2004 President’s Letter to Shareholders Helped by a growing national economy, Fastenal  had a very good year in 2004. Our 2004 net  sales of $1.238 billion represented a 24.5%  increase over the 2003 level. Our net earnings of  $131 million represented a 55.7% increase over  the 2003 level. Earnings per share increased  from $1.11 in 2003 to $1.72 in 2004. This is the  highest level of earnings growth we have produced since 1994 and the second best year  since we went public in 1987.  The earnings growth was helped by the stronger  sales growth but is more attributable to the  efficiencies we are experiencing from our store  upgrade project. We refer to the store upgrade  project as the Customer Service Project, or CSP. Since the beginning of the CSP in May 2002,  the sales per store employee has grown by more  than 30%. This improvement has allowed us to  improve our compensation structure, while also  lowering our overall labor costs relative to the  size of the Company. In 2004, we experienced the most significant  inflation in product cost that we have seen in  many years. This inflation was caused by the  steel shortage from China. A large portion of  our fastener product line we sell is imported  from Asia. In these product areas we saw price  increases during the year ranging from 5 to 40%.  Approximately 40% of our fasteners are imported. Our product buyers worked hard to  stay ahead of the increases to minimize the  impact on our customers. The store personnel  also had to work hard explaining this increase to  the customers and had to raise prices. Although  it is never easy to raise prices, it was made  somewhat easier because of all the media coverage the steel shortage received. Our sales growth in 2004 was driven by many  factors. One of the most important is our new  store openings. In 2004 we opened 219 stores  compared to our previous record of 151 stores  opened in 2003, an increase in store openings of  45%. We opened 127 stores in the first half of  the year and 92 in the second half. Opening the  stores earlier in the year helped to contribute to  our improved sales growth in the second half of  the year. This milestone was made possible by  the strong leadership of our regional managers. Because of the success of the CSP project, we  developed a product test program to identify  other products that should: 1) sell well in the  new store format, and 2) produce above average  returns on the inventory investment.  In December 2003, we began this test program at  100 stores. Our marketing department selected  the 100 locations to get a good cross section of  stores with different age, size, and geographic  characteristics.  The product development managers each identified what they believed  were good candidate products; next, they presented their suggestions to a small group of  senior managers (I also participated). As a  group, we decided which products should be  tested. For the first test, we decided on 44  product groups which represented approximately  $20,000 in additional inventory per store. Each  product was monitored on a monthly basis and  by November we were prepared to make stocking decisions. Of the 44 product groups During 2004, we re-set more than 200 existing  CSP stores. These were stores converted to the  CSP format early in the project. The results  show that the new format is far more efficient. A key ingredient is prepackaged product, which  allows customers to serve themselves. We have  also been able to negotiate better prices with our  suppliers by committing to stock their product in  all of our stores. This has allowed us to improve  the gross profit margins in the CSP stores.  The Customer Service Project was Fastenal’s  biggest focus in 2004 as it was in 2003 and the  last half of 2002. To date, we have converted  approximately 90% of our stores to this new  open format. In 2005, we will complete the  initial roll out of the project and continue to  upgrade existing CSP stores. Our merchandising  people have been very aggressive in improving  the layout and merchandising of our stores. We  are currently on the fourth version of CSP. They challenged their district managers to open  as many stores as possible in the first half of the  year and they worked to find better locations and  better buildings. During my travels throughout  the year, I found that most of them fit the  criteria. We believe this effort has helped, and  will continue to help, our business grow faster.  2004 ANNUAL REPORT – PAGE 2 