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 June 27, 2003

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	X		No

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

	Yes	X		No

45,800,000 common shares were outstanding as of July 25, 2003.

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	6-9

	Item 2.	Management's Discussion and Analysis
		of Financial Condition and
		Results of Operations	10-12

	Item 4.	Controls and Procedures	13

PART II	OTHER INFORMATION

	Item 4.	Submission of Matters to a Vote of Security Holders	14

	Item 6.	Exhibits and Reports on Form 8-K	14

SIGNATURES			15

EXHIBITS

PART I

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

	Thirteen Weeks Ended				Twenty-six Weeks Ended

	June 27, 2003		June 28, 2002		June 27, 2003			June 28, 2002

Net Sales	$	146,364	$	132,796	$	266,024		$	240,653

Cost of products sold		70,432		65,655		127,089			118,349

Gross Profit		75,932		67,141		138,935			122,304

Product development		4,328		4,527		8,801			8,688
Selling, marketing and distribution		25,288		22,096		48,185			41,888
General and administrative		10,057		8,785		18,569			16,502

Operating Earnings		36,259		31,733		63,380			55,226

Interest expense		112		110		240			260
Other expense (income), net		84		207		(17	)		204

Earnings Before Income Taxes		36,063		31,416		63,157			54,762

Income taxes		11,600		9,900		20,500			17,700

Net Earnings	$	24,463	$	21,516	$	42,657		$	37,062

Basic Net Earnings
Per Common Share	$	.54	$	.45	$	.92		$	.78

Diluted Net Earnings
Per Common Share	$	.53	$	.44	$	.90		$	.77

Cash Dividends Declared
Per Common Share	$	.08	$	.07	$	.17		$	.15

See notes to consolidated financial statements.

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

	June 27, 2003			Dec. 27, 2002

ASSETS

Current Assets
Cash and cash equivalents	$	58,746		$	103,333
Accounts receivable, less allowances of $6,100 and $5,600		103,556			93,617
Inventories		36,549			30,311
Deferred income taxes		13,446			12,022
Other current assets		1,568			1,241

Total current assets		213,865			240,524

Property, Plant and Equipment:
Cost		224,799			219,427
Accumulated depreciation		(130,088	)		(124,474	)

		94,711			94,953

Intangible Assets, net		20,996			11,860

Other Assets		7,658			8,513

	$	337,230		$	355,850

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
Notes payable to banks	$	6,015		$	13,204
Trade accounts payable		12,662			13,031
Salaries, wages and commissions		12,185			14,490
Accrued insurance liabilities		10,318			10,251
Accrued warranty and service liabilities		6,730			6,294
Income taxes payable		8,232			5,583
Dividends payable		3,773			3,922
Other current liabilities		12,712			13,439

Total current liabilities		72,627			80,214

Retirement Benefits and Deferred Compensation		29,349			28,578

Deferred Income Taxes		1,788			1,652

Shareholders' Equity
Common stock		45,727			47,533
Additional paid-in capital		75,503			71,277
Retained earnings		113,336			128,125
Other, net		(1,100	)		(1,529	)

Total shareholders' equity		233,466			245,406

	$	337,230		$	355,850

See notes to consolidated financial statements.

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

	Twenty-six Weeks Ended
	June 27, 2003			June 28, 2002
Cash Flows from Operating Activities

Net Earnings	$	42,657		$	37,062
Adjustments to reconcile net earnings to net cash provided
by operating activities
Depreciation and amortization		9,199			9,416
Deferred income taxes		(1,214	)		(719	)
Tax benefit related to stock options exercised		1,200			3,300
Change in:
Accounts receivable		(6,472	)		(9,197	)
Inventories		(3,042	)		1,677
Trade accounts payable		(1,779	)		1,551
Salaries, wages and commissions		(2,547	)		(970	)
Retirement benefits and deferred compensation		1,459			(189	)
Other accrued liabilities		1,852			(2,886	)
Other		(89	)		(275	)

		41,224			38,770

Cash Flows from Investing Activities

Property, plant and equipment additions		(7,298	)		(3,926	)
Proceeds from sale of property, plant and equipment		102			271
Acquisition of business		(13,514	)		--

		(20,710	)		(3,655	)

