Document:

SEPARATION AND RELEASE AGREEMENT

     THIS AGREEMENT is effective the 31st day of December,  1999, by and between
Graco Inc., a Minnesota  corporation  ("Graco"),  with its principal  offices at
4050  Olson  Memorial  Highway,  Golden  Valley,  Minnesota  55422  and James A.
Earnshaw,  an  individual,  residing at 6407 Oxbow Bend,  Chanhassen,  MN. 55317
("Mr. Earnshaw").

     WHEREAS, Mr. Earnshaw is now employed by Graco; and

     WHEREAS,  Mr.  Earnshaw  has  resigned as an officer and  employee of Graco
effective December 31, 1999, and his employment  relationship with Graco will be
terminated in accordance with the terms of this Agreement.

     NOW, THEREFORE, It is hereby mutually agreed by and between the parties for
good and valuable consideration as follows:

     1.   Separation Payment

          On or before  January 15,  2000,  Graco will pay to Mr.  Earnshaw in a
          lump sum as a  separation  payment the amount of eight  hundred  forty
          thousand dollars  ($840,000)  dollars,  subject to tax withholding and
          deductions required by law.

      2.  Annual Bonus Plan

          Mr. Earnshaw shall be entitled to payment of a bonus for the year 1999
          under the 1999  Corporate  Annual Bonus Plan, in accordance  with said
          Plan and when the bonuses thereunder are normally paid.

      3.  Benefits

          Mr. Earnshaw's  entitlement to,  continuation or cessation of employee
          benefits following the termination of his employment is described in a
          letter from the Graco Benefits Department to Mr. Earnshaw's attention,
          attached hereto as Exhibit A and incorporated herein by reference.

      4.  Stock Options

          The stock options granted to Mr. Earnshaw in accordance with the stock
          option agreements  between Mr. Earnshaw and Graco dated March 1, 1999,
          shall vest in full and be exercisable for a period of six months after
          the  termination  of Mr.  Earnshaw's  employment  in  accordance  with
          Section 3.A.(ii) of each of said agreements.

      5.  Outplacement Assistance

          Graco  shall  assume the cost of an  outplacement  agency  used by Mr.
          Earnshaw to seek other employment,  for a period not to exceed one (1)
          year or upon Mr. Earnshaw securing other  employment,  whichever first
          occurs. Said agency, and the costs incurred,  shall be mutually agreed
          upon by Graco and Mr.  Earnshaw,  and shall be  customary  for seeking
          employment at the level of the position Mr. Earnshaw held at Graco.

      6.  Cooperation

          Mr.  Earnshaw  shall  render all  reasonable  cooperation  to Graco in
          connection  with the  prosecution  or defense of any  lawsuit or other
          judicial or administrative action, including participating as a source
          of  information or witness in any such action.  Graco shall  reimburse
          Mr.  Earnshaw for any  reasonable  out-of-pocket  expenses  (including
          attorneys'  fees,  if necessary)  incurred by him in  connection  with
          rendering such cooperation.

      7.  Confidentiality

          a.   Mr.  Earnshaw hereby agrees that, for a period of three (3) years
               after  December 31, 1999,  he will not,  directly or  indirectly,
               disclose any Confidential  Information,  as defined in subsection
               (b) below,  to any other party,  and will not in any way use such
               Confidential  Information  in  the  course  of  his  business  or
               employment during said period.

          b.   As used herein,  the term  "Confidential  Information" shall mean
               all  information  which is treated as confidential or proprietary
               by Graco in the normal course of its business, including, without
               limitation,  documents so marked,  or is a trade secret of Graco,
               which  has been  disclosed  by Graco to Mr.  Earnshaw  including,
               without  limitation,  information  relating  to  Graco  products,
               processes, product development or research, equipment, machinery,
               apparatus,  business operations,  financial results or condition,
               strategic plans or projections,  customers, suppliers, marketing,
               sales,  management practices,  technical  information,  drawings,
               specifications,  material,  and the like,  and any  knowledge  or
               information  developed  by Mr.  Earnshaw  relating  to the  same,
               provided,   however,  that  Confidential  Information  shall  not
               include  information  which  is at the  time  of  disclosure,  or
               thereafter becomes, a part of the public domain through no act or
               omission by Mr.  Earnshaw or  information  which Mr.  Earnshaw is
               required to disclose in a court or other  judicial  proceeding or
               is otherwise legally required to disclose.

