The President's Letter

To Starrett Stockholders and All Starrett Personnel:

I would like to share with you my thoughts on our year and to comment on
some of the opportunities and risks we may encounter in the future.

We have seen an improvement in most segments of our business during the last
three quarters of our financial year, but true to our historical trend, we
have lagged the improved economy and have been slower to benefit than other
companies.

Our sales hit bottom during the first quarter, but still increased 2% year-
on-year and 10% during the last six months.  Even though we incurred a loss
for the year, much of it was attributable to the impact of the government
investigation on earnings of over $4 million pretax and was not reflective
of the progress we have made on the initiatives begun in fiscal 2002.
These initiatives to reduce inventories and product lines, shorten lead-
times, consolidate manufacturing, and streamline SG&A functions are ongoing
and helped contribute to the generation of positive cash flow during this
fiscal year.

The silver lining in all of this is that the government investigation is now
behind us.  We have agreed to a settlement with the government of $500,000.
While I personally would have preferred my day in court, entering into this
settlement is the financially prudent decision for our shareholders and
employees, as it avoids a protracted and expensive fight.  This settlement
puts to bed all claims by the government against the Company and compensates
the government for the time they have spent on the investigation since 2002.
The total charge taken in the fourth quarter was $1.1 million, which
includes the settlement and legal costs to button up the government
investigation.  With this behind us, let me review some of our successes
during the year.

Beginning in January, we started to see the benefits of our R&D investments
with the introduction of our new bi-metal uniqueT saw product lines.  This
is a proprietary raw material processing technology that we introduced
internationally in the second quarter of 2004, which will result in better
performing saw products that we believe will be highly valued by our
customers.  We will continue to apply this innovative technology with the
introduction of additional new products through fiscal 2005 and beyond.

Last year I indicated we were concentrating much of our efforts on growing
international markets.  Our global focus has never been more evident.  Our
Brazilian operation was our best performing location this year.  We began to
see improvement at the tail end of last year and have finished the year with
an increase in sales of 6% in their own currency and benefited from the full
utilization of our new bi-metal uniqueT processing line.

Our Scotland operations were hurt by a relatively weak European economy and
the expense of consolidating the manufacture of optical profile projectors,
previously done in Skipton, England, into the Scotland facility.  This
consolidation will start to pay for itself during the next fiscal year.

In China, we continue to expand our breadth of operations and completed the
installation of assembly and production lines for selected precision tools
and two saw product categories.  We have continued our investment in sales
and sales infrastructure and we had the opportunity during the year to
introduce our new bi-metal uniqueT saw program by hosting an international
sales meeting for Starrett personnel and a broad-base of distribution
partners from around the world.

In concert with our plans to lower costs, we have closed our level
manufacturing plant in Pennsylvania and, as part of a consolidation effort
in our Hardware Division, are in the process of moving this to the Dominican
Republic where we will have access to lower production costs located in this
hemisphere.

In North America, we created a separate sales team to penetrate the hardware
and construction trades in our drive for more channel diversification.  We
have introduced and added selected product line extensions to broaden the
product range.  In the coming year, we will feature our new bi-metal uniqueT
saw product offering that will span several saw product categories.

In the industrial channels, we have made changes to our sales structure to
better focus our efforts on precision tools and saw blades.  This
concentration of effort, in addition to new product introductions in the
precision measuring tool category and the launch of GladiatorT, a line of
band saw blades featuring new tooth geometry, will generate new
opportunities for growth.

SALES AND INCOME
Our net sales for fiscal year ended June 2004 were $180 million.  This is up
2% from last year's $176 million.  The good news is that the trend was up
this year compared to being down last year.  Most encouraging is the fact
that domestic sales have started to improve and in fact are up 10% over last
year for the last six months of the fiscal year.  Our net loss was $2.4
million ($.35 per share) compared to $10.6 million ($1.60 per share) last
year. However, several unusual items discussed above and in the financial
statements are affecting year to year comparability. In 2003, we had charges
of $.92 per share for the write-off of goodwill and $.35 per share for CMM
investigation and inventory related charges.  This year had charges of $.09
per share for facility relocations/closures and an additional $.43 per share
in connection with the CMM division. In both years we had LIFO inventory
liquidation benefits ($.15 per share in fiscal 2004 and $.09 per share in
fiscal 2003) that probably won't continue in the future. Without these
items, we are looking at a small profit of $.02 per share compared to a $.42
per share loss last year.  Cost cutting measures and more domestic factory
hours are beginning to have an effect.

DIVIDENDS
We held the quarterly dividend level at $0.10 per share this year.  We have
set a level we feel we can maintain and still not short the Company for
cash.  We know that many stockholders count on this regular income and we
also take a long-term view of our business and wish to retain enough cash to
be able to improve our plant and equipment and otherwise invest in the
future.

FINANCIAL CONDITION
Our financial condition remains strong with a current ratio of 5.4 to one
and net working capital of $100 million.  Book value per share is $24.42 at
the end of this year compared to $24.77 last year.  In addition to dividends
and normal earnings retained in the business, fluctuations in foreign
currencies, pension fund condition, and treasury stock activity can have a
significant effect on our book value per share.  We have cut way back on
treasury stock purchases in the past few years in order to conserve cash.
The stock activity shown in our financial statements has to do with our
employee stock plans.  Our cash position continued to improve during the
year, mainly because of the significant inventory reductions that have taken
place, and is up $10 million to $35 million.

PLANT ADDITIONS
Once again, plant additions are well below our annual depreciation charge,
reflecting our efforts to conserve cash.  The Company made capital
expenditures for plant and equipment of about $6.3 million in 2004 compared
to $5.9 million in 2003.  Depreciation for the year was $10.9 million
compared to $11.0 million in 2003.

EMPLOYEE STOCKHOLDERS
During fiscal 2004, 52 options for 3,322 shares were exercised by employees.
As of June 26, 2004 employees of the Company hold options for 73,547 shares
that can be exercised over the next two years. Our experience over the years
has been that employee stock ownership contributes to the success of a
Company, which is good for all stockholders and employees.  Present and
former employees hold almost half of the Company's outstanding stock.  In
addition, over 50% of our domestic employees are participants in one or more
of our stock plans.

TREASURY STOCK
During 2004, the Company purchased 40,000 shares of its own stock for the
treasury at a cost of $632,000.  These shares were purchased from the
Company's 401(k) plan in order to maintain its liquidity needs.  Consistent
with cash needs, the Company may acquire additional shares from time to
time, both on the New York Stock Exchange and in private transactions.  This
is to have stock available for miscellaneous corporate purposes and to
reduce the dilutive effect on existing stockholders of the issuance of
shares under the various employee stock ownership plans.

GENERAL COMMENTS
Risks and Challenges - The risks to our business are many and multifaceted.
The major issues that I see are these.  Overcapacity in our industry and
lower cost imports will continue to put downward price pressure on our
products.  The high cost of doing business in the U.S. in the form of
increased medical expenses, energy, steel, and compliance compounds the
effects of the price pressures.  Distribution consolidation and erosion of
the U.S. manufacturing base is a risk for North America and for many of the
developed countries in Western Europe.  While we can't eliminate these
risks, we can endeavor to minimize them.  In order to do that, the challenge
in front of the Company is to grow our brand globally.  This entails brand
maintenance in developed and high-share countries and brand growth in
developing and low-share markets.  We need to achieve lower overall costs,
and improve lead-times in our delivery systems.  The distribution challenges
are to realign our distributor relationships and secure more profitable
distribution partnerships while diversifying our distribution channels.

Government Investigation - A few closing thoughts on the government
investigation.  While I am pleased to see this issue in the rearview mirror,
this does not mean I think justice was served.  The most disturbing issue is
that all shareholders suffered economic harm because of unsubstantiated
allegations leaked to The Wall Street Journal in apparent violation of the
seal order. Legal reform is sorely needed in the U.S., and until we adopt
the British loser-pays-legal-costs system, we shall continue to see a
proliferation of lawsuits.

Directors - During the year, we had two additions to the Board.  Terry Piper
joined the Board replacing George Webber, who is still our Vice President of
the Webber Gage division.  Terry is CEO and President of Precision Steel
Warehouse, Inc., a Berkshire Hathaway Company, and someone we can all rely
on for good, sound advice and industry knowledge.  I would like to thank
George Webber for the wisdom and guidance he has given the Board for the
past 41 years.  Bob Montgomery replaced Bill Hurley on our Board and comes
with a wealth of knowledge from the Columbus McKinnon Corporation, where he
served as Executive Vice President, CFO, and Director for 30 years, and
brings financial savvy and experience to the Board.  I look forward to
working closely with the two of them.

Election 2004 - By the time you receive this letter, the convention
extravaganzas in Boston and New York will be behind us.  Facing us are the
November elections and they will have an important bearing on the direction
that the country takes over the next four years.  Each and every one of you
will have to make your own decisions on the merits of the candidates, and
while world events and foreign policy will be a hot topic, the battleground
should and will be fought on the economy, job creation, and wages.  The
government's job is to provide an environment that is conducive to the
growth of business and the creation of jobs in the country.  Unfortunately,
in regard to international trade, neither candidate understands the
difference between protectionism and fair trade.  This is an important
election and the differences between President Bush and Senator Kerry are as
clear as a bell.  In my personal view, whether you credit or criticize
President Bush for his policies and actions, what you see is what you get.
On the other hand, Senator Kerry, our long-time senator from Massachusetts,
has positioned himself as a champion of job creation and the working man.  I
have a difficult time swallowing this line based on what he has done in
Massachusetts and his voting record on pro-manufacturing initiatives.  I
encourage all of you to go to the polls in November and vote for the
candidate who you believe will protect America and American industry in this
rapidly changing world.

I would like to thank all of our dedicated personnel around the world for
stepping forward during this year and rising to the challenges with
dedication and drive.  I look forward to working with all of you during the
upcoming year.

S/D.A.Starrett
President and CEO
August 31, 2004