Cash Flows from Financing Activities

Borrowings on notes payable and lines of credit		9,625			11,736
Payments on notes payable and lines of credit		(16,947	)		(12,329	)
Payments on long-term debt		--			(50	)
Common stock issued		6,772			11,567
Common stock retired		(55,496	)		(1,028	)
Cash dividends paid		(7,686	)		(6,905	)

		(63,732	)		2,991

Effect of exchange rate changes on cash		(1,369	)		(771	)

Net increase (decrease) in cash and cash equivalents		(44,587	)		37,335

Cash and cash equivalents

Beginning of year		103,333			26,531

End of period	$	58,746		$	63,866

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 June 27, 2003, and the related statements of earnings for the thirteen and twenty-six weeks ended June 27, 2003 and June 28, 2002, and cash flows for the twenty-six weeks ended June 27, 2003 and June 28, 2002 have been prepared by the Company without being audited.

In the opinion of management, these consolidated statements reflect all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of Graco Inc. and Subsidiaries as of June 27, 2003, 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 2002 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.

The Company accounts for stock option and purchase plans using the intrinsic value method and has adopted the “disclosure only” provisions of Statement of Financial Accounting Standards (SFAS) No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” No compensation cost has been recognized for the Employee Stock Purchase Plan and stock options granted under the various stock incentive plans.

Had compensation cost been determined based upon fair value (using the Black-Scholes option-pricing method) at the grant date for awards under these plans, the Company’s net earnings and earnings per share would have been reduced as follows (in thousands, except per share amounts):

	Thirteen Weeks Ended				Twenty-six Weeks Ended
	June 27, 2003		June 28, 2002		June 27, 2003		June 28, 2002
Net earnings

As reported	$	24,463	$	21,516	$	42,657	$	37,062
Stock-based compensation,
net of related tax effects		1,037		1,058		2,074		2,116

Pro forma	$	23,426	$	20,458	$	40,583	$	34,946

Net earnings per common share

Basic as reported	$	.54	$	.45	$	.92	$	.78
Basic pro forma		.51		.43		.87		.74
Diluted as reported		.53		.44		.90		.77
Diluted pro forma		.50		.42		.86		.73

Total comprehensive income in 2003 was $24.5 million in the second quarter and $42.9 million year-to-date. In 2002, comprehensive income was $21.5 million for the second quarter and $37.1 million for the six-month period. There have been no significant changes to the components of comprehensive income from those noted on the 2002 Form 10-K .

4.	The Company has three reportable segments; Industrial/Automotive, Contractor and Lubrication. The Company does not identify assets by segment. Sales and operating earnings by segment for the thirteen and twenty-six weeks ended June 27, 2003 and June 28, 2002 were as follows (in thousands):

	Thirteen Weeks Ended						Twenty-six Weeks Ended
	June 27, 2003			June 28, 2002			June 27, 2003			June 28, 2002
Net Sales

Industrial/Automotive	$	57,685		$	50,759		$	110,102		$	96,862
Contractor		76,906			68,593			131,744			119,728
Lubrication		11,773			13,444			24,178			24,063

Consolidated	$	146,364		$	132,796		$	266,024		$	240,653

Operating Earnings

Industrial/Automotive	$	15,284		$	13,223		$	29,272		$	24,960
Contractor		19,936			17,243			30,693			28,108
Lubrication		2,440			3,129			5,587			5,521
Unallocated Corporate
expenses		(1,401	)		(1,862	)		(2,172	)		(3,363	)

Consolidated	$	36,259		$	31,733		$	63,380		$	55,226

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

	June 27, 2003			Dec. 27, 2002

Finished products and components	$	32,307		$	26,199

Products and components in various stages
of completion		17,140			17,219

Raw materials and purchased components		17,868			18,021

		67,315			61,439

Reduction to LIFO cost		(30,766	)		(31,128	)

	$	36,549		$	30,311

At the beginning of the second quarter, the Company purchased certain assets and assumed certain liabilities of Sharpe Manufacturing Company for $13.5 million cash. Sharpe manufactures spray guns and related parts and accessories for the automotive refinishing market, where the Company had no previous presence. Sharpe had sales of approximately $11 million in 2002. Results of Sharpe’s operations have been included in the Industrial/Automotive segment since the date of acquisition.