          c.   The  provisions  of this Section 7 are in addition to, and not in
               lieu of, the  fiduciary and other duties and  obligations  of Mr.
               Earnshaw as an employee,  officer and director of Graco, and this
               Section 7 does not limit said  obligations in any way, by time or
               otherwise.

      8.  Release

          a.   Except  with  respect to the  provisions  of this  Agreement  Mr.
               Earnshaw  hereby  releases and forever  discharges  Graco and its
               officers, employees, agents, successors, and assigns from any and
               all claims,  causes of action,  demands,  damages,  liability and
               responsibility  whatsoever,  arising  prior  to the  date of this
               Agreement, including without limitation, any rights or claims for
               further  compensation,  or  any  rights  to  participate  in  any
               Company-sponsored program relating to the purchase or acquisition
               of any Graco common stock,  preferred  stock,  or other equity in
               Graco or any subsidiary thereof (except as specifically  provided
               in this  Agreement),  or any right or claim Mr. Earnshaw may have
               or assert under the common law or any state, municipal,  federal,
               or other statute or regulation  regarding the rights of employees
               generally or based on discrimination on the basis of race, creed,
               gender,  age, or other protected status. This Section 8 shall not
               affect Mr.  Earnshaw's rights to  indemnification  as an officer,
               director,  and  employee  of  Graco  under  Graco's  by-laws  and
               applicable  Minnesota  law nor any rights which he has accrued by
               participating   in  any  Graco  benefit  plan,   subject  to  the
               provisions  of this  Agreement and the terms and  conditions  set
               forth in such plan as of his resignation date.

          b.   Mr. Earnshaw certifies, represents and agrees that:

               (i)   this Agreement is written in a manner that he understands;

               (ii)   he understands that this Section 8 specifically waives any
                      rights or claims he may have arising under federal, state,
                      and local laws prohibiting employment discrimination, such
                      as the Age Discrimination in Employment Act, the Minnesota
                      Human  Rights Act,  Title VII  of the Civil  Rights Act of
                      1964, the Rehabilitation Act of 1973, the  Americans  with
                      Disabilities  Act and/or  any  claims for  damages  or for
                      injuries based  on  common  law   theories  of   contract,
                      quasi-contract or tort;

               (iii)  the waiver herein of rights or claims  are to those  which
                      may have  arisen  prior  to  the execution  date  of  this
                      Agreement;

               (iv)   a portion  of the consideration  set out in this Agreement
                      is in addition to  compensation  that he may already  have
                      been entitled to;

               (v)    he  has been  specifically  advised in writing  to consult
                      with an attorney prior to executing this Agreement;

               (vi)   he has been informed  that  he has a  period  of at  least
                      twenty-one  (21)  calendar days  within which  to consider
                      this Agreement;

               (vii)  he specifically   understands  that  he  may  revoke  this
                      Agreement for a period of at least fifteen  (15)  calendar
                      days following  his execution of this  Agreement, and that
                      this Agreement is not  effective or enforceable  until the
                      fifteen (15) day revocation period has expired;

               (viii) if  he  decides  to  revoke  this  Agreement  within  said
                      fifteen  (15)  day  period,   he  should  provide  written
                      notice  to  the   Vice  President,   General  Counsel  and
                      Secretary,  delivered  in  person   or  by  mail.   If his
                      revocation  is sent by mail,  it  must be postmarked on or
                      before January 15, 2000,  properly addressed  to Robert M.
                      Mattison, Vice President, General Counsel  and  Secretary,
                      Graco Inc., P.O. Box 1441, Minneapolis, MN 55440, and sent
                      by certified mail, return receipt requested.  Mr. Earnshaw
                      understands that Graco will  have no obligation to pay him
                      anything under this Agreement if he revokes his acceptance
                      within  the  time  limit  specified,  and  that he will be
                      obligated to immediately refund  to  Graco  all sums  paid
                      to him by Graco pursuant hereto.

