GRACO INC
NON-ISO STOCK OPTION AGREEMENT
<DOCUMENT>
<TYPE>EX-10.40
<SEQUENCE>5
<FILENAME>0005.txt
<DESCRIPTION>NON-ISO STOCK OPTION AGREEMENT
<TEXT>


                             STOCK OPTION AGREEMENT
                                    (NON-ISO)


     THIS AGREEMENT,  made this 23nd day of February, 2001, by and between Graco
Inc.,  a  Minnesota  corporation  (the  "Company")  and George  Aristides  ("Mr.
Aristides").

     WITNESSETH THAT:

     WHEREAS,  the Company pursuant to its Long-Term Stock Incentive Plan wishes
to grant this stock option to Mr. Aristides;

     NOW THEREFORE, in consideration of the premises and of the mutual covenants
herein contained, the parties hereto hereby agree as follows:

     1.   Grant of Option
          ---------------

          The  Company  hereby  grants to Mr.  Aristides  the  right and  option
          (hereinafter  called the  "option")  to purchase all or any part of an
          aggregate of 60,000  shares of Common Stock of the Company,  par value
          $1.00 per  share,  at the  price of $26.35  per share on the terms and
          conditions set forth herein.

      2.  Duration and Exercisability
          ---------------------------

          A.   This option shall become  exercisable in full (i) on May 6, 2002,
               if Mr. Aristides remains a member of the Board of Directors until
               that  date,  or (ii)  upon  the  date of the  resignation  of Mr.
               Aristides  from the Board of Directors  prior to May 6, 2002, but
               only if the Board of Directors has  requested by resolution  that
               Mr. Aristides  resign from the Board of Directors.  If the option
               becomes fully  exercisable  pursuant to this Section 2A, it shall
               remain  exercisable  for a period  equal to the  duration  of the
               option (i.e., 10 years from the date of grant).


          B.   In the event that Mr. Aristides does not purchase in any one year
               the full number of shares of Common Stock of the Company to which
               he is entitled  under this option,  he may,  subject to the terms
               and  conditions  of  Section 3 hereof,  purchase  such  shares of
               Common  Stock  in any  subsequent  year  during  the term of this
               option. During the lifetime of Mr. Aristides, the option shall be
               exercisable   only  by  him  and  shall  not  be   assignable  or
               transferable by him otherwise than by will or the laws of descent
               and distribution.

      3.  Effect of Termination of Board Membership
          -----------------------------------------

          A.   In the event that Mr. Aristides shall cease to be a member of the
               Board  of   Directors,   by  reason  of  his  gross  and  willful
               misconduct,  including but not limited to wrongful  appropriation
               of Company funds or the commission of a felony,  the option shall
               be terminated as of the date of the misconduct.

          B.   If Mr.  Aristides  shall  die  while a  member  of the  Board  of
               Directors of the Company and the option granted  hereunder  shall
               not have become fully exercisable, such option shall become fully
               exercisable  and may be  exercised at any time within the term of
               this option by the executors or  administrators  of Mr. Aristides
               or by any person or persons to whom the option is  transferred by
               will or the applicable laws of descent and distribution.

      4.  Manner of Exercise
          ------------------

          A.   The option can be exercised only by Mr. Aristides or other proper
               party within the option period  delivering  written notice to the
               Company  at  its  principal  office  in  Minneapolis,  Minnesota,
               stating  the  number of  shares  as to which the  option is being
               exercised and,  except as provided in Section 4. C.,  accompanied
               by  payment-in-full of the option price for all shares designated
               in the notice.

          B.   Mr.  Aristides may, at Mr.  Aristides'  election,  pay the option
               price either by check (bank check,  certified  check, or personal
               check) or by delivering to the Company for cancellation shares of
               Common Stock of the Company which have been held by Mr. Aristides
               for not less than six (6) months with a fair  market  value equal
               to the option price. For these purposes, the fair market value of
               the  Company's  Common  Stock shall be the  closing  price of the
               Common  Stock  on the  date of  exercise  on the New  York  Stock
               Exchange  (the "NYSE") or on the  principal  national  securities
               exchange  on which  such  shares are traded if the shares are not
               then traded on the NYSE.  If there is not a  quotation  available
               for such day,  then the closing  price on the next  preceding day
               for which such a quotation  exists shall be determinative of fair
               market  value.  If the shares are not then traded on an exchange,
               the fair market value shall be the average of the closing bid and
               asked  prices of the Common  Stock as  reported  by the  National
               Association of Securities Dealers Automated  Quotation System. If
               the Common  Stock is not then traded on NASDAQ or on an exchange,
               then the fair market value shall be  determined in such manner as
               the Company shall deem reasonable.

          C.   Mr.  Aristides  may,  with the  consent of the  Company,  pay the
               option price by arranging for the  immediate  sale of some or all
               of the shares  issued upon exercise of the option by a securities
               dealer and the payment to the Company by the securities dealer of
               the option exercise price.

      5.  Payment of Withholding Taxes
          ----------------------------

          Upon exercise of any portion of this option,  Mr.  Aristides shall pay
          to the Company an amount sufficient to satisfy any federal,  state, or
          local  withholding  tax  requirements  which  arise as a result of the
          exercise  of the  option or  provide  the  Company  with  satisfactory
          indemnification for such payment. If the Committee,  as defined in the
          Company's  Long  Term  Stock  Incentive  Plan,  has in its  discretion
          determined  that Mr.  Aristides  may do so, such amount may be paid by
          Mr. Aristides by delivering to the Company for cancellation  shares of
          Common  Stock of the  Company  with a fair  market  value equal to the
          minimum amount of such  withholding tax requirement by (i) electing to
          have the Company withhold common shares otherwise to be delivered with
          a fair  market  value equal to the amount of such tax  obligation,  or
          (ii)  electing to  surrender  to the Company  previously  owned common
          shares  with a fair market  value equal to the amount of such  minimum
          tax obligation.

      6.  Change of Control
          -----------------

          A.  Notwithstanding  Section 2 hereof,  the entire option shall become
              immediately  and fully  exercisable on the day following a "Change
              of  Control"  and shall  remain  fully  exercisable  until  either
              exercised or expiring by its terms. A "Change of Control" means:

              (1)  acquisition by any individual,  entity,  or group (within the
                   meaning of Section  13(d)(3) or 14(d)(2) of the  Exchange Act
                   of 1934), (a "Person"),  of beneficial  ownership (within the
                   meaning  of Rule 13d-3  under the 1934 Act) which  results in
                   the  beneficial  ownership  by such  Person of 25% or more of
                   either

                    (a)  the then  outstanding  shares  of  Common  Stock of the
                         Company (the "Outstanding Company Common Stock") or

                    (b)  the  combined  voting  power  of the  then  outstanding
                         voting  securities  of the  Company  entitled  to  vote
                         generally   in   the   election   of   directors   (the
                         "Outstanding Company Voting Securities");

                   provided, however, that the following acquisitions will
                   not result in a Change of Control:

                        (i)   an acquisition directly from the Company,
                        (ii)  an acquisition by the Company,
                        (iii) an  acquisition by  an employee  benefit plan  (or
                              related  trust)  sponsored  or  maintained by  the
                              Company  or  any  corporation  controlled  by  the
                              Company,
                        (iv)  an acquisition by any Person who is deemed to have
                              beneficial  ownership of the  Company common stock
                              or other Company  voting  securities  owned by the
                              Trust Under  the Will of  Clarissa L. Gray ("Trust
                              Person"), provided   that  such  acquisition  does
                              not result  in the  beneficial  ownership  by such
                              Person of  32% or more of  either the  Outstanding
                              Company  Common  Stock or the Outstanding  Company
                              Voting Securities, and provided  further  that for
                              purposes of this  Section 6,  a Trust Person shall
                              not be deemed to have beneficial  ownership of the
                              Company  common  stock  or  other  Company  voting
                              securities  owned by  The Graco Foundation  or any
                              employee benefit  plan of the Company,  including,
                              without limitations, the Graco Employee Retirement
                              Plan and the Graco Employee Stock Ownership Plan,
                        (v)   an acquisition by Mr. Aristides or  any group that
                              includes Mr. Aristides, or
                        (vi)  an acquisition  by any corporation  pursuant  to a
                              transaction  that complies  with clauses (a), (b),
                              and (c) of subsection (4) below; and

                   provided,  further, that if any Person's beneficial ownership
                   of  the  Outstanding  Company  Common  Stock  or  Outstanding
                   Company  Voting  Securities  is 25% or more as a result  of a
                   transaction  described in clause (i) or (ii) above,  and such
                   Person   subsequently   acquires   beneficial   ownership  of
                   additional  Outstanding  Company  Common Stock or Outstanding
                   Company Voting  Securities as a result of a transaction other
                   than  that  described  in  clause  (i) or  (ii)  above,  such
                   subsequent acquisition will be treated as an acquisition that
                   causes  such  Person  to own 25% or  more of the  Outstanding
                   Company Common Stock or Outstanding Company Voting Securities
                   and be deemed a Change of Control; and provided further, that
                   in the  event any  acquisition  or other  transaction  occurs
                   which results in the  beneficial  ownership of 32% or more of
                   either  the   Outstanding   Company   Common   Stock  or  the
                   Outstanding  Company  Voting  Securities by any Trust Person,
                   the  Incumbent  Board  may  by  majority  vote  increase  the
                   threshold  beneficial  ownership  percentage  to a percentage
                   above 32% for any Trust Person; or

              (2)  Individuals who, as of the date hereof,  constitute the Board
                   of Directors of the Company (the "Incumbent Board") cease for
                   any reason to  constitute  at least a majority of said Board;
                   provided,  however,  that any individual  becoming a director
                   subsequent to the date hereof whose  election,  or nomination
                   for election by the Company's shareholders, was approved by a
                   vote of at least a majority of the directors then  comprising
                   the  Incumbent  Board  will  be  considered  as  though  such
                   individual  were  a  member  of  the  Incumbent   Board,  but
                   excluding,  for  this  purpose,  any  such  individual  whose
                   initial  membership  on the  Board  occurs  as a result of an
                   actual or  threatened  election  contest  with respect to the
                   election  or  removal  of   directors   or  other  actual  or
                   threatened  solicitation  of  proxies  or  consents  by or on
                   behalf of a Person other than the Board; or

              (3)  The  commencement  or  announcement of an intention to make a
                   tender offer or exchange  offer,  the  consummation  of which
                   would result in the  beneficial  ownership by a Person of 25%
                   or  more  of  the   Outstanding   Company   Common  Stock  or
                   Outstanding Company Voting Securities; or

              (4)  The  approval  by  the  shareholders  of  the  Company  of  a
                   reorganization,  merger, consolidation, or statutory exchange
                   of Outstanding  Company  Common Stock or Outstanding  Company
                   Voting  Securities  or sale or  other  disposition  of all or
                   substantially  all of the  assets of the  Company  ("Business
                   Combination")   or,   if   consummation   of  such   Business
                   Combination  is  subject,  at the  time of such  approval  by
                   stockholders,   to  the   consent   of  any   government   or
                   governmental  agency,  the obtaining of such consent  (either
                   explicitly or implicitly by consummation) excluding, however,
                   such a Business combination pursuant to which

                   (a)  all or substantially all of the individuals and entities
                        who  were  the  beneficial  owners  of  the  Outstanding
                        Company  Common  Stock  or  Outstanding  Company  Voting
                        Securities    immediately   prior   to   such   Business
                        Combination  beneficially  own,  directly or indirectly,
                        more  than 80% of,  respectively,  the then  outstanding
                        shares of common stock and the combined  voting power of
                        the then outstanding voting securities  entitled to vote
                        generally in the election of directors,  as the case may
                        be, of the  corporation  resulting  from  such  Business
                        Combination    (including,    without   limitation,    a
                        corporation  that as a result of such  transaction  owns
                        the Company or all or substantially all of the Company's
                        assets   either   directly   or  through   one  or  more
                        subsidiaries) in  substantially  the same proportions as
                        their  ownership,  immediately  prior  to such  Business
                        Combination of the  Outstanding  Company Common Stock or
                        Outstanding Company Voting Securities,

                   (b)  no  Person  [excluding  any  employee  benefit plan  (or
                        related  trust)  of  the  Company  or  such  corporation
                        resulting from such Business  Combination]  beneficially
                        owns,  directly or  indirectly,  25% or more of the then
                        outstanding  shares of common  stock of the  corporation
                        resulting from such Business Combination or the combined
                        voting power of the then outstanding  voting  securities
                        of such  corporation  except  to the  extent  that  such
                        ownership existed prior to the Business Combination, and

                   (c)  at  least a  majority  of the  members  of the  board of
                        directors  of  the   corporation   resulting  from  such
                        Business Combination were members of the Incumbent Board
                        at the time of the  execution of the initial  Agreement,
                        or of  the  action  of the  Board,  providing  for  such
                        Business Combination; or

              (5)  approval by the stockholders of the Company of a complete
                   liquidation or dissolution of the Company.

          B.  A Change of Control shall not be deemed to have occurred with
              respect to Mr. Aristides if:

              (1)  the acquisition of the 25% or greater interest referred to in
                   subparagraph A.(1) of this Section 6 is by a group, acting in
                   concert, that includes Mr. Aristides or

              (2)  if at  least  25% of the  then  outstanding  common  stock or
                   combined voting  power of the then outstanding Company voting
                   securities  (or voting  equity  interests)  of  the surviving
                   corporation  or  of   any   corporation   (or  other  entity)
                   acquiring  all  or  substantially  all of the  assets  of the
                   Company shall  be beneficially owned, directly or indirectly,
                   immediately after a  reorganization,  merger,  consolidation,
                   statutory  share exchange, disposition of assets, liquidation
                   or dissolution referred to  in subsections (4) or (5) of this
                   section by a group,  acting in  concert,  that  includes  Mr.
                   Aristides.


      7.  Adjustments
          -----------

          If there shall be any change in the number or  character of the Common
          Stock of the Company  through merger,  consolidation,  reorganization,
          recapitalization,  dividend in the form of stock (of whatever amount),
          stock split or other change in the corporate structure of the Company,
          and all or any portion of the option shall then be unexercised and not
          yet expired,  appropriate  adjustments in the outstanding option shall
          be made by the Company, in order to prevent dilution or enlargement of
          option rights.  Such  adjustments  shall include,  where  appropriate,
          changes  in the  number of  shares  of Common  Stock and the price per
          share subject to the outstanding option.

      8.  Miscellaneous
          -------------

          A.   This option is issued  pursuant to the Company's  Long-Term Stock
               Incentive  Plan and is subject  to its terms.  A copy of the Plan
               has been given to Mr.  Aristides.  The terms of the Plan are also
               available for inspection  during  business hours at the principal
               offices of the Company.

          B.  This  Agreement  shall not confer on Mr.  Aristides any right with
              respect to  continuance of employment by the Company or any of its
              subsidiaries,  nor will it  interfere in any way with the right of
              the  Company  to  terminate  such  employment  at  any  time.  Mr.
              Aristides  shall  have none of the  rights of a  shareholder  with
              respect to shares  subject to this option  until such shares shall
              have been issued to him/her upon exercise of this option.

          C.  The  Company  shall at all  times  during  the term of the  option
              reserve  and keep  available  such  number  of  shares  as will be
              sufficient to satisfy the requirements of this Agreement.


      IN WITNESS  WHEREOF,  the parties  hereto have caused this Agreement to be
executed on the day and year first above written.

                                          GRACO INC.
                                          By:

                                          ------------------------------------



                                          /s/GEORGE ARISTIDES
                                          ------------------------------------
                                          George Aristides



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