Based on the results of an independent appraisal, the purchase price was allocated as follows (in thousands):

Accounts receivable	$	1,300
Inventories		3,000
Property, plant and equipment		600
Identifiable intangible assets		8,900
Goodwill		1,300

Total purchase price		15,100
Liabilities assumed		(1,600	)

Net assets acquired	$	13,500

Identifiable intangible assets include Sharpe’s distribution network, non-compete agreements and manufacturing documentation, which are being amortized over a weighted-average estimated useful life of 5 years. Also included in identifiable intangible assets is $5.3 million assigned to the Sharpe brand name, which has an indefinite useful life. Goodwill is expected to be fully deductible for tax purposes.

7.	Components of intangible assets were (in thousands):

	June 27, 2003		Dec. 27, 2002

Goodwill	$	9,199	$	7,939

Other identifiable intangibles, net of accumulated
amortization of $7,100 and $6,100		11,797		3,921

	$	20,996	$	11,860

Amortization of intangibles was $618,000 in the second quarter of 2003 and $1,029,000 year-to-date. Estimated annual amortization is as follows: $2,200,000 in 2003, $1,700,000 in 2004, $1,100,000 in 2005, $900,000 in 2006 and $900,000 in 2007.

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

Results of Operations

The following table sets forth items from the Company’s Consolidated Statements of Earnings as percentages of net sales:

	Thirteen Weeks Ended						Twenty-six Weeks Ended
	June 27, 2003			June 28, 2002			June 27, 2003			June 28, 2002
Net Sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of products sold		48.1			49.4			47.8			49.2
Product development		2.9			3.4			3.3			3.6
Selling, marketing and distribution		17.3			16.7			18.1			17.4
General and administrative		6.9			6.6			7.0			6.9
Operating Earnings		24.8			23.9			23.8			22.9
Interest expense		0.1			0.1			0.1			0.1
Other (income) expense, net		0.1			0.1			--			--
Earnings Before Income Taxes		24.6			23.7			23.7			22.8
Income taxes		7.9			7.5			7.7			7.4
Net Earnings		16.7	%		16.2	%		16.0	%		15.4	%

Net Sales

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

	Thirteen Weeks Ended				Twenty-six Weeks Ended
	June 27, 2003		June 28, 2002		June 27, 2003		June 28, 2002
By Segment

Industrial/Automotive	$	57,685	$	50,759	$	110,102	$	96,862
Contractor		76,906		68,593		131,744		119,728
Lubrication		11,773		13,444		24,178		24,063

Consolidated	$	146,364	$	132,796	$	266,024	$	240,653

By Geographic Area

Americas	$	102,805	$	97,220	$	184,995	$	175,798
Europe		27,172		22,942		50,737		42,744
Asia Pacific		16,387		12,634		30,292		22,111

Consolidated	$	146,364	$	132,796	$	266,024	$	240,653

Industrial/Automotive segment sales increased 14 percent for both the quarter and year-to date. Sales measured in local currencies increased 6 percent for both the quarter and year-to-date. Most of the currency translation effect came from Europe, where sales for the quarter were down 4 percent in local currencies but increased by 16 percent when translated to U.S. dollars. Industrial/Automotive sales volume increased in Asia Pacific and sales were up in the Americas primarily due to the Sharpe acquisition.

Contractor segment sales increased 12 percent for the quarter, 10 percent year-to-date (9 percent and 7 percent respectively, measured in local currencies). In the Americas, sales were higher in both the paint store and home center channels. Demand for new and existing products in the paint store channel more than offset the ongoing impacts of poor weather conditions and a weak commercial construction market in the United States. In the home center channel, sales were up for the quarter due to the introduction of a new model, marketing initiatives and more stores carrying the complete line of product. Asia Pacific posted strong volume gains while Europe experienced modest growth.

Lubrication segment sales were down 12 percent for the quarter and were essentially flat year-to-date. Sales in the second quarter last year were influenced by a sales promotion that was not repeated in the second quarter of 2003.

Gross Profit

Higher gross profit margin percentages were mainly due to favorable currency translation rates, which, combined with some pricing effect, more than offset the effects of increased costs.