               (ix)   Mr.  Earnshaw  expressly  agrees  that  the  waiver of his
                      rights pursuant to the Agreement is knowing and  voluntary
                      on his part.

      9.  Applicable Law

          Except to the extent  governed by federal law, this  Agreement and any
          controversies  between the parties  shall be governed by and construed
          in accordance with the laws of the State of Minnesota.

     10.  Entire Agreement

          This  Agreement  constitutes  the entire  agreement and  understanding
          between the parties with respect to the subject  matter  hereof,  and,
          except  as  otherwise   specifically   provided  herein   specifically
          supersedes  and replaces any and all prior written or oral  agreements
          or  understandings,  including but not limited to the letter agreement
          between Mr. Earnshaw and Graco dated December 22, 1998. This Agreement
          may  not  be  amended   except  in  a  writing  signed  by  authorized
          representatives of both parties.

     11.  Headings

          The  headings of the  paragraphs  herein are  included  solely for the
          convenience  of  reference  and  shall  not  control  the  meaning  or
          interpretation of any provisions of this Agreement.

      IN WITNESS  WHEREOF,  the parties  hereto have executed this  Agreement in
duplicate originals on the day and year first above written.

GRACO INC.

By: /s/David A. Koch
    ------------------------------------
         David A. Koch
         Chairman

JAMES A. EARNSHAW

/s/James A. Earnshaw
------------------------------

<PAGE>

                                                                       Exhibit A

January 5, 2000

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

Dear Jim:

This letter will review the status of your Graco benefit programs following your
termination  of employment  with the Company,  and advise you of decisions  that
need to be made concerning  these programs.  In summarizing the benefits in this
letter, December 31, 1999 was used as your last day of employment.

Health Coverage

Your group Health coverage  through  HealthPartners  would normally end December
31, 1999.  You have the option to retain family  coverage until you are eligible
for coverage through a new employer, or for a period of 18 months,  whichever is
shorter.  Coverage can be extended from January,  2000 through June,  2001.  You
have the option of continuing  coverage for three months at the employee rate of
$84.44 per month.  You may then extend  coverage for an  additional 15 months by
paying the full monthly premium of $538.40. Premium rates and benefit levels are
subject to future changes.  You have 60 days from the date of your separation or
the date of this letter, whichever is longer, to elect continuation coverage.

It will be your  responsibility  to pay the monthly premium to Graco to continue
your Health coverage.  Your first check or money order should be made payable to
Graco Inc.,  and sent to the Benefits  Department on or before January 17, 2000,
to  guarantee  uninterrupted  medical  coverage.  Subsequent  checks  should  be
received  by the  Payroll  Department  no later  than the  first of each  month.
Failure to make timely  payments  will result in the  automatic  termination  of
coverage.  You will not receive any statements or reminders.  Please indicate on
the enclosed  form whether you elect to continue  your Health  coverage.  If you
elect to continue coverage,  continuation coupons will be sent to you indicating
your monthly premium amount.

Please note:  If you elect  continuation  coverage  after the date your coverage
would  normally end, you must submit  premium  payments  retroactive to the time
your coverage as an employee ceased. In addition, any medical expenses you incur
during this period will be delayed in processing until coverage is reinstated.

Dental Coverage

Your Dental coverage  through  Prudential  would normally end December 31, 1999.
You have the  option to  retain  family  coverage  until  you are  eligible  for
coverage  through a new  employer,  or for a period of 18 months,  whichever  is
shorter.  Your coverage can be extended from January,  2000 through June,  2001.
You have the option of continuing coverage for three months at the employee rate
of $25.08 per month. You may then extend coverage for an additional 15 months by
paying the full monthly premium of $79.89.  This  continuation  coverage will be
through  Delta Dental.  Premium  rates and benefit  levels are subject to future
changes.  Payment  is  handled  in the same  manner as Health  coverage.  Please
indicate  on the  enclosed  form  whether  you  elect to  continue  your  Dental
coverage.

