December 22, 1998


Mr. James A. Earnshaw
6407 Oxbow Bend
Chanhassen, MN.  55317

Dear Jim:

On behalf of the Board of Directors, I am extremely pleased to extend to you the
following  offer to become the  President and Chief  Executive  Officer of Graco
Inc., as follows:

o    Base salary:  $30,000 per month.  Compensation is reviewed  annually by the
     Management Organization and Compensation Committee.

o    Annual Bonus:  Participation  in the Annual Bonus  Program,  with a maximum
     payment for 1999 of 80% of base salary paid during the year.

o    Stock Options:  Under our Long Term Stock  Incentive Plan, an initial grant
     of 50,000 shares, effective the first day of your employment, and a regular
     annual grant in 1999 of 40,000  shares,  effective on the date those grants
     are  made.  Future  grants  are  determined   annually  by  the  Management
     Organization and Compensation Committee.  These are 10 year non-ISO options
     at the market price on the date of grant, with 25% vesting on the 2nd, 3rd,
     4th and 5th anniversaries.  As we discussed,  these initial two grants will
     also provide for immediate vesting if you are involuntarily  terminated for
     other  than  gross and  willful  misconduct  during  the first two years of
     employment, and be exercisable for 6 months after such termination.

o    Severance   Pay:  In  the  event  that  your   employment   is   terminated
     involuntarily  during  the  first  two  years  after  your  first  date  of
     employment for other than gross and willful misconduct, you will be paid an
     amount  equal to two years of your then base  salary.  After said two years
     your severance pay will be in accordance with Graco's  regular  practice of
     one year of base salary.  For  purposes of this  letter,  gross and willful
     misconduct  includes,  but is not limited  to,  wrongful  appropriation  of
     Company funds,  serious  violation of Company policy or the commission of a
     felony.

o    Key  Employee  Agreement:  You will be extended a Key  Employee  Agreement,
     effective your first day of employment,  which essentially provides for two
     years of base salary,  expected  bonus and  benefits if you are  terminated
     within two years after a change of control of the Company.  Also, all stock
     options automatically fully vest upon a change of control.

o    Benefits: Participation in Graco's comprehensive employee benefit plans.

o    Club dues:  Payment of your  regular dues at the  Minneapolis  Club and the
     Lafayette Club.

As we discussed,  we anticipate  that you will start on March 1, 1999.  You will
immediately  be  elected  to the  Board of  Directors.  Until  April  30, I will
continue to run the day to day operations while you learn about the business. On
May 1 you will be in charge.

To accept this offer, please sign the enclosed copy of this letter and return it
to me. There are also some routine tests and checks that must be performed,  and
forms to complete,  that are  explained in the letter from Michael  Galdonik you
have  received.  He has also  provided  you with a  description  of our benefits
package.

Jim, we are  delighted  at the prospect of you joining  Graco.  I know that with
your  experience and track record,  you are the right person to lead the company
to even greater success in the years to come.


Yours very truly,


/s/George Aristides
George Aristides
Chief Executive Officer



Agreed and Accepted:

/s/James A. Earnshaw
James A. Earnshaw