Annual Report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

x	Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2007, or

¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file number 0-16125

FASTENAL COMPANY

(Exact name of registrant as specified in its charter)

Minnesota

41-0948415

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

2001 Theurer Boulevard

Winona, Minnesota

55987-0978

(Address of principal executive offices)

(Zip Code)

(507) 454-5374

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, par value $.01 per share		The NASDAQ Global Select Market

Securities registered pursuant to Section 12(g): None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act Yes ¨ No x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer x		Accelerated Filer ¨

Non-Accelerated Filer ¨		Smaller Reporting Company ¨

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June 30, 2007, the last business day of the registrant’s most recently completed second fiscal quarter, was $5,505,741,736, based on the closing sale price of the Common Stock on that date. For purposes of determining this number, all executive officers and directors of the registrant as of June 30, 2007 are considered to be affiliates of the registrant. This number is provided only for the purposes of this report on Form 10-K and does not represent an admission by either the registrant or any such person as to the status of such person.

As of February 1, 2008, the registrant had 149,120,712 shares of Common Stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Annual Report to Shareholders for the fiscal year ended December 31, 2007 are incorporated by reference in Parts I and II. Portions of the registrant’s Proxy Statement for the annual meeting of shareholders to be held Tuesday, April 15, 2008 is incorporated by reference in Part III.

FORWARD LOOKING STATEMENTS

This Form 10-K, including the sections in Part I hereof captioned “Item 1. Business – Development of the Business”, “Item 1. Business – Products”, “Item 1. Business – Manufacturing and Support Services Operations”, and “Item 2. Properties”, and the sections in Part II hereof captioned “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contains or incorporates by reference statements that are not historical in nature and that are intended to be, and are hereby identified as, “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995, including statements regarding (1) the outcome of our new long-term growth strategy, ‘Pathway to Profit’, including planned decreases in the rate of new store openings, planned additions to our outside sales personnel, the expected funding if such additions out of cost savings resulting from the slowing of the rate of new store openings, the growth in average store sales expected to result from this strategy, our ability to capture leverage expected to result from this strategy (including expected decreases in the growth of support personnel and expected working capital efficiencies), and our ability to achieve our goals regarding pretax earnings and return on assets, (2) the payment of dividends, (3) working capital goals and expected returns on total assets when working capital is appropriately managed, (4) capital expenditures, (5) the expansion of foreign operations, (6) new store openings, (7) markets for new stores, (8) growth in manufacturing and support services, (9) protection from economic downturns provided by the number or type of customers, (10) our ability to mitigate the effects of rising fuel prices, and (11) funding of expansion plans. Certain risks and uncertainties that could cause actual results to differ materially from those predicted in such forward-looking statements are described later in this Form 10-K under the heading entitled “Item 1A. Risk Factors” and in the registrant’s Annual Report to Shareholders for the fiscal year ended December 31, 2007 in the section thereof captioned “Management’s Discussion & Analysis of Financial Condition & Results of Operations”, which section has been incorporated in this Form 10-K by reference. The registrant assumes no obligation to update either such forward-looking statements or the discussion of such risks and uncertainties.

PRESENTATION OF DOLLAR AMOUNTS

All dollar amounts in this Form 10-K are presented in thousands, except for per share dollar amounts or unless otherwise noted.

PART I

ITEM 1.

BUSINESS

Fastenal Company (“Fastenal” and, together with our wholly owned subsidiaries, hereinafter referred to as Fastenal or by terms such as we, our, or us) began as a partnership in 1967, and was incorporated under the laws of Minnesota in 1968. As of December 31, 2007, we had 2,160 store locations located in 50 states, Puerto Rico, Canada, Mexico, Singapore, China, and the Netherlands, and employed 8,617 people at these stores.

We sell industrial and construction supplies in a wholesale and retail fashion. As of December 31, 2007 these industrial and construction supplies were grouped into ten product lines described further below. Our Internet address for corporate and investor information is www.fastenal.com . The information contained on this website or connected to our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this report.

We operated 13 distribution centers in North America as of December 31, 2007 from which we distribute products to our store locations.

Development of the Business

Fastenal began in 1967 with a marketing strategy of supplying threaded fasteners to customers in small, medium-sized, and, in subsequent years, large cities. We believe our success can be attributed to our ability to offer our customers a full line of products at convenient locations and to the high quality of our employees.

We opened our first store in Winona, Minnesota, a city with a population of approximately 25,000. The following table shows our consolidated net sales for each fiscal year during the last ten years and the number of our store locations at the end of each of the last ten years:


	2007		2006	2005	2004	2003	2002	2001	2000	1999	1998
Net sales (in millions)	$	2,061.8	1,809.3	1,523.3	1,238.5	994.9	905.4	818.3	755.6	618.2	511.2
Number of stores at year end		2,160	2,000	1,755	1,533	1,314	1,169	1,025	897	807	764

As of December 31, 2007 and 2006, respectively, we operated store locations in:


Geographic location	2007	2006
United States	1,969	1,829
Puerto Rico	8	8
Canada	148	137
Mexico	31	22
Singapore	1	1
Netherlands	2	2
China	1	1

	2,160	2,000

We have closed only eleven stores in our history. Three of these locations were subsequently reopened when the expansion of our product line or the expansion of our distribution network improved the profitability of the locations.

We select new locations for our stores based on their proximity to our distribution network, population statistics, and employment data for manufacturing and construction. We intend to continue opening new store locations and currently expect the rate of new store openings to be approximately 7% to 10% per year (calculated on the ending number of stores in the previous year).

We stock all new stores with inventory drawn from all of our product lines. Subsequent to opening, store personnel may supplement the inventory offering to customize the selection to the needs of our local customer base.

We currently have several versions of store locations. The majority of our stores operate under our ‘expected inventory’ format. This format was also referred to as the CSP (or Customer Service Project) format. Consistent with our operating philosophy, we intend to continue identifying products and store display themes to position our stores to the Fastenal goal of being ‘the best industrial and construction supplier in each local market in which we operate’. In June 2005 we disclosed our intention to convert locations to the CSP2 format. The CSP2 store model represented an expansion of the core stocking items and sales personnel in an existing store with the goal of driving additional product sales to existing customers, target customers, and specific geographic areas within established markets. During the third quarter of 2007 we chose to modify the CSP2 expansion from a ‘one size fits all’ approach to an ‘a la carte’ approach. This will emphasize inventory expansion based on local customer demographics and based on local product knowledge within our sales force.

We believe, based on the demographics of the marketplace in North America, that there is sufficient potential in this geographic area to support at least 3,500 total stores. Many of the new store locations may be in cities in which we currently operate. Fastenal has not operated outside of North America long enough to assess the market potential of those markets.

In addition to the store types discussed above, we also operate “in-plant” sites. An “in-plant” site is a selling unit located in or near a customer’s facility that sells product solely to that customer. These sites are not included in the store count numbers as they represent a customer subset of a store.

We opened the following stores in the last five years:


	2007	2006	2005	2004	2003
United States	141	210	198	198	140
Puerto Rico	—	—	—	1	—
Canada	11	25	17	16	9
Mexico	9	10	5	3	2
Singapore	—	—	—	—	—
Netherlands	—	—	1	1	—
China	—	—	1	—	—

Total openings	161	245	222	219	151

We plan to open additional stores outside of the United States in the future. The stores located outside the United States contributed approximately 8% of our consolidated net sales in 2007 with approximately 78% of this amount attributable to our Canadian operations.

No assurance can be given that any of the expansion plans described above will be achieved, or that new store locations, once opened, will be profitable.

It has been our experience that near-term profitability has been adversely affected by the opening of new store locations. This adverse effect is due to the start-up costs and the time necessary to generate a customer base. A new store generates its sales from direct sales calls, a slow process involving repeated contacts. As a result of this process, sales volume builds slowly and it typically requires nine to 12 months for a new store to achieve its first profitable month. Of the 73 stores opened in the first quarter of 2007, 28 were profitable in the fourth quarter of 2007.

The data in the following table shows the growth in the average sales of our stores from 2006 to 2007 based on the age of each store. The stores opened in 2007 contributed approximately $35,432 (or approximately 1.7%) of our consolidated net sales in 2007, with the remainder coming from stores opened prior to 2007.