Business Travel  Accident,  Seatbelt  Accident,  Dependent Life  Insurance,  and
Disability Coverages

Your Business Travel Accident, Seatbelt Accident,  Dependent Life Insurance, and
Disability  coverages  ended on December 31, 1999.  There are no  provisions  to
extend coverages.

Life Coverage

Your Basic and  Supplemental  Life coverage  would  normally end on December 31,
1999.  You have the option of extending  your  $200,000  Basic Life coverage and
your $360,000  Supplemental  Life  coverage  until you are eligible for coverage
through a new  employer,  or for a period of 18 months,  whichever  is  shorter.
Coverage can be extended  from January,  2000 through June,  2001, by paying the
following monthly premium:

         o  Basic Life Coverage                       $54.00
         o  Supplemental Life Coverage                187.20
                                                      ------
                  Total                     $241.20 Per Month

Premium  rates are subject to future  changes.  Please  indicate on the enclosed
form whether you elect to continue your Life coverage.

Conversion  to a private  policy is  available  either when your  coverage as an
employee ends or after you complete the full 18 month extension. You may convert
any increment of $1,000,  from a minimum of $5,000 up to a maximum of your total
coverage through Graco. If you convert now, conversion is to a whole life policy
with the rate set for the life of the policy.  Payments can be  established on a
quarterly,  semi-annual  or annual  basis.  If you  convert  after your 18 month
extension,  conversion is to a three year  renewable  term policy.  Your premium
will be adjusted every three years to reflect your new age. Premiums are paid on
an annual  basis only.  If you wish to convert to a private  policy,  it is your
responsibility  to contact us for a conversion  form.  You have 31 days from the
date your coverage would normally end to make this conversion.

Executive Long Term Disability Policy

Your Executive Long Term  Disability  Policy with Graco will end on December 31,
1999. Chaffee and Westenberg  Companies,  brokers for the Plan, will contact you
regarding conversion rights.

Expense Reimbursement Account

You were enrolled in Graco's health care expense  reimbursement  account for the
1999 plan year.  Claims on expenses incurred prior to leaving Graco may be filed
between  now  and  February  29,  2000.  Thereafter,  remaining  funds  will  be
forfeited.

Vacation

Payment for any hours of unused vacation will be forwarded to you.

Graco Employee Investment Plan

You are eligible for a distribution from your Employee  Investment Plan account.
As of January 3, 2000, your account balances are as follows:

                  Pre-Tax Account               $7,929.98
                  Employer Account               1,941.43
                                                ---------
                  Total EIP Account             $9,871.41
                                                =========

You may elect one of the following distribution options:

    o Single lump sum distributed in cash.

    o Installment payments paid annually, quarterly, or monthly, in cash.

    o Defer distribution until the close of the calendar year in which you reach
      age 70 1/2.  (Note:  This is the maximum age to which  distribution can be
      deferred. Distribution may be deferred to an earlier date.)

    o Rollover of Pre-Tax and Employer contributions and investment  earnings to
      Individual Retirement Account (IRA) or new employer  plan.  A rollover may
      be made  directly to your IRA  or new employer plan,  without  withholding
      taxes being  applicable.  Graco stock may be distributed in cash or stock,
      depending on the  requirements of the new employer plan. A rollover may be
      distributed to you for  transmission to a new plan, but a 20%  withholding
      will apply (see the enclosed Special Tax Notice).

You have not paid taxes on any of these funds,  and the entire  account  balance
will be  taxable  to you when funds are  distributed.  You should  note that the
taxable portion of your account balance is subject to federal income tax. If you
receive any payment  before you reach age 59 1/2, an  additional  10% income tax
penalty  will  apply  to  all  taxable  amounts.   These  include  your  Pre-Tax
contributions, Employer contributions, and earnings on all accounts.

