

Long-term debt, less current portion above .................................                  8,911                 10,074

Retirement benefits and deferred compensation ..............................                 32,917                 32,605

Shareholders' equity:
      Common stock .........................................................                 17,092                 17,265
      Additional paid-in capital ...........................................                 16,102                 20,397
      Retained earnings ....................................................                 84,451                 64,949
      Other, net ...........................................................                  1,153                    960
                                                                                          ---------              ---------

                                                                                          $ 239,739              $ 217,833
                                                                                          =========              =========

                 See notes to consolidated financial statements.




                                        4






                           GRACO INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

                                                                                                Thirty-Nine Weeks
                                                                                                -----------------
                                                                                      Sept. 27, 1996       Sept. 29, 1995
                                                                                      --------------       --------------
                                                                                                 (In thousands)
                                                                                                                
CASH FLOWS FROM OPERATING ACTIVITIES:                    

Net Earnings .................................................................             $  25,774            $  20,537
   Adjustments to reconcile net earnings to
     net cash provided by operating activities:
      Depreciation and amortization ..........................................                 9,633                9,251
      Deferred income taxes ..................................................                 2,318                1,186
      Change in:
        Accounts receivable ..................................................                (3,182)               2,733
        Inventories ..........................................................                (7,147)               1,241
        Trade accounts payable ...............................................                  (380)              (4,954)
        Retirement benefits and deferred
         compensation ........................................................                   564                2,659
        Other accrued liabilities ............................................                 6,813               (3,191)
        Other ................................................................                   350                  821
                                                                                           ---------            ---------

                                                                                              34,743               30,283
                                                                                           ---------            ---------

CASH FLOWS FROM INVESTING ACTIVITIES:

   Property, plant and equipment additions ...................................               (18,681)             (16,546)
   Proceeds from sale of property, plant,
        and equipment ........................................................                    62                  151
                                                                                           ---------            ---------

                                                                                             (18,619)             (16,395)
                                                                                           ---------            ---------

CASH FLOWS FROM FINANCING ACTIVITIES:

   Borrowing on notes payable and lines of credit ............................                13,932              111,279
   Payments on notes payable and lines of credit .............................               (13,957)            (120,794)
   Borrowing on long-term debt ...............................................                   198                 --
   Payments on long-term debt ................................................                (1,347)                (613)
   Common stock issued .......................................................                 2,352                2,234
   Retirement of common and preferred stock ..................................                (6,819)                --
   Cash dividends paid .......................................................                (6,293)              (5,625)
                                                                                           ---------            ---------

                                                                                             (11,934)             (13,519)
                                                                                           ---------            ---------

Effect of exchange rate changes on cash ......................................                 1,568               (2,164)
                                                                                           ---------            ---------

Net increase(decrease)in cash and cash equivalents ...........................                 5,758               (1,795)

Cash and cash equivalents:

   Beginning of year .........................................................                 1,643                2,444
                                                                                           ---------            ---------

   End of period .............................................................             $   7,401            $     649
                                                                                           =========            =========

                 See notes to consolidated financial statements.

                                       
                                        5






                           GRACO INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)


1.    The  consolidated  balance  sheet  of Graco  Inc.  and  Subsidiaries  (the
      Company) as of September  27, 1996 and the related  statements of earnings
      and cash flows for the  thirty-nine  weeks ended  September 27, 1996,  and
      September  29,  1995,  have been  prepared  by the Company  without  being
      audited.

      In the opinion of management,  these  consolidated  statements reflect all
      adjustments  necessary to present  fairly the financial  position of Graco
      Inc.  and  Subsidiaries  as of  September  27,  1996,  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 financial statements and
      notes thereto included in the Company's 1995 Form 10-K.

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

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

                                                 Sept. 27, 1996   Dec. 29, 1995
                                                 --------------   -------------

      Finished products and components                  $45,497         $40,335
      Products and components in various
          stages of completion                           27,248          22,597
      Raw materials                                      12,188          13,152
                                                   ------------    ------------
                                                         84,933          76,084
      Reduction to LIFO cost                            (36,614)        (34,391)
                                                   ------------    ------------
                                                        $48,319         $41,693
                                                   ============    ============







                                        6





Item 2.                    GRACO INC. AND SUBSIDIARIES
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Results of Operations
- ---------------------

Net earnings of $10.2 million for the quarter ended September 27, 1996 increased
$3.6  million,  or 55 percent,  over the same period last year.  Net earnings of
$25.8  million for the nine months  ended  September  27,  1996  increased  $5.2
million,  or 26  percent,  over the  first  nine  months of 1995.  The  earnings
improvement  came  primarily  as a result  of  improved  gross  margin,  reduced
operating  expenses,  a $1.5 million pretax settlement of a lawsuit involving an
escrow deposit dating back to 1986, lower interest expense  resulting from lower
debt balances, and a lower effective tax rate.

Sales for the quarter of $97.7 million were $2.9 million,  or 3 percent  higher,
than the third  quarter  of 1995.  The  increase  in  quarterly  sales  occurred
primarily  in the  Americas.  Year-to-date  sales of  $284.9  million  were $8.8
million, or 3 percent, lower than 1995. The decline in year-to-date sales can be
attributed  primarily  to  economic  softness in the  international  markets and
currency fluctuations.

Sales in the  Americas of $62.0  million for the quarter  were 8 percent  higher
than 1995.  Year-to-date sales of $187.9 million were 1 percent higher. European
sales continue to lag behind last year with quarterly and year-to-date  sales of
$21.7 million and $54.6 million, respectively. Europe's third quarter sales were
equal to 1995's level (a 4 percent volume  increase,  offset by a 4 percent loss
due to exchange  rates).  Year-to-date  European  sales are 7 percent lower than
1995 (a 6 percent volume decease,  and a 1 percent loss due to exchange  rates).
In Asia  Pacific,  sales  decreased 12 percent from last year's third quarter to
$13.9 million (a 2 percent volume decease, and a 10 percent loss due to exchange
rates).  For the nine month period ended  September 27, 1996, Asia Pacific sales
of $42.4 million were 12 percent lower than 1995 (a 5 percent  volume  decrease,
and a 7 percent loss due to exchange rates).

While many of the  markets  the  Company  serves  were slow in the first half of
1996,  the Company is  encouraged  by the somewhat  improved  levels of business
activity during the third quarter.  Worldwide,  Industrial/Automotive  Equipment
sales  improved 3 percent  to $56.2  million  from last  year's  third  quarter,
Contractor  Equipment sales improved 4 percent to $30.6 million, and Lubrication
Equipment  sales  improved 2 percent  to $10.9  million.  For 1996's  first nine
months,  Industrial/Automotive  Equipment sales of $156.1 million were 6 percent
lower  than the same  period  last  year,  Contractor  Equipment  sales of $96.6
million were at the 1995 level, and Lubrication Equipment sales of $32.2 million
were 5 percent higher than 1995.

The  gross  profit  margin  percentage  for both the  quarter  and  year-to-date
increased 2 percentage points over a year ago to 51 percent. The increase can be
attributed to improved pricing in the Americas and Europe,  manufacturing volume
and efficiencies.

Operating  expenses of $34.7 million for the quarter and $106.3  million for the
first nine  months are both 3 percent  lower  than the same  periods  last year.
While  investments in product  development and marketing  reached record levels,
close  control  of  selling  and  general  and  administrative  costs  have kept
operating expenses below 1995 levels.

                                        7


Interest expense of $0.2 million is $0.4 million, or 74 percent,  lower than the
third  quarter of 1995.  Year-to-date  interest  expense of $0.7 million is $1.3
million,  or 64 percent  lower.  The decreases in interest  expense  result from
lower debt balances at September 27, 1996 as compared to September 29, 1995.

The  effective  tax rate for both the  quarter and the nine month  period  ended
September  27,  1996  of 32  percent  is 4  percentage  points  lower  than  the
year-to-date  rate for  1995.  The  decline  in the  effective  tax rate in 1996
results from lower effective tax rates on foreign earnings.  The Company expects
a higher effective tax rate in 1997.

The Company's  backlog of $33.0 million is nearly $10.0 million  higher than the
level a year ago and the current  rate of incoming  orders  provides the Company
with  reason to be  cautiously  optimistic  about a solid  fourth  quarter.  The
earnings  momentum and modestly  improved sales activity achieved by the Company
across all  divisions  gives it added  confidence  that its  investments  in new
products, technology,  globalization, and world-class manufacturing are having a
significant impact on the Company's long-term ability to grow profitably.


Liquidity and Capital Resources
- -------------------------------

The Company  generated cash from  operations of $34.7 million for the first nine
months of 1996 as  compared  to $30.3  million  for the same  period  last year.
Significant uses of cash include increases in inventory balances in anticipation
of a November  factory move to a new facility as discussed  below,  purchases of
property,  plant and equipment,  payments of cash dividends,  and repurchases of
common stock. Working capital increased $9.0 million to $65.9 million from $56.9
million at December 29, 1995. The Company plans on spending  approximately $17.0
million in 1996 ($8.5 million to date) for the  construction of a 325,000 square
foot  world-class  manufacturing  facility  and  global  distribution  center in
Rogers,  Minnesota  (approximately  20 miles  northwest  of  Minneapolis).  This
expenditure will be funded primarily with cash generated through operations. The
Company has unused  lines of credit  available at  September  27, 1996  totaling
$70.1 million.

                                            8


                                     PART II

Item 6.     Exhibits and Reports on Form 8-K

            (a)   Exhibits

                  Sixth Amendment dated September 27, 1996
                  to Credit Agreement between the Company and
                  First Bank National Association                     Exhibit  4

                  Statement on Computation                            Exhibit 11
                  of Per Share Earnings

                  Financial Data Schedule                             Exhibit 27

            (b)   No reports on Form 8-K have been filed during
                  the quarter for which this report is filed.


                                        9


                                   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: November 4, 1996                By:/S/George Aristides
                                         -------------------
                                         George Aristides
                                         President and Chief Executive Officer





Date: November 4, 1996                By:/S/David M. Lowe
                                         -------------------
                                         David  M. Lowe
                                         Treasurer
                                        (Principal Financial Officer)


                                       10