Age of stores on December 31, 2007	Year opened	Number of stores in group on December 31, 2007		Average sales 2006 ¹			Average sales 2007			Percent Change
0–1 year old	2007	161		$	—		$	220	¹	—	%
1–2 years old	2006	245			134	¹		486		—
2–3 years old	2005	222			492			597		21.3
3–4 years old	2004	219			647			703		8.7
4–5 years old	2003	151			684			740		8.2
5–6 years old	2002	142	²		743			823		10.8
6–7 years old	2001	128			978			1,084		10.8
7–8 years old	2000	89			811			933		15.0
8–9 years old	1999	44			991			1,174		18.4
9–10 years old	1998	120			1,146			1,170		2.1
10–11 years old	1997	157			1,135			1,206		6.3
11–12 years old	1996	107			1,108			1,127		1.7
12–16 years old	1992-1995	217			1,298			1,313		1.2
16+ years old	1967-1991	158			2,273			2,424		6.6

¹	The average sales include sales of stores open for less than the full fiscal year.

²	We closed one store in this category during 2007. The 2007 average is calculated assuming the store number existed half of the year

As of December 31, 2007, we operated distribution centers in or near Winona, Minnesota; Indianapolis, Indiana; Dallas, Texas; Atlanta, Georgia; Scranton, Pennsylvania; Modesto, California; Seattle, Washington; Akron, Ohio; Salt Lake City, Utah; Greensboro, North Carolina; Kansas City, Kansas; Toronto, Ontario (Canada) and Monterrey, Nuevo Leon (Mexico). These 13 distribution centers give us over 2.2 million square feet of distribution capacity. These distribution centers are located so as to permit twice-a-week to five times-a-week deliveries to our stores using our trucks and overnight delivery by surface common carrier. Approximately 76% of our stores receive deliveries five times-a-week, with 80% of these deliveries arriving by 7:00 a.m. As the number of stores increases, we intend to add new distribution centers.

We provide centralized UNIX based computer systems to support Corporate, e-business, and Distribution Center business functions. The systems consist of both customized and purchased software. At the store level, we operate a proprietary point-of-sale (POS) system that operates on a Microsoft Windows operating system. System access is provided to authorized users via a dedicated Wide Area Network (WAN). The data exchange between the centrally located systems and POS is monitored and controlled centrally.

Trademarks and Service Marks

We conduct business under various trademarks and service marks, including Fastenal ^® with various designs or tag lines, FAS-N-IT ^® , FNL ^® , Blackstone™, Rock River Anchors ^® , BlueGlobal ^® , Fastenal Racing ^® and FNL G9 ^® . Although we do not believe our operations are substantially dependent upon any of our trademarks or service marks, we consider the ‘Fastenal’ name and other trademarks and service marks to be valuable to our business.

Products

Our original product offerings were fasteners and other industrial and construction supplies, many of which are sold under the Fastenal ^® product name. This product line, which we refer to as the fastener product line, consists of two broad categories: threaded fasteners, such as bolts, nuts, screws, studs, and related washers; and miscellaneous supplies, such as paints, various pins and machinery keys, concrete anchors, batteries, sealants, metal framing systems, wire rope, strut, private-label stud anchors, rivets, and related accessories.

Threaded fasteners are used in most manufactured products and building projects, and in the maintenance and repair of machines and structures. Many aspects of the threaded fastener market are common to all cities. Variations from city to city that do exist typically relate to the types of businesses operating in a market or to the environmental conditions in a market. Therefore, we open each store with a broad selection of base stocks of inventory and then allow the local store and district leaders to tailor the additional inventory to the local market demand as it develops.

Threaded fasteners accounted for approximately 90% of the fastener product line sales in 2007, 2006, and 2005 and approximately 46%, 46%, and 48% of our consolidated net sales in 2007, 2006, and 2005, respectively. Concrete anchors make up the largest portion of the miscellaneous supply items included in the fastener product line. Most concrete anchors use threaded fasteners as part of the completed anchor assembly.

Since 1993, we have added additional product lines. These product lines are sold through the same distribution channel as the original fastener product line. Our product lines include the following:


Product line:	Year introduced	Approximate number of stock items	Private label product name
Fasteners	1967	349,000	Fastenal ^® , FNL G9 ^® , Rock River Anchors ^®
Tools and equipment	1993	119,000	FastTool, Blackstone™
Cutting tools and abrasives	1996	204,000	SharpCut, Blackstone™
Hydraulics, pneumatics, plumbing and HVAC	1996	49,000	Fastenal ^®
Material handling, storage, and packaging	1996	12,000	EquipRite
Janitorial supplies, chemicals, and paints	1996	13,000	CleanChoice, Blackstone™
Electrical supplies	1997	19,000	PowerPhase, Blackstone™
Welding supplies ¹	1997	28,000	FastArc, Blackstone™
Safety supplies	1999	23,000	Fastenal ^® , Body Guard
Metals, alloys, and materials	2001	9,000	Fastenal ^®

¹	We do not sell welding gases.

We plan to continue to add other product lines in the future.

Inventory Control

Our inventory stocking levels are determined using our computer systems, our sales personnel at the store, district, and region levels, and our product managers. The data used for this determination is derived from sales activity from all of our stores, from individual stores, and from geographic areas. It is also derived from vendor information and from customer demographic information. The computer system monitors the inventory level for all stock items and triggers replenishment, or prompts a buyer to purchase, as necessary, based on an established minimum-maximum level. All stores stock a base inventory and may expand beyond preset inventory levels as deemed appropriate by their district managers. Inventories in distribution centers are established from computerized data for the stores served by the respective centers. Inventory quantities are continually re-balanced utilizing an automated store-to-store transfer mechanism called ‘inventory re-distribution’.

Manufacturing and Support Services Operations

In 2007, approximately 94.8% of our consolidated net sales were attributable to products manufactured by other companies to industry standards. The remaining 5.2% of our consolidated net sales for 2007 related to products manufactured, modified or repaired by our manufacturing division or our support services. The manufactured products consist primarily of non-standard sizes of threaded fasteners made to customers’ specifications. The services provided by the support services group include, but are not limited to, items such as tool repair, band saw blade welding, third-party logistics, and light manufacturing. We engage in these activities primarily as a service to our customers and expect these activities in the future to continue to contribute in the range of 4% to 10% of our consolidated net sales.

Sources of Supply

We use a large number of suppliers for the approximately 825,000 standard stock items we distribute. Most items distributed by our network can be purchased from several sources, although preferred sourcing is used for some stock items to facilitate quality control. No single supplier accounted for more than 5% of our purchases in 2007.

Geographic Information

Information regarding our revenues and certain assets by geographic location is set forth in note 8 to the Notes to Consolidated Financial Statements contained in our annual report for the fiscal year ended December 31, 2007, which is incorporated herein by reference. Foreign currency fluctuations, changes in trade relations, or fluctuations in the relative strength of foreign economies could impact our ability to procure products overseas at competitive prices and our foreign sales.

Customers and Marketing

We believe our success can be attributed to our ability to offer customers a full line of quality products at convenient locations, and to the superior service orientation and expertise of our employees. Most of our customers are in the construction and manufacturing markets. The construction market includes general, electrical, plumbing, sheet metal, and road contractors. The manufacturing market includes both original equipment manufacturers and maintenance and repair operations. Other users of our products include farmers, truckers, railroads, mining companies, federal, state and local governmental entities, schools, and certain retail trades. As of December 31, 2007, our total number of active customer accounts (defined as accounts having purchase activity within the last 90 days) was approximately 314,000.

During each of the three years ended December 31, 2007, no one customer accounted for a significant portion of our sales. We believe that our large number of customers together with the varied markets that they represent, provide some protection to us from economic downturns.

Store personnel generate a significant portion of our sales through direct calls on customers. Because of the nature of our business, we make limited use of the more expensive forms of mass media advertising such as television, radio, and newspapers. The forms of advertising we use include signs, catalogs, and direct mailings.

Competition

Our business is highly competitive. Competitors include both large distributors located primarily in large cities and smaller distributors located in many of the same cities in which we have stores. We believe that the principal competitive factors affecting the markets for our products are customer service and convenience.

Some competitors use vans to sell their products in markets away from their main warehouses, while others rely on mail order or telemarketing sales. We, however, believe that the convenience provided to customers by operating stores in small, medium, and large markets, each offering a wide variety of products, is a competitive selling advantage and that the large number of stores in a given area, taken together with our ability to provide frequent deliveries to such stores from centrally located distribution centers, makes possible the prompt and efficient distribution of products. Having trained personnel at each store also enhances our ability to compete (see “Employees” below).

Employees

As of December 31, 2007, we employed a total of 12,013 full and part-time employees, 8,617 being store managers and store employees, and the balance being employed in our distribution centers, manufacturing operations, service operations, and home office.

We believe the quality of our employees is critical to our ability to compete successfully in the markets we currently serve and to our ability to open new stores in new markets. We foster the growth and education of skilled employees throughout the organization by operating training programs (see the description of the Fastenal School of Business below) and by decentralizing decision-making. Wherever possible, promotions are from within our organization. For example, most new store managers are promoted from an outside sales position or from an assistant manager’s position, and district managers (who supervise a number of stores) are usually former store managers.

The Fastenal School of Business develops and delivers a comprehensive array of industry and company specific education and training programs that are offered to all Fastenal employees. Our school of business provides core curricula focused on key competencies determined to be critical to the success of our employees’ performance. In addition, we provide specialized educational tracks within various institutes of learning. These institutes of learning are advanced levels that provide specific concentrations of education and development and have been designed to focus on the critical aspects of our business. These institutes provide a focused educational experience to enhance employee performance in relevant business areas such as leadership, effective store best practices, sales and marketing, product education, and distribution.

Our sales personnel participate in incentive bonus arrangements that place emphasis on achieving increased sales on a store and regional basis, while still attaining targeted levels of gross profit and collections. As a result, a significant portion of our total employment cost varies with sales volume. We also pay incentive bonuses to our leadership personnel based on one or more of the following factors: sales growth, profit growth (before and after taxes), profitability, and return on assets, and to our other personnel for achieving pre-determined cost containment goals.

None of our employees are subject to a collective bargaining agreement and we have experienced no work stoppages. We believe our employee relations are good.

Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act, are available free of charge on or through our website at www.fastenal.com as soon as reasonably practicable after such reports have been filed with or furnished to the SEC.

ITEM 1A.

RISK FACTORS

In addition to the other information in this Annual Report on Form 10-K for the fiscal year ended December 31, 2007, the following factors should be considered in evaluating our business. Our operating results depend upon many factors and are subject to various risks and uncertainties. The material risks and uncertainties known to us which may cause the operating results to vary from anticipated results or which may negatively affect our operating results and profitability are as follows:

A downturn in the economy and other factors may affect customer spending, which could harm our operating results.

In general, our sales represent spending on discretionary items or consumption needs by our customers. This spending is affected by many factors, including, among others:

•

general business conditions,

•

interest rates,

•

inflation,

•

the liquidity in credit markets,

•

taxation,

•

fuel prices and electrical power rates,

•

unemployment trends,

•

terrorist attacks and acts of war, and

•

other matters that influence customer confidence and spending.

A downturn in either the national or local economy where our stores operate or changes in any of the other factors described above could negatively impact sales at our established stores (open more than two years) and their level of profitability.

Our current estimate for total store market potential in North America could be incorrect.

One of our primary growth strategies is to grow our business through the introduction of stores into new markets. Based on a snapshot of current marketplace demographics in the U.S., Canada, and Mexico, we currently estimate there is potential market opportunity in North America to support approximately 3,500 stores. We cannot guarantee that our market potential estimates are accurate or that we will open stores to reach the full market opportunity. In addition, a particular local market’s ability to support a store may change because of a change in our store format or the presence of a competitor’s store.

We may be unable to meet our goals regarding new store openings.

Our growth is primarily dependent on our ability to attract new customers; and historically, the most effective way to attract new customers has been opening new stores. Our current business strategy focuses on opening stores at a rate of approximately 7% to 10% each year. Failure to open stores at this rate could negatively impact our long-term growth.

Neither our current business strategy of expanding certain stores with additional product selection or our new business strategy of reducing our rate of new store openings and using the money saved to add outside sales personnel to existing stores has proven successful on a long-term basis.

In 2002, we began implementing our current business strategy that focuses on store locations with a consistent wholesale merchandising theme, which we refer to as the Customer Service Project or CSP. The viability of this business strategy has not been proven on a long-term basis. In June 2005 we disclosed our intention to convert locations to the CSP2 format. These stores have an additional investment which includes an additional $62,000 in inventory, two additional sales specialists and two additional vehicles in each store. As discussed earlier in this report, during the third quarter of 2007 we chose to modify the CSP2 expansion from a ‘one size fits all’ approach to an ‘a la carte’ approach. This will emphasize inventory expansion based on local customer demographics and based on local product knowledge within our sales force. The results we achieved at our CSP format stores may not be indicative of the results we will achieve at our a la carte format stores. The a la carte format increases our operating costs per store, but may not lead to proportionately increased revenues per store. Our mix of higher and lower margin merchandise in the a la carte stores differs from the merchandise mix in our smaller stores and, therefore, may negatively impact our gross margins in our a la carte format stores. In addition, we may not carry the appropriate merchandise mix during the appropriate time of year in our a la carte format stores. We cannot assure our success in operating the a la carte format stores on a profitable basis. If the a la carte format store is unprofitable, the impact on our financial results could be greater than the impact of an unprofitable smaller format store.

In April 2007, we introduced our ‘Pathway to Profit’ strategy. This strategy involves slowing our annual new store openings from our historical rate of 13% to 18% to approximately 7% to 10%. The funds saved by opening fewer stores will be invested in additional outside sales personnel, with the goal of increasing our average annual per store sales, capturing earnings leverage, and increasing our pretax operating margin. In a normal economic cycle, we believe that, over a five year period, we can grow our average store sales to $125,000 per month and grow our pretax operating margin from 18% to 23%. However, we cannot assure these results. A downturn in the economy, difficulty in successfully attracting and retaining qualified outside sales personnel, and failure to successfully change our selling process could impact our ability to grow average store sales, capture earnings leverage, and achieve expected pretax earnings results.

Lower volume orders and changes in our customers and product mix could cause our gross margin percentage to fluctuate or decline in the future.

From time to time, we have experienced changes in product mix and inbound inventory costs. For example, marketing activities to existing customers and needs communicated to us from existing and prospective customers have caused us to change our product mix in the past. When we change our product mix, there can be no assurance that we will be able to maintain our historical gross margins. Furthermore, there is no assurance that we will be able to continue to incrementally increase our gross margin percentage by varying product mix as we have over the last several years. Changes in our customers, product mix, or the volume of our orders could cause our gross margin percentage to fluctuate or decline.

Opening stores in new markets presents increased risks that may prevent us from being profitable in these new locations.

We intend to open stores in new markets pursuant to our growth strategy. New stores do not typically achieve operating results comparable to our existing stores until after several years of operation, and stores in new markets face additional challenges to achieving profitability. A new store generates its sales from direct sales calls, a slow process involving repeated contacts. In new markets, we have less familiarity with local customer preferences and customers in these markets are less familiar with Fastenal’s name and capabilities. In addition, entry into new markets may bring us into competition with new, unfamiliar competitors. We cannot assure success in operating our stores in new markets on a profitable basis.

New store openings may negatively impact our operating results.

While new stores build the infrastructure for future growth, the first year sales in new stores are low, and the added expenses relating to payroll, occupancy, and transportation costs can impact our ability to leverage earnings. It has been our experience that new stores take approximately ten to twelve months to achieve profitability. We cannot assure you that we will be successful in operating our new stores on a profitable basis.

The ability to identify new products and products lines, and integrate them into our store and distribution network, may impact our ability to compete and our sales and margins.

Our success depends in part on our ability to develop product expertise at the store level and identify future products and product lines that complement existing products and product lines and that respond to our customer’s needs. We may not be able to compete effectively unless our product selection keeps up with trends in the markets in which we compete or trends in new products. In addition, our ability to integrate new products and product lines into our stores and distribution network could impact sales and margins.

Increases in energy costs and the cost of raw materials used in our products could impact our cost of goods and distribution and occupancy expenses, which may result in lower operating margins.

Costs of raw materials used in our products (e.g., steel) and energy costs have been rising during the last several years, which has resulted in increased production costs for our vendors. These vendors typically look to pass their increased costs along to us through price increases. The fuel costs of our distribution operation have risen as well. While we typically try to pass increased vendor prices and fuel costs through to our customers or to modify our activities to mitigate the impact, we may not be successful. Failure to fully pass these increased prices and costs through to our customers or to modify our activities to mitigate the impact would have an adverse effect on our operating margins.

Our ability to successfully attract and retain qualified personnel to staff our stores could impact labor costs, sales at existing stores, and the rate of new store openings.

Our success depends in part on our ability to attract, motivate, and retain a sufficient number of qualified employees, including store managers and store associates, who understand and appreciate our culture and are able to adequately represent this culture to our customers. Qualified individuals of the requisite caliber and number needed to fill these positions may be in short supply in some areas, and the turnover rate in the industry is high. If we are unable to hire and retain personnel capable of consistently providing a high level of customer service, as demonstrated by their enthusiasm for our culture and product knowledge, our sales could be materially adversely affected. Additionally, competition for qualified employees could require us to pay higher wages to attract a sufficient number of employees. An inability to recruit and retain a sufficient number of qualified individuals in the future may also delay the planned openings of new stores. Any such delays, any material increases in employee turnover rates at existing stores, or any increases in labor costs, could have a material adverse effect on our business, financial condition or operating results.

Inclement weather and other disruptions to the transportation network could impact our distribution system.

Our ability to provide efficient distribution of core business products to our store network is an integral component of our overall business strategy. Disruptions at distribution centers or shipping ports, due to events such as the hurricanes of 2005 and the longshoreman’s strike on the West Coast in 2002, may affect our ability to both maintain core products in inventory and deliver products to our customers on a timely basis, which may in turn adversely affect our results of operations. In addition, severe weather conditions could adversely affect demand for our products in particularly hard hit regions.

We are exposed to foreign currency exchange rate risk, and changes in foreign exchange rates could increase our costs to procure products and our foreign sales.

Because the functional currency related to most of our foreign operations is the applicable local currency, we are exposed to foreign currency exchange rate risk arising from transactions in the normal course of business, such as sales to third party customers and purchases from suppliers denominated in foreign currencies. In addition, fluctuations in the relative strength of foreign economies could impact our ability to procure products overseas at competitive prices and our foreign sales. Our primary exchange rate exposure is with the Canadian dollar.

We may not be able to compete effectively against our competitors, which could harm our business and operating results.

The industrial, construction, and maintenance supply industry, although consolidating, still remains a large, fragmented industry that is highly competitive. We believe that sales of industrial, construction, and maintenance industry supplies will become more concentrated over the next few years, which may make the industry even more competitive. Our current or future competitors include companies with similar or greater market presence, name recognition, and financial, marketing, and other resources, and we believe they will continue to challenge us with their product selection, financial resources, and services. Increased competition in markets in which we have stores or the adoption by competitors of aggressive pricing strategies and sale methods could cause us to lose market share or to reduce our prices or increase our spending, thus eroding our margins.

Our revenues and net income may be adversely affected by economic conditions, political situations, and changing laws and regulations in foreign countries, over which we have no control.

We obtain certain of our products, and our suppliers obtain certain of their products, from China, Taiwan, South Korea, Mexico and other foreign countries. Our vendors could discontinue selling products manufactured in foreign countries at any time for reasons that may or may not be in our control or the vendor’s control, including foreign government regulations, political unrest, war, disruption or delays in shipments, changes in local economic conditions and trade issues. Our operating results and inventory levels could suffer if we are unable to promptly replace a vendor who is unwilling or unable to satisfy our requirements with a vendor providing equally appealing products.

The industrial, construction, and maintenance supply industry is consolidating, which could cause it to become more competitive and could negatively impact our business.

The industrial, construction and maintenance supply industry in North America is consolidating. This consolidation is being driven by customer needs and supplier capabilities, which could cause the industry to become more competitive as greater economies of scale are achieved by suppliers. Customers are increasingly aware of the total costs of fulfillment and of the need to have consistent sources of supply at multiple locations. We believe these customer needs could result in fewer suppliers as the remaining suppliers become larger and capable of being a consistent source of supply.

There can be no assurance that we will be able in the future to take advantage effectively of the trend toward consolidation. The trend in our industry toward consolidation could make it more difficult for us to maintain operating margins. Furthermore, as our industrial and construction customers face increased foreign competition, and potentially lose business to foreign competitors or shift their operations overseas in an effort to reduce expenses, we may face increased difficulty in growing and maintaining our market share and growth prospects.

ITEM 1B.

UNRESOLVED STAFF COMMENTS.

None.

ITEM 2.

PROPERTIES

We own seven facilities in Winona, Minnesota. These facilities are as follows:


Purpose		Approximate Square Feet
Distribution center and home office		213,000
Manufacturing facility		100,000
Computer support center		13,000
Winona store		15,000
Winona product support and support services facility		55,000
Rack and shelving storage		42,000
Multi-building complex which houses certain operations of the distribution group and home office support group		30,000

We also own the following facilities, excluding store locations, outside of Winona, Minnesota:


Purpose	Location	Approximate Square Feet
Distribution center	Indianapolis, Indiana	414,000
Distribution center	Atlanta, Georgia	198,000
Distribution center	Dallas, Texas	95,000	¹
Distribution center	Scranton, Pennsylvania	160,000
Distribution center	Akron, Ohio	102,000
Distribution center	Kansas City, Kansas	300,000
Distribution center	Toronto, Ontario, Canada	62,000
Distribution center	Greensboro, North Carolina	250,000
Distribution center	Modesto, California	320,000

In addition, we own 173 buildings that house our store locations in various cities throughout North America and are in the process of building or renovating another 7 owned store locations for future use.

¹	We are in the process of building another distribution center in the Dallas, Texas area to replace this facility. We expect the new facility, when completed, will be approximately 300,000 square feet.

All other buildings we occupy are leased. Leased stores range from approximately 3,500 to 10,000 square feet, with lease terms of up to 60 months (most lease term are for 36 to 48 months). We also lease the following:


Purpose	Location	Approximate Square Feet	Lease Expiration Date	Remaining Lease Renewal Options
Distribution center	Seattle, Washington	55,000	April 2011	None
Distribution center	Salt Lake City, Utah	22,000	July 2012	None
Distribution center	Monterrey, Nuevo Leon, Mexico	14,000	September 2008	None
New store processing center	LaCrosse, Wisconsin	48,750	June 2009	None

If economic conditions are suitable, we will, in the future, consider purchasing store locations to house our older stores. It is anticipated the majority of new store locations will continue to be leased. It is our policy to negotiate relatively short lease terms to facilitate relocation of particular store operations, if deemed desirable. Our experience has been that space suitable for our needs and available for leasing is more than sufficient.

ITEM 3.

LEGAL PROCEEDINGS

On October 18, 2007, a complaint was filed in the United States District Court for the Northern District of California against Fastenal Company on behalf of two former employees claiming to represent all employees employed in the store position of Assistant General Manager in the United States within three years prior to the filing date (four years for California employees). The suit alleges Fastenal misclassified its Assistant General Managers as exempt for purposes of the overtime provisions of the Fair Labor Standards Act (FLSA) and California and Pennsylvania state statutes. This suit also alleges that Assistant General Managers in California did not receive sufficient meal breaks and paid rest periods under the California Labor Code. The complaint seeks overtime pay, meal and rest period penalties, liquidated damages, restitution, attorneys’ fees, costs and interest. The plaintiffs seek class action status. This action is in a preliminary stage. We are not currently able to predict the outcome of this action or reasonably estimate a range of potential loss. We intend to vigorously defend this action.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM X.

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of Fastenal Company are:


Name	Employee of Fastenal since	Age	Position
Willard D. Oberton	1980	49	Chief Executive Officer, President, and Director
Daniel L. Florness	1996	44	Executive Vice President and Chief Financial Officer
Nicholas J. Lundquist	1979	50	Executive Vice President-Sales
Leland J. Hein	1985	47	Executive Vice President-Sales
Steven A. Rucinski	1980	50	Executive Vice President-Sales
Reyne K. Wisecup	1988	45	Executive Vice President-Human Resources and Director
James C. Jansen	1992	37	Executive Vice President-Internal Operations

Mr. Oberton has been our chief executive officer and president since December 2002. From July 2001 through December 2002, Mr. Oberton was our president and chief operating officer. Mr. Oberton has also served as one our directors since June 1999.

Mr. Florness has been our executive vice-president and chief financial officer since December 2002. From June 1996 to November 2002, Mr. Florness was our chief financial officer.

Mr. Lundquist has been our executive vice president—sales since November 2007. Mr. Lundquist’s responsibilities include complete sales and operational oversight over a substantial portion of our business. From December 2002 to November 2007, Mr. Lundquist was our executive vice president and chief operating officer. From June 2000 through December 2002, Mr. Lundquist was our vice-president of sales.

Mr. Hein was elected as executive vice president—sales in November 2007. Mr. Hein’s responsibilities under this new role include complete sales and operational oversight over a substantial portion of our business. Prior to December 2007, Mr. Hein served in various sales roles, most recently serving as a regional vice president in our Winona and Kansas City based regions.

Mr. Rucinski was elected as executive vice president—sales in November 2007. Mr. Rucinski’s responsibilities under this new role include complete sales and operational oversight over a substantial portion of our business. Prior to December 2007, Mr. Rucinski served in various sales roles, most recently serving as a senior vice president of strategic accounts.

Ms. Wisecup was elected as executive vice president—human resources in November 2007. During her tenure with Fastenal, she has served in various support roles, most recently serving as director of employee development. Ms. Wisecup’s responsibilities will be similar under this new role. Ms. Wisecup has served as one of our directors since 2000.

Mr. Jansen was elected as executive vice president—internal operations in November 2007. Mr. Jansen’s responsibilities expanded at that time to include product and merchandising development as well as systems development. Since June 2005, Mr. Jansen served as director of systems development (this role encompassed both information systems and distribution systems development). Prior to June 2005, Mr. Jansen was the regional vice president of our regional business unit based in Dallas, Texas.

The executive officers are elected by our board of directors, for a term of one year, and serve until their successors are elected and qualified. None of our executive officers are related to any other such executive officer or to any of our other directors.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Incorporated herein by reference is our annual report to shareholders for the fiscal year ended December 31, 2007, Common Stock Data on page 6 and Performance Graph on page 8.

ITEM 6.

SELECTED FINANCIAL DATA

Incorporated herein by reference is our annual report to shareholders for the fiscal year ended December 31, 2007, Six-Year Selected Financial Data on page 5.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Incorporated herein by reference is our annual report to shareholders for the fiscal year ended December 31, 2007, Management’s Discussion & Analysis of Financial Condition & Results of Operations on pages 9 to 20.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Incorporated herein by reference is our annual report to shareholders for the fiscal year ended December 31, 2007, Market Risk Management on page 19.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Incorporated herein by reference is our annual report to shareholders for the fiscal year ended December 31, 2007, Selected Quarterly Financial Data (Unaudited) on page 6, Consolidated Financial Statements and Notes to Consolidated Financial Statements on pages 21 to 37, and Report of Independent Registered Public Accounting Firm on page 39.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES

Incorporated herein by reference is our annual report to shareholders for the fiscal year ended December 31, 2007, Management Report on Internal Control over Financial Reporting on page 38 and Report of Independent Registered Public Accounting Firm on page 39.

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act). Based on this evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.

ITEM 9B.

OTHER INFORMATION

None.

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

Incorporated herein by reference is the information appearing under the headings “Proposal 1—Election of Directors—Nominees and Required Vote”, pages 4 to 5, “Corporate Governance – Audit Committee”, pages 9 to 10, and “Corporate Governance — Section 16(a) Beneficial Ownership Reporting Compliance”, page 13, in our proxy statement dated February 21, 2008. See also Part I hereof under the heading “Item X. Executive Officers of the Registrant”.

There were no material changes to the procedures by which security holders may recommend nominees to the board of directors since our last report.

On January 19, 2004, our board of directors adopted a supplement to our existing standards of conduct designed to qualify the standards of conduct as a code of ethics within the meaning of Item 406(b) of Regulation S-K promulgated by the SEC (“Code of Ethics”). The standards of conduct, as supplemented, apply to all of our directors, officers, and employees, including without limitation our chief executive officer, chief financial officer, principal accounting officer, and controller (if any), and persons performing similar functions (“Senior Financial Officers”). Those portions of the standards of conduct, as supplemented, that constitute a required element of a Code of Ethics are available without charge by submitting a request to us pursuant to the directions detailed on our website at www.fastenal.com. In the event we amend or waive any portion of the standards of conduct, as supplemented, that constitutes a required element of a Code of Ethics and such amendment or waiver applies to any of our Senior Financial Officers, we intend to post on our website, within four business days after the date of such amendment or waiver, a brief description of such amendment or waiver, the name of each Senior Financial Officer to whom the amendment or waiver applies, and the date of the amendment or waiver.

ITEM 11.

EXECUTIVE COMPENSATION

Incorporated herein by reference is the information appearing under the headings “Corporate Governance —– Compensation Committee Interlocks and Insider Participation”, page 12, “Corporate Governance — Compensation Committee Report”, page 12, and “Executive Compensation”, pages 14 to 21, in our proxy statement dated February 21, 2008.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Incorporated herein by reference is the information appearing under the heading “Security Ownership of Principal Shareholders and Management”, pages 7 to 8, in our proxy statement dated February 21, 2008.

Equity Compensation Plan Information


Plan Category	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants, and Rights	Weighted-Average Exercise Price of Outstanding Options, Warrants, and Rights		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
	(a)	(b)		(c)
Equity Compensation Plans Approved by Security Holders	2,140,000	$	45	4,821,770
Equity Compensation Plans Not Approved by Security Holders	0		0	0

Total	2,140,000	$	45	4,821,770

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Incorporated herein by reference is the information appearing under the headings “Corporate Governance – Board Matters”, page 9, “Corporate Governance – Related Person Transaction Approval Policy”, page 10, “Corporate Governance – Transactions with Related Persons”, page 11, and “Corporate Governance – Director Nominations Policy”, pages 12 to 13, in our proxy statement dated February 21, 2008.

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

Incorporated herein by reference is the information appearing under the heading “Audit and Related Fees”, page 23, in our proxy statement dated February 21, 2008.

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

a)	1. Financial Statements:

Consolidated Balance Sheets as of December 31, 2007 and 2006

Consolidated Statements of Earnings for the years ended December 31, 2007, 2006, and 2005

Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended December 31, 2007, 2006, and 2005

Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006, and 2005

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

(Incorporated by reference to pages 21 to 37 and page 39 of Fastenal Company’s Annual Report to Shareholders for the fiscal year ended December 31, 2007)

2. Financial Statement Schedules:

Schedule II—Valuation and Qualifying Accounts

3. Exhibits:



3.1		Restated Articles of Incorporation of Fastenal Company, as amended (incorporated by reference to Exhibit 3.1 to Fastenal Company’s Form 10-Q for the quarter ended September 30, 2005)

3.2		Restated By-Laws of Fastenal Company, as amended

10.1		Description of Bonus Arrangements for Executive Officers (incorporated by reference to the information appearing under the heading “Executive Compensation – Compensation Discussion and Analysis”, pages 14 to 17, in Fastenal Company’s Proxy Statement dated February 21, 2008)*

10.2		Fastenal Company Stock Option Plan (incorporated by reference to Exhibit A to Fastenal Company’s Proxy Statement dated February 23, 2007)*

13		Annual Report to Shareholders for the fiscal year ended December 31, 2007 (only those portions specifically incorporated by reference herein shall be deemed filed with the SEC)

21		List of Subsidiaries

23		Consent of Independent Registered Public Accounting Firm

31		Certifications under Section 302 of the Sarbanes-Oxley Act of 2002

32		Certification under Section 906 of the Sarbanes-Oxley Act of 2002

We will furnish copies of these Exhibits upon request and payment of our reasonable expenses in furnishing the Exhibits.

* Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 15(c).

FASTENAL COMPANY

Schedule II—Valuation and Qualifying Accounts

Years ended December 31, 2007, 2006, and 2005

(Amounts in thousands)


Description	Balance at beginning of year		“Additions” charged to costs and expenses		“Other” additions (deductions)	“Less” deductions		Balance at end of year
Year ended December 31, 2007

Allowance for doubtful accounts	$	2,119	5,343		—	5,197		2,265
Insurance reserves	$	17,662	56,939	¹	—	55,604	²	18,997

Year ended December 31, 2006
Allowance for doubtful accounts	$	3,875	3,722		—	5,478		2,119
Insurance reserves	$	12,533	34,131	¹	—	29,002	²	17,662

Year ended December 31, 2005

Allowance for doubtful accounts	$	5,181	5,933		—	7,239		3,875
Insurance reserves	$	6,698	32,190	¹	—	26,355	²	12,533

¹	Includes costs and expenses incurred for premiums and claims related to health and general insurance.

²	Includes costs and expenses paid for premiums and claims related to health and general insurance.

See accompanying Report of Independent Registered Public Accounting Firm incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: February 21, 2008


FASTENAL COMPANY

By		/s/ Willard D. Oberton
		Willard D. Oberton, Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

Date: February 21, 2008


By	/s/ Willard D. Oberton	By	/s/ Daniel L. Florness
	Willard D. Oberton, Chief Executive Officer (Principal Executive Officer) and Director		Daniel L. Florness, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

By	/s/ Robert A. Kierlin	By	/s/ Michael M. Gostomski
	Robert A. Kierlin, Director		Michael M. Gostomski, Director

By	/s/ Stephen M. Slaggie	By	/s/ Henry K. McConnon
	Stephen M. Slaggie, Director		Henry K. McConnon, Director

By	/s/ Robert A. Hansen	By	/s/ Michael J. Dolan
	Robert A. Hansen, Director		Michael J. Dolan, Director

By	/s/ Reyne K. Wisecup	By	/s/ Hugh L. Miller
	Reyne K. Wisecup, Director		Hugh L. Miller, Director

INDEX TO EXHIBITS


3.1	Restated Articles of Incorporation of Fastenal Company, as amended	Incorporated by Reference
3.2	Restated By-Laws of Fastenal Company, as amended	Electronically Filed
10.1	Description of Bonus Arrangements for Executive Officers	Incorporated by Reference
10.2	Fastenal Company Stock Option Plan	Incorporated by Reference
13	Annual Report to Shareholders for the fiscal year ended December 31, 2007 (only those portions specifically incorporated by reference herein shall be deemed filed with the SEC)	Electronically Filed
21	List of Subsidiaries	Electronically Filed
23	Consent of Independent Registered Public Accounting Firm	Electronically Filed
31	Certifications under Section 302 of the Sarbanes-Oxley Act of 2002	Electronically Filed
32	Certification under Section 906 of the Sarbanes-Oxley Act of 2002	Electronically Filed

Exhibit 3.2

RESTATED

BYLAWS

FASTENAL COMPANY

ARTICLE I.

The corporation shall maintain a registered office in Minnesota, at the address stated in the Articles of Incorporation. The corporation may have other offices in such places within or without Minnesota as the Board of Directors may from time to time designate.

ARTICLE II.

SHAREHOLDERS’ MEETINGS

Section 1. PLACE. Meeting of the shareholders shall be held at the registered offices of the corporation, or at such time other place within or without Minnesota as may from time to time be designated by the Board of Directors of the Chief Executive Officers of the corporation and state in the Notice of Meeting; provided, however, that any meeting called by or at the demand of a shareholder or shareholders shall be held in the county where the principal executive office of the corporation is located.

Section 2. REGULAR MEETINGS. A regular meeting of the shareholders shall be held annually, as soon as convenient after the close of the preceding fiscal year of the corporation, at a time to be fixed by the Board of Directors, for the election of directors and the transaction of other appropriate business.

Section 3. SPECIAL MEETINGS. Special meetings of the shareholders may be called at any time and for any purpose or purposes by a shareholder or shareholders holding ten percent (10%) or more of the voting power of all shares entitled to vote (except that a special meeting for the purpose of considering any action to directly or indirectly facilitate or effect a business combination, including any action to change or otherwise affect the composition of the Board of Directors for that purpose, must be called by twenty-five percent (25%) or more of the voting power of all shares entitled to vote) or by the Chairman of the Board, the Chief Executive Officer, the Chief Financial Officer or two or more directors. The business transacted at a special meeting shall be limited to the purposes stated in the notice of the meeting.

Section 4. NOTICE. Written notice of each meeting of shareholders, stating the time and place of the meeting and, in the case of a special meeting, the purpose or purposes for which it is called, shall be given to every holder of shares entitles to vote, at the time (which shall be at least 10 days and not more than 60 days before the date of the meeting) and in the manner required by law.

Section 5. WAIVER; OBJECTIONS. A shareholder may waive notice of a meeting of shareholders. A waiver of notice by a shareholder entitled to notice is effective whether given before, at, or after the meeting, and whether given in writing, orally, or by attendance. Attendance by a shareholder at a meeting is a waiver of notice of that meeting, except where the shareholder objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened, or objects before a vote on an item of business because the item may not lawfully be considered at that meeting and does not participate in the consideration of the item at that meeting.

Section 5. QUORUM. The holders of a majority of the voting power of the shares entitled to vote at a meeting, present in person or represented by proxy, shall constitute a quorum for the transaction of business, except as may be otherwise specifically provided by law, by the Articles of Incorporation or by these laws. If a quorum is present when a duly called or held meeting is convened, the shareholders present may continue to transact business until adjournment, even though the withdrawal of a number of shareholders originally present leaves less than a quorum. If a quorum is not present when a duly called or held meeting is convened, a majority of those present may adjourn the meeting to a time and place announced at the time of adjournment, and no further notice of the adjourned meeting shall be required.

Section 7. VOTING. At all meetings of shareholders, every owner of shares entitled to vote may vote in person or by proxy and shall have one vote for each share held. In electing directors, the voting shall be by ballot.

Section 8. CHAIRMAN OF MEETING. The Chairman of the Board shall preside at all meetings of shareholders. In his absence, the Board of Directors may appoint any other officer, or any stockholder, to act as Chairman at the meeting.

ARTICLE III.

BOARD OF DIRECTORS

Section 1. MANAGEMENT. The business and affairs of the corporation shall be managed by or under the direction of its Board of Directors, except as management rights are reserved or granted to shareholders by law.

Section 2. NUMBER AND QUALIFICATIONS. The Board shall consist of not less than five (5) nor more than nine (9) persons. The number of directors to be elected shall be fixed from time to time by the Board of Directors, and shall be stated in the notice of the meeting at which directors are to be elected.

Section 3. TERMS. Directors shall serve for an indefinite term that expires at the next regular meeting of shareholders. Each director shall hold office for the term for which he was elected and until a successor is elected and has qualified, or until his earlier death, resignation, removal, or disqualification.

Section 4. VACANCIES. Vacancies on the Board resulting from the death, resignation, removal, or disqualification of a director may be filled by the affirmative vote of a majority of the remaining directors, even though less than a quorum. Vacancies on the Board resulting from newly created directorships may be filled by the affirmative vote of a majority of the directors serving at the time of the increase. Each director so elected to fill a vacancy shall hold office for an indefinite term that expires at the next regular meeting of the shareholders.

Section 5. MEETING. Regular meetings of the Board of Directors shall be held annually immediately after the regular meeting of shareholders, and at such other times as may be fixed by resolution of the Board adopted from time to time. Special meetings of the Board of Directors may be called by the Chairman of the Board or by two or more directors.

Section 6. NOTICE. At least five (5) days notice shall be given to all directors of the date, time and place of a special meeting of the Board. The notice may but not need state the purpose of the meeting. No notice is required if the day or date, time, and place of a Board meeting have been provided in a resolution of the Board establishing regular Board meetings, or announced at a previous meeting of the Board. Notice of an adjourned meeting need not be given other than by announcement at the meeting at which adjournment is taken. Notice of a meeting may be waived by a director as provided by law.

Section 7. ADVANCE CONSENT. A director may give advance written consent or opposition to a proposal to be acted on at a Board meeting. If the director is not present at the meeting, consent or opposition to a proposal does not constitute presence for purposes of determining the existence of a quorum, but consent or opposition shall be counted as a vote in favor of or against the proposal and shall be entered in the minutes or other record of action at the meeting, if the proposal acted on at the meeting is substantially the same or has substantially the same effect as the proposal to which the director has consented or objected.

Section 8. COMPENSATION. The directors shall receive such compensation for their services as directors and as members of any committee appointed by the Board as may be prescribed by the Board of Directors, and shall be reimbursed by the company for ordinary and reasonable expenses incurred in the performance of their duties.

ARTICLE IV.

OFFICERS

Section 1. PRINCIPAL OFFICERS. The Board of Directors may elect from its own number a Chairman of the Board, and shall elect a President and a Treasurer, neither of whom need be a Director. The Chairman of the Board, if elected and present, shall preside at all meetings of the Board and of the shareholders, and shall perform such other duties as may be prescribed by the Board. Unless otherwise determined by the Board, and except as heretofore delegated to the Chairman of the Board, the President shall be and have the duties of Chief Executive Officer of the corporation as set forth in Minnesota Statutes, Section 302A.305, as amended from time to time. Unless otherwise determined by the Board, the Treasurer shall be and have the duties of Chief Financial Officer of the corporation, as set forth in Minnesota Statutes, Section 302A.305, as amended from time to time.

Section 2. OTHER OFFICERS. The board may elect or appoint such other officers or agents as it deems necessary for the operation and management of the corporation, each of whom shall have the powers, rights, duties, responsibilities, and terms in office determined by the Board.

Section 3. MULTIPLE OFFICES. Any number of offices or functions of those offices may be held or exercised by the same person, who may sign documents in more than one capacity if the documents indicate each capacity in which the person signs.

Section 4. SALARIES. The salaries of all officers and agents of the corporation shall be determined by or under the direction of the Board.

ARTICLE V.

Section 1. ISSUANCE OF SHARES. The Board of Directors may authorize the issuance of shares of the corporation and rights to purchase shares of the corporation, to the full amount authorized by the Articles of Incorporation, in such amounts, at such times, and upon such terms as may be determined by the Board and permitted by law.

Section 2. CERTIFICATED AND UNCERTIFICATED SHARES. Subdivision 1. The shares of the corporation shall be either certificated shares or uncertificated shares. Each holder of duly issued certificated shares is entitled to a certificate of shares.

Subdivision 2. Certificates for shares of the corporation shall be in such form as the Board of Directors may from time to time prescribe, and shall be signed by the President

or a Executive Vice President and by the Treasurer or an Assistant Treasurer. If certificates are signed by a transfer agent, acting on behalf of the corporation, and a registrar, the signatures of the officers of the corporation may be facsimile.

Subdivision 3. The corporation may determine that some or all of any or all classes and series of the shares of the corporation will be uncertificated shares. Any such determination shall not apply to shares represented by a certificate until the certificate is surrendered to the corporation.

Section 3. TRANSFER AGENT. The Board of Directors may appoint one or more transfer agents and registrars for the transfer and registration of shares of any class, and may require that share certificates shall be countersigned and registered by one or more of such transfer agents and registrars.

Section 4. TRANSFER OF SHARES. Shares of the corporation shall be transferable on the books of the corporation only by the holder of record thereof in person or by a duly authorized attorney. In case of certificated shares, shares shall be transferred only upon surrender and cancellation of certificates for a like number of shares.

Section 5. LOST CERTIFICATES. If any certificate for shares of the corporation shall be lost, stolen, or destroyed, the corporation may require such proof of the fact and such indemnity to be given to it and to its transfer agent and registrar, if any, as shall be deemed necessary or advisable by it.

Section 6. DETERMINATION OF VOTING AND OTHER RIGHTS. The Board may fix a date not more than sixty (60) days before the date of any meeting of shareholders or the date for payment of any dividend or other distribution or the date for the allotment of rights or the date when any change or conversion or exchanging of shares shall go into effect, as the date for the determination of the holders of shares entitles to notice of and entitled to vote at the meeting, or entitled to receive payment of any such dividends or other distributions, or entitled to any such allotment of rights, or entitled to exercise the rights in respect of any such change, conversion or exchange of shares, and in such case only shareholders of record on the date so fixed shall be entitled to such notice of and to vote at such meeting, or to receive payment of such dividend or distribution, or to such allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after any such record date fixed as herein provided.

Section 7. HOLDER OF RECORD. The corporation shall be entitled to treat the holder of record of any share or shares as the holder thereof in fact and shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise expressly provided by law, or as authorized by any procedure established by resolution of the Board of Directors.

ARTICLE VI.

MISCELLANEOUS

Section 1. INDEMNIFICATION. The corporation shall provide indemnification and advances of expenses, including witness reimbursements, to any director, officer, or employee of the corporation made or threatened to be made a party to a proceeding, or appearing as a witness in a proceeding, by reason of the former or present official capacity of the person, in such manner, under such circumstances, and to such extent as required or permitted by Minnesota Statues, Section 302A.521, as amended from time to time, or as required or permitted by other provisions of law.

Section 2. FISCAL YEAR. The Board of Directors may fix, and from time to time change, the fiscal year of the corporation. Unless otherwise fixed by the Board, the calendar year shall be the fiscal year.

Section 3. SEAL. The corporation shall have no seal, and the affixing of a seal shall not be essential to the execution of any document or instrument by or on behalf of the corporation.

Section 4. EXECUTION OF INSTRUMENTS. The President, any Vice President, or any other person or persons designated by the Board of Directors, may sign and deliver in the name of the corporation any deeds, mortgages, bonds, contracts or other instruments pertaining to the business of the corporation, except in cases in which the authority to sign and deliver is required by the law to be exercised by another person or is expressly delegated by the Articles of Incorporation or these Bylaws or by the Board of Directors to some other officer or agent of the corporation.

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Exhibit 13

FASTENAL

2007

ANNUAL REPORT

40 YEARS OF QUALITY PRODUCTS AND SERVICES

1967 ANNIVERSARY 2007

FASTENAL

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2007 Profile of Fastenal

Fastenal was founded in 1967. As of December 31, 2007, we operated 2,160 stores located in 50 states, Puerto Rico, Canada, Mexico, Singapore, China, and the Netherlands, and employed 8,617 people at these stores. In addition, there were 3,396 people employed in various support positions. We sell approximately 825,000 different types of industrial and construction supplies in ten product categories. These include (approximately): 349,000 different types of threaded fasteners and miscellaneous supplies (fasteners); 119,000 different types of tools and equipment (tools); 204,000 different types of cutting tool blades and abrasives (cutting tools); 49,000 different types of fluid transfer components and accessories for hydraulic power, pneumatic power, plumbing, and HVAC (hydraulics & pneumatics); 12,000 different types of material handling, storage, and packaging products (material handling); 13,000 different types of janitorial supplies, chemicals, and paint (janitorial supplies); 19,000 different types of electrical supplies; 28,000 different types of welding supplies (excluding welding gases); 23,000 different types of safety supplies; and 9,000 different types of metals, alloys, and materials (metals).

As of December 31, 2007, we operated 13 distribution centers located in Minnesota, Indiana, Ohio, Pennsylvania, Texas, Georgia, Washington, California, Utah, North Carolina, Kansas, Ontario, Canada, and Nuevo Leon, Mexico. During 2007, approximately 94.8% of our sales were attributable to products manufactured by others, and approximately 5.2% related to items manufactured, modified, or repaired by either our Manufacturing Division or one of our Support Services. Since December 31, 2007, we have opened additional store locations.

This annual report, including the sections captioned “President’s Letter to Shareholders,” “Management’s Discussion & Analysis of Financial Condition & Results of Operations” and “Stock and Financial Data,” contains statements that are not historical in nature and that are intended to be, and are hereby identified as, “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995 (the “Reform Act”), including statements regarding (1) the improvements in sales growth and return on investment expected to result from making separate decisions for each store regarding the addition of inventory and sales personnel, (2) the outcome of our new long term growth strategy ‘Pathway to Profit’, including planned decreases in the rate of new store openings, planned additions to our outside sales personnel, the expected funding of such additions out of cost savings resulting from the slowing of the rate of new store openings, the growth in average store sales expected to result from this strategy, our ability to capture leverage expected to result from this strategy (including expected decreases in the growth of support personnel and expected working capital efficiencies), and our ability to achieve our goals regarding pretax earnings and return on investment, (3) the payment of dividends, (4) working capital goals and expected returns on total assets when working capital is appropriately managed, (5) capital expenditures, (6) growth in foreign operations, (7) the planned expansion of inventory selection at the Indiana distribution center and master stocking hub, (8) our ability to mitigate the effect of rising fuel prices, and (9) the funding of expansion plans.

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Table of Contents 2007

Page Section

2-4 President’s Letter to Shareholders

5 Six—Year Selected Financial Data

6 Stock and Financial Data

7-8 Stock Performance Highlights

9-20 Management’s Discussion & Analysis of Financial Condition & Results of Operations

21 Consolidated Balance Sheets

22 Consolidated Statements of Earnings

23 Consolidated Statements of Stockholders’ Equity and Comprehensive Income

24 Consolidated Statements of Cash Flows

25-37 Notes to Consolidated Financial Statements

38 Management Report on Internal Control Over Financial Reporting

39 Report of Independent Registered Public Accounting Firm

40 Directors, Executive Officers & Corporate Information

1967 – 2007: Snapshots of the First 40 Years

When Fastenal opened its doors in 1967, we were a small nuts and bolts operation on Lafayette Street in Winona, MN. Bob Kierlin’s chair was an empty fastener keg, and our sales in December of that year were $579 – that’s dollars, not millions. In short, we were a company struggling to find our footing, but we believed in our people.

In 2007, we celebrated our 40th birthday, we celebrated our 20th anniversary as a public company, Will Oberton was named ‘CEO of the Year’ by Morningstar, Inc., and nine organizations (including Fastenal) were included as subject material in a new business book – The Breakthrough Company.

Throughout this annual report, we have added pictures and other items from our first 40 years. We hope you enjoy this history and we hope you forgive our indulgence.

As to the future, we intend to continue the tradition of… Growth Through Customer Service

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2007 President’s Letter to Shareholders

Almost every day some one asks me, how is business at Fastenal? In 2007, it was a good year in most areas of our business, but there is a lot of work to do. The year started out very slowly with our daily sales growth at 12.6% in January. Our team worked hard and we ended 2007 on a stronger note by reporting daily sales growth of 15.3% for the fourth quarter and 16.8% daily sales growth for the month of December. This was also a year of great change at Fastenal with the introduction of our new growth strategy called ‘Pathway to Profit.’ I will discuss this strategy later in the letter.