A request for  distribution  of Employee  Investment  Plan assets can be made 30
days after your employment  separation date.  Please contact the Plan's Helpline
at (888) 319-9451, or (612) 316-1355 in Minneapolis/St. Paul. You will receive a
form from  Norwest to access a total  distribution  in either a single  lump sum
cash payment,  or a direct  rollover to another  employer plan or qualified IRA.
Complete and return the form to Norwest for processing.  An application received
prior to 30 days after separation from employment cannot be processed.

If you decide to defer distribution of your account, you do not need to take any
action at this time.

Graco Employee Retirement Plan

The Employee  Retirement  Plan provides a vested  benefit at retirement  age for
employees who have completed five years of service with the Company. Your period
of service with Graco was less than five years, therefore,  you are not entitled
to a retirement benefit.

We advise you review the enclosed  Special Tax Notice for information  regarding
the federal tax  implications  of decisions  made with respect to Graco Employee
Benefit Plans.

Please complete and return the enclosed paperwork at your earliest  convenience.
If you have any questions  concerning your benefits,  please contact me at (612)
623-6628.

Sincerely,

/s/Carolyn Haeger
Carolyn Haeger
Benefits Technician

<PAGE>

                    CERTIFICATE OF GROUP HEALTH PLAN COVERAGE

* IMPORTANT - This certificate  provides evidence of your prior health coverage.
You may need to furnish this  certificate  if you become  eligible under a group
health plan that excludes coverage for certain medical  conditions that you have
before you enroll.  This  certificate may need to be provided if medical advice,
diagnosis,  care,  or treatment  was  recommended  or received for the condition
within the  6-month  period  prior to your  enrollment  in the new plan.  If you
become   covered  under   another  group  health  plan,   check  with  the  plan
administrator to see if you need to provide this certificate.  You may also need
this  certificate to buy, for yourself or your family,  an insurance policy that
does not exclude for medical conditions that are present before you enroll.

 1.  Date of this certificate:                 January 5, 2000

 2.  Name of group health plan:                HealthPartners

 3.  Name of participant:                      James Earnshaw

 4.  Social Security Number of participant:    ###-##-####

 5.  Name of any dependents to whom this  certificate applies:  Judith,  Emilie,
     and Alexander Earnshaw

 6.  Name,  address,  and  telephone  number of  plan  administrator  or  Issuer
     responsible for providing this certificate:

                      Graco, Inc.
                      P.O. Box 1441
                      Minneapolis, MN  55440

 7.  For further information, call:  (612) 623-6628

 8.  If the individual(s) identified in line 3 and line 5 has at least 18 months
     of creditable  coverage  (disregarding periods  of coverage before a 63-day
     break), check here __ and skip lines 9 and 10.

 9.  Date waiting period or affiliation period (if any) began:     March 1, 1999

10.  Date coverage began:   March 1, 1999

11.  Date coverage ended:  December 31, 1999

Note:  separate  certificates  will be furnished if information is not identical
for the participant and each beneficiary.February 1999
                                EXECUTIVE OFFICER
                           ANNUAL INCENTIVE BONUS PLAN

1.   Definitions.  When the following terms are used herein with initial capital
     letters, they shall have the following meanings:

     1.1  Base  Salary  - a  specific  dollar  amount  for each  Participant  as
          identified in Schedule A

     1.2  Compensation Committee - the Management  Organization and Compensation
          Committee of the Board of Directors of Graco Inc.; it is intended that
          the  Compensation  Committee will satisfy the  requirements of Section
          162(m)  of the  Code  by  being  comprised  of two  or  more  "outside
          directors."

     1.3  Code - the Internal  Revenue  Code of 1986,  as it may be amended from
          time  to  time,   and  any  proposed,   temporary  or  final  Treasury
          Regulations promulgated thereunder.

     1.4  Company  -  Graco  Inc.,  a  Minnesota  corporation,  and  any  of its
          affiliates that adopt the Plan.

     1.5  Eligible  Employee - the chief  executive  officer  and any  executive
          officer of the Company designated by the Compensation Committee.