Operating Expenses

Total operating expenses in the first half of 2003 increased 13 percent from 2002. Much of the increase is from payroll-related costs (salaries, incentives and benefits) and also includes Sharpe operations and higher sales meeting, travel, product introduction and warranty expenses. Changes in exchange rates used to translate expenses incurred in foreign currencies also had the effect of increasing expenses as reported in U.S. dollars. The Company’s contribution to the Graco Foundation, included in general and administrative expense, decreased by $1 million compared to the first six months of 2002.

Year-to-date operations include $.9 million of pension expense related to the Company’s U.S. defined benefit pension plan, compared to a $.5 million credit in the same period last year. This change resulted from recognition of investment losses attributable to pension plan assets. Pension expense/income is allocated to cost of products sold and operating expenses based on salaries and wages.

Liquidity and Capital Resources

In March 2003, the Company repurchased 2.2 million shares of its common stock for $54.8 million from David A. Koch, a former Chairman and Chief Executive Officer of the Company, his wife, and a family trust and family foundation. The Company used available cash balances to fund the repurchase.

In the second quarter of 2003, the Company acquired the operations of Sharpe Manufacturing Company, utilizing available cash of $13.5 million and assuming liabilities totaling $1.6 million.

The Company had unused lines of credit available at June 27, 2003 totaling $56 million. Cash balances of $59 million at June 27, 2003, internally generated funds and unused financing sources provide the Company with the financial flexibility to meet liquidity needs.

Outlook

Despite ongoing soft conditions in its two largest geographic markets, the Company is on track to make 2003 a year of sales and earnings growth. In North America, demand remains flat for Industrial/Automotive and Lubrication products while the Contractor Equipment Division continues to benefit from a combination of a strong housing market and successful new product launches. Conditions throughout Europe remain weak and management expects that to continue for at least the balance of this year. Contractor business in Europe is a bright spot, growing from new product introductions. Asia, except for Japan, remains strong with higher demand for the Company’s products as companies continue to invest in infrastructure and durable goods output increases. While current economic conditions make growth difficult in most regions of the world, year-to-date results give management confidence that its long-term growth strategies of introducing new products, expanding and enhancing distribution, entering new markets and making strategic acquisitions are paying off.

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, as well as 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 Exhibit 99 to the Company’s Annual Report on Form 10-K for fiscal year 2002 for a more comprehensive discussion of these and other risk factors.

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 pursuant to Exchange Act Rule 13a-15. This evaluation was done under the supervision and with the participation of the Company’s President and Chief Executive Officer, Vice President and Controller, Vice President and Treasurer, and 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 were no significant changes in the Company’s internal control over financial reporting.

PART II

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

At the Annual Meeting of Shareholders held on May 6, 2003, Robert G. Bohn and William J. Carroll were elected to the Board of Directors with the following votes:


	For	Withheld
Robert G. Bohn	43,169,254	450,398
William J. Carroll	42,444,773	1,174,879

At the same meeting, the Executive Officer Annual Incentive Bonus Plan was approved, with the following votes:

For	Against	Abstentions	Broker Non-Vote
42,134,298	1,074,415	410,939	-

Also, at the same meeting, the selection of Deloitte & Touche LLP as independent auditors for the current year was approved and ratified, with the following votes:

For	Against	Abstentions	Broker Non-Vote
41,720,991	1,774,510	124,152	-

No other matters were voted on at the meeting.

Exhibits and Reports on Form 8-K

(a)	Exhibits

	11	Computation of Net Earnings per Common Share

	31.1	Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.2	Certification of Vice President and Controller pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.3	Certification of Vice President and Treasurer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	32	Certification of President and Chief Executive Officer, Vice President and Controller, and Vice President and Treasurer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b)	Reports on Form 8-K

	The following Current Report on Form 8-K was filed during the quarter ended June 27, 2003: On April 17, 2003, Graco Inc. filed a current report on Form 8-K to furnish its earnings release for the first quarter of 2003.

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:	By:
		David A. Roberts
		President and Chief Executive Officer
Date:	By:
		James A. Graner
		Vice President and Controller
Date:	By:
		Mark W.Sheahan
		Vice President and Treasurer

UNITED STATESSECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

GRACO INC. AND SUBSIDIARIES

PART I

SIGNATURES

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION