Management’s Discussion & Analysis of Financial Condition & Results of Operations 2004 (Dollar Amounts in Millions except Per Share Information and as Otherwise Noted)  Gross Profit Margins— Gross profit as a  percent of net sales was as follows:  improvement and stabilization in the growth  rates experienced. The choppy trend, which the  Company experienced from July 2002 until June  2003, reflects the alternating strengthening and  weakening in the industrial economy during that  period, while the July 2003 to December 2004  improvement and stabilization reflects continued  strengthening in the economy as it relates to the  customers we sell to in North America and the  impact of the CSP initiative (discussed below).  The improvement in the gross profit margin in  2004 resulted from several factors. Rising steel  prices had the largest impact on Fastenal’s gross  profit margin. As a reseller of industrial  products, primarily steel-based industrial  products, Fastenal was forced to increase its  selling prices. These increases resulted in  approximately 3.0% to 4.0% of additional sales  dollars in 2004. To date, the increases relate  primarily to CSP (defined below) products, to  changes in our wholesale (or list) pricing, and, to  a lesser degree, to increases in the selling prices  to our key account customers; the latter being  less immediate. The short-term gross profit  margin benefited from these changes as the  increased cost of new inventory, still on the  shelf, is included in ending inventory, and is  relieved through cost of goods over the three to  six month ‘turn’ period between purchase and  sale of the product. Some of this short-term  benefit has been eliminated during 2004;  however, Fastenal’s ability to continue raising its  prices in reaction to inbound product cost  increases should allow us to retain some of the  increased gross profit margin. The second factor  impacting gross profit margins was the strength  of our fastener products in the current economy. These products enjoy the highest gross profit  margin percentage. The third factor was vendor  incentive programs, including vendor freight  allowances, early payment discounts, and  rebates. The fourth factor was improvements in  freight costs, primarily inbound. The fifth factor  was the benefit of inventory depth discussed  below. We expect the current economic activity  to continue positively impacting our growth rates  and the strength in our fastener business. This  should allow us to maintain a portion of the  improvements related to the first two factors, and  should allow us to maintain most of the  improvements related to vendor incentives,  freight costs, and inventory depth.  Threaded fasteners accounted for approximately  46%, 45%, and 46% of the Company’s net sales  in 2004, 2003, and 2002, respectively.  P 2  PThe Retail Packaged Product line related to the  DIY Business acquisition, which was sold in  October 2002. This product line has been merged  into the Company’s other product lines.  P $_{1}$  PFastenal product line represents fasteners and miscellaneous supplies.  2004 2003 2002 FastenalP 1 P  1967  55.6% 54.8%  55.6%  Tools 1993 10.9%  11.4%  11.1%  Cutting Tools  1996   5.0%   5.4%   5.4%  Hydraulics &Pneumatics  1996   6.1%   6.3%   6.0%  Material  Handling  1996   6.8%   7.0%   6.7%  Janitorial  Supplies  1996   3.5%   3.6%   3.2%  Electrical  Supplies  1997   3.2%   2.9%   2.6%  Welding  Supplies  1997   3.3%   3.1%   2.8%  Safety Supplies  1999   4.8%   4.8%   4.1%  Raw Materials  2001   0.5%   0.3%   0.1%  Retail Packaged  ProductsP 2 P  2001  –  –   1.9%  Other  0.3%   0.4%   0.5%  100% 100%  100%  Sales by Product Line— The following table  indicates, by product line: (1) the products sold  by the Company, (2) the year of introduction,  and (3) the percentage of net sales.  2004  50.4%  2003  49.2% 2002  49.5% 2004 ANNUAL REPORT – PAGE 11 