     1.6  Participant  - an Eligible  Employee  designated  by the  Compensation
          Committee,  at any  time  ending  on or  before  the  90th day of each
          Performance Period, as subject to the Plan.

     1.7  Performance Period - the Company's fiscal year.

     1.8  Plan - this Executive Officer Annual Incentive Bonus Plan.

     1.9  Maximum Targeted Bonus Percentage - the maximum potential bonus payout
          expressed as a percentage of  Participant's  Base Salary as identified
          in Schedule B.

     1.10 Company  Performance   Target(s)  -  the  financial  growth  target(s)
          established by the Compensation Committee for a Performance Period and
          reflected  in the  percentages  identified  in Schedule C. The Company
          Performance  Target(s) shall be directly and specifically  tied to one
          or more of the  following  financial  measures:  consolidated  pre-tax
          earnings,  net revenues,  net  earnings,  operating  income,  earnings
          before interest and taxes, cash flow, return on equity,  return on net
          assets  employed  or  earnings  per  share   [hereinafter   "Financial
          Measure(s)"]for the applicable  Performance Period, all as computed in
          accordance with generally accepted accounting  principles as in effect
          from time to time and as applied by the Company in the  preparation of
          its  financial  statements  and  subject  to other  special  rules and
          conditions  as the  Compensation  Committee  may establish at any time
          ending on or before the 90th day of the applicable Performance Period.
          Any Financial  Measure may be stated in absolute  terms or as compared
          to  another  company  or  companies.  Such  Financial  Measures  shall
          constitute the sole bases upon which the Company  Performance  Targets
          shall be based.

2.   Administration.

     2.1  Determinations  must be made prior to each Performance Period - At any
          time ending on or before the 90th day of each Performance  Period, the
          Compensation Committee shall:

          (a)  designate  the  Participants  in the Plan  for  that  Performance
               Period;

          (b)  indicate  the Base Pay of each  Participant  for the  Performance
               Period by amending Schedule A in writing;

          (c)  establish  Targeted Bonus Percentages for the Performance  Period
               by amending Schedule B in writing;

          (d)  establish  Company  Performance  Target(s)s  for the  Performance
               Period by amending Schedule C in writing.

     2.3  Certification  - Following  the close of each  Performance  Period and
          prior to  payment  of any  bonus  under  the  Plan,  the  Compensation
          Committee  must  certify  in  writing  that  the  Company  Performance
          Target(s)  and all other factors upon which a bonus is based have been
          attained.

     2.4  Shareholder  Approval  - The  material  terms  of the  Plan  shall  be
          disclosed to and approved by shareholders of the Company in accordance
          with Section 162(m) of the Code. No bonus shall be paid under the Plan
          unless such shareholder approval has been obtained.

3.   Bonus Payment

     3.1  Maximum - Each  Participant  shall  receive a bonus  payment  for each
          Performance Period calculated in accordance with the formula set forth
          in   subparagraph   3.2  and  in  an  amount  not  greater   than  the
          Participant's  Maximum  Targeted  Bonus  Percentage  multiplied by the
          Participant's Base Salary.

     3.2  Formula - Subject to other  provisions of this Plan, each  Participant
          shall receive a bonus payment for each Performance  Period  calculated
          as follows:

          (a)  Each of the  Company  Performance  Targets  shall be  assigned  a
               weight  expressed  as a  percent  of  the  Participant's  Maximum
               Targeted Bonus Percentage.

          (b)  At the conclusion of each Performance  Period, the percent of the
               Participant's Maximum Targeted Bonus Percentage achieved for each
               applicable Financial Measure shall be calculated.

          (c)  The percentages achieved by performing the calculation  described
               in subparagraph 3.2(b) shall be added together and this sum shall
               be  multiplied  by  the  Participant's   Maximum  Targeted  Bonus
               Percentage.

          (d)  The amount  obtained by performing the  calculation  described in
               subparagraph 3.2(c) shall be multiplied by the Participant's Base
               Salary.

     3.3  Limitations

          (a)  No payment if Company  Performance  Targets not  achieved - In no
               event shall any Participant  receive a bonus payment hereunder if
               the Company  Performance  Targets and all other  factors on which
               the  bonus   payment  is  based  are  not  achieved   during  the
               Performance Period.

          (b)  No payment in excess of  preestablished  amount - No  Participant
               shall receive a payment under the Plan for any Performance Period
               in excess of One Million Dollars ($1,000,000).

          (c)  Pro-ration or elimination of Bonus payment - Participation in the
               Plan ceases with resignation,  termination,  retirement, death or
               long-term disability.  A Participant who resigns or is terminated
               effective during the Performance Period is ineligible for a bonus
               payment. A Participant who retires,  dies or becomes eligible for
               long-term  disability  benefits  under  the  Company's  long-term
               disability  benefit  plan during the  Performance  Period will be
               paid a bonus based on a calculation  performed in accordance with
               the  provisions  of  subparagraph  3.2,  provided,  however,  the
               Participant's  Base  Salary  shall  be  pro-rated  to the date of
               retirement,   death  or  eligibility  for  long-term   disability
               benefits.

4.   Time  and  Form  of   Payments;   Taxability  -  Subject  to  any  deferred
     compensation  election  pursuant to any such plans of the Company,  a bonus
     payment  shall be made to the  Participant  in one or more cash payments as
     soon as determined  by the  Compensation  Committee  after it has certified
     that the Company Performance Target(s) and all other factors upon which the
     bonus payment for the Participant is based have been achieved.

     4.1  Nontransferability - Participants and beneficiaries shall not have the
          right to assign,  encumber or otherwise  anticipate the payments to be
          made under the Plan, and the benefits provided  hereunder shall not be
          subject to seizure for payment of any debts or  judgments  against any
          Participant or any beneficiary.

     4.2  Tax  Withholding - In order to comply with all  applicable  federal or
          state income tax laws or regulations, the Company may take such action
          as it deems appropriate to ensure that all applicable federal or state
          payroll,  withholding,  income or other taxes,  which are the sole and
          absolute  responsibility  of a Participant,  are withheld or collected
          from such Participant.

5.   Amendment and Termination - The  Compensation  Committee may amend the Plan
     prospectively  at any  time  and for any  reason  deemed  sufficient  by it
     without  notice  to any  person  affected  by the  Plan  and  may  likewise
     terminate or curtail the benefits of the Plan,  both with regard to persons
     expecting to receive  benefits  hereunder in the future and persons already
     receiving  benefits at the time of such action,  provided that no amendment
     to the Plan shall be  effective  which would  increase  the maximum  amount
     payable to a Participant  under  paragraph  3.3(b),  which would change the
     Financial Measures upon which Company  Performance Targets must be based as
     set forth in  subparagraph  1.10 of this  Plan or which  would  modify  the
     requirements   for   eligibility   under   subparagraph   1.5,  unless  the
     shareholders  of the Company  shall have approved such change in accordance
     with the requirements of Section 162(m).

6.   Miscellaneous

     6.1  Effective Date - January 1, 1999

     6.2  Term of the Plan - Unless  the Plan shall  have been  discontinued  or
          terminated,  the Plan shall  terminate on December 31, 2003.  No bonus
          shall be granted after the termination of the Plan; provided, however,
          that a payment  with  respect to a  Performance  Period  which  begins
          before such  termination  may be made  thereafter.  In  addition,  the
          authority of the Compensation Committee to amend the Plan shall extend
          beyond the termination of the Plan.

     6.3  Headings - Headings are given to the Sections and  subsections  of the
          Plan solely as a convenience  to facilitate  reference.  Such headings
          shall  not  be  deemed  in  any  way   material  or  relevant  to  the
          construction or interpretation of the Plan or any provision thereof.

     6.4  Applicability to Successors - The Plan shall be binding upon and inure
          to the benefit of the Company and each Participant, the successors and
          assigns   of   the   Company,   and   the   beneficiaries,    personal
          representatives and heirs of each Participant.  If the Company becomes
          a party to any  merger,  consolidation  or  reorganization,  this Plan
          shall remain in full force and effect as an  obligation of the Company
          or its successors in interest.

     6.5  Employment  Rights and Other Benefit  Programs - The provisions of the
          Plan shall not give any  Participant  any right to be  retained in the
          employment of the Company. In the absence of any specific agreement to
          the contrary,  the Plan shall not affect any right of the Company,  or
          of any affiliate of the Company, to terminate,  with or without cause,
          the  Participant's  employment at any time. The Plan shall not replace
          any  contract of  employment,  whether  oral or  written,  between the
          Company and any  Participant,  but shall be  considered  a  supplement
          thereto.  The Plan is in  addition  to,  and not in lieu of, any other
          employee  benefit plan or program in which any  Participant  may be or
          become  eligible  to  participate  by  reason of  employment  with the
          Company.  Receipt of  benefits  hereunder  shall  have such  effect on
          contributions  to and  benefits  under such other plans or programs as
          the provisions of each such other plan or program may specify.

     6.6  No Trust or Fund  Created - The Plan shall not create or be  construed
          to  create  a  trust  or  separate  fund of any  kind  or a  fiduciary
          relationship between the Company or any affiliate and a Participant or
          any other  person.  To the extent that any person  acquires a right to
          receive  payments  from the Company or any  affiliate  pursuant to the
          Plan,  such right shall be no greater than the right of any  unsecured
          general creditor of the Company or of any affiliate.

     6.7  Governing Law - The validity,  construction  and effect of the Plan or
          any bonus  payable  under the Plan shall be  determined  in accordance
          with the laws of the State of Minnesota.

     6.8  Severability - If any provision of the Plan is or becomes or is deemed
          to be  invalid,  illegal or  unenforceable  in any  jurisdiction  such
          provision   shall  be  construed  or  deemed  amended  to  conform  to
          applicable  laws,  or if it cannot be so construed  or deemed  amended
          without,   in  the   determination  of  the  Compensation   Committee,
          materially  altering the purpose or intent of the Plan, such provision
          shall be stricken as to such  jurisdiction,  and the  remainder of the
          Plan shall remain in full force and effect.

     6.9  Qualified  Performance-Based  Compensation  - All  of  the  terms  and
          conditions  of the Plan shall be  interpreted  in such a fashion as to
          qualify all compensation paid hereunder as qualified performance-based
          compensation within the meaning of Section 162(m) of the Code.
<PAGE>

                                   SCHEDULE A

                       BASE SALARY FOR PERFORMANCE PERIOD
                  BEGINNING ON           AND ENDING ON
                              -----------             ----------

                 Name                            Base Salary
                 ----                            -----------

                                  Actual paid salary for the calendar
                                       year that most closely coincides
                                     with Company fiscal year but not in
                                             excess of $1,250,000

<PAGE>

                                   SCHEDULE B

                TARGETED BONUS PERCENTAGE FOR PERFORMANCE PERIOD
                 BEGINNING ON           AND ENDING ON
                             -----------             ----------

                        Minimum Targeted Bonus        Maximum Targeted Bonus
                              Percentage                    Percentage
                          as a Percentage of            as a Percentage of
        Name                  Base Salary                   Base Salary
        ----            ----------------------        ----------------------

<PAGE>

                                   SCHEDULE C

                           COMPANY PERFORMANCE TARGETS
                             FOR PERFORMANCE PERIOD
                  BEGINNING ON           AND ENDING ON
                              -----------             ----------
                             Company       Minimum Company   Maximum Company
                           Performance       Performance       Performance
                             Target(s)         Target(s)         Target(s)
  Financial Measure(s)        Weight
  --------------------     -----------     ---------------   ---------------

                                   %          $                 $
                             ------            ---------         --------

                                   %          $                 $
                             ------            ---------         --------

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