Our 2007 sales growth was 14.0% and our total revenue for the year was approximately $2.1 billion. Two billion in revenue is a new milestone for Fastenal, and for me it represents a bit more. When I started with Fastenal in January 1980, we had annual revenue of two million dollars which means our revenue is now one thousand times greater than it was when I started with Fastenal. When I have the opportunity to speak with newer employees, I share this story to motivate them. I believe it gives them an example of our future and the potential they have with Fastenal.

Our net earnings for 2007 were $232.6 million; this represents a 16.9% increase over 2006. Although this rate of earnings growth is less than planned, I am proud of the fact we were able to produce earnings leverage despite historically low sales growth and increasing energy costs.

We opened 161 new stores in 2007 versus 245 stores in 2006. The lower number was the result of our decision to open fewer stores and to add more outside sales people to our existing stores. We also slowed the rollout of our CSP2 project. This decision is a reflection of what we learned from the CSP2 expansion. We now believe that the addition of inventory and sales people in a store should be separate decisions, not just one. In other words, some stores will benefit more from the inventory, while others will benefit from the addition of sales people. We feel by separating the decisions we will see greater sales growth and a better return on our investment.

Pathway to profit

Accelerated outside sales program

As I stated earlier, we introduced a new long-term growth strategy in 2007 which we call the ‘Pathway to Profit.’ We developed this strategy by analyzing the profitability of our stores based on age, sales volume, geographic location, staffing, and sales growth. We also factored in many of the things we learned from our CSP projects over the last several years.

During this analysis, we confirmed some things and we learned some things. First off, we discovered the real ‘sweet spot’ for store profitability. This sweet spot is annual per store sales of approximately $1.5 million, or $125,000 per month. When our stores reach this sales level, they currently produce an average pretax operating margin of approximately 23.0%. By comparison, our pretax earnings margin was 17.6% in 2006, and our average annual per store sales were $955,000, or $79,500 per month.

The ‘Pathway to Profit’ strategy is very straightforward – to grow our average store sales to $125,000 per month and to drive our pretax operating margin to 23.0%. To drive our average store volume to this level, we have transitioned from a growth strategy primarily focused on store openings to a strategy that blends store openings with a heightened investment in additional outside sales personnel in existing stores.

We believe this new growth strategy will allow us to produce annual sales growth at, or above, 20.0% in a normal economic cycle. In addition, we believe it can produce an even greater profit growth and return on invested capital. Specifically, our plan is to slow the annual new store openings from our previously stated goal of 13.0-18.0% additional stores to approximately 7.0% to 10.0% additional stores. We will then use the money saved by opening fewer stores and will increase our investment in outside sales people. These additional outside sales people will be added to our strongest stores. We define our strongest stores as those that score well on our internal scorecard system.

Our research shows for every store we don’t open, we can hire four sales people. Based on the results we had in our CSP2 stores, we believe we will achieve greater sales growth by adding these sales people to an existing store. If we are able to execute on the ‘Pathway to Profit,’ an 8.0% rate of new store openings, combined with 20.0% sales growth company-wide, would raise our average store to $125,000 per month in five years. Our stated plan is to grow our pretax earnings margin from the current 18.3% to 23.0% over this five year period. A simple way to think about this strategy – greater investment in people and lower investment in brick and mortar.

Another important finding is that a high percentage of the work done by our support staff is based more on the number of stores rather than sales volume. This means with lower store openings we will not have to add as much support help. So, we set a new goal of growing support labor at half the rate of sales growth, which will greatly help us manage operating and administrative expense growth. Even with lower sales growth in 2007, we were able to achieve this support labor goal.

We also learned from the CSP2 project that to get the sales productivity we need from our new sales hires, we needed to greatly improve our sales process. We started by determining what tools our sales people would need to be efficient and effective at serving their customers. We knew they needed access to operational and product information, needed access to CRM software, and also needed to be capable of communicating with both the customer and their store. We concluded that e-mail was a more efficient form of communication than telephone, so we asked our technology group to find the best tool on the market that would fit these needs. Their research concluded that the Symbol MC70 was the best choice as it could provide all of the functionality required and was also equipped with a barcode scanner for scanning customers’ product bins. This would eliminate having two devices. By the close of 2007, our technology group had not only written and tested the software to run the MC70s, but they have also rolled out the devices to over 2,300 salespeople and have trained them on how to use it efficiently.

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President’s Letter to Shareholders 2007

We also changed the sales territories to sales zones within each store. The CSP2 analysis revealed to us one simple fact: stores that do a good job of dividing up current and potential accounts achieve better sales growth. The sales zone allows us to measure the performance of each sales person using our outside sales scorecard. The scorecard measures the performance of every sales person against their peers in several categories on a monthly basis. To lead the development of this sales program we formed a new department within Fastenal whose sole focus is the improvement of our sales process and productivity. They are committed to developing the most professional and productive sales force in our industry.

The inventory expansion project in our Indianapolis Distribution Center was a big focus in 2007. As I stated in my 2006 President’s Letter, we began to expand our inventory selection in that facility from 28,000 to approximately 120,000 items during 2005. We chose to do this project in Indianapolis due to its central location and because we can reach more than 70.0% of our customers in less than 48 hours using Fastenal’s ground transportation. Because of the benefits we have seen from this program, we have continued to expand the number of stocked items at this location, and at year end there were approximately 140,000 different items available. In 2008, we plan to continue expanding the selection of inventory at this location by adding 25,000 to 50,000 more items throughout the year. This project is all about improving the service we provide to our customers.

Our accounting and purchasing people did a nice job of managing our assets in 2007. Both our inventory and accounts receivable grew at a lower rate than sales. Inventory grew $48.6 million, or 10.7%, and accounts receivable grew $26.8 million, or 12.8%. This allowed us to produce more free cash flow than ever before. We used this money to increase our stock buy-back program and purchased nearly 2.1 million shares during 2007.

The accounting team continues to find new and better ways to process the millions of transactions we handle every year. In 2006, we installed a new automated scanning system that electronically captures the information from incoming invoices and payments and automates both the bill paying and payment application processes. Throughout 2007, the accounting group continued to find new ways to speed up these processes, enabling them to process more transactions with fewer people. Meanwhile, the team at our accounts receivable call center worked on developing new ideas and better training, which allowed them to increase their call volume to a level 21.0% higher than just 12 months earlier. This is the main reason we continue to see improvement in our days outstanding.

The strategic accounts team continued to bring in new business in 2007. The environment for large manufacturers and contractors was somewhat challenging in 2007, but through hard work and dedication they continued to win new business. As a supplier, Fastenal is very well positioned to serve these large companies due to our multiple locations and our wide range of products and services.

We saw good success at our manufacturing division in 2007. For those of you not as familiar with Fastenal, our manufacturing division was started in 1982 to quickly produce hard-to-find parts for customers. This division has grown to four locations, Winona, MN, Rockford, IL, Indianapolis, IN, and Modesto, CA, and we have more than 350 people focused on solving customer problems as quickly as possible. Many of the orders received are produced within a day or less and shipped directly to the customer location. This is not a service most customers need often, but when a critical machine is down, one part can make a big difference.

Our marketing department continues to work hard promoting the Fastenal name. In 2007, we decided to increase our presence in the NASCAR racing program by agreeing to sponsor the No. 40 Dodge in the Nationwide Series (formerly the Busch Series). The team is owned by Chip Ganassi Racing with Felix Sabates and our lead driver will be Dario Franchitti, the reigning Indianapolis 500 and IndyCar points champion. Both our research and our experience have told us that racing is a very popular sport with a high percentage of our customer base. We are excited to have Dario and the entire Ganassi team associated with the Fastenal name.

Product development and purchasing continue to search for the best suppliers. This group is tasked with putting our sales people in a position of having high quality product at a competitive price. They have done a great job, and our sales people can be proud of the high quality products and service they bring to our customers. We continue to expand our foreign sourcing efforts and have greatly increased the number of field inspectors traveling to factories to check for both quality and social compliance. In 2007, we opened two quality control laboratories, one in Kan Shan, Taiwan and the other in Shanghai, China. These investments were made to help with quality assurance and to speed up the product development process. Both of these labs have received their A2LA quality certification.

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2007 President’s Letter to Shareholders

During the first quarter, we completed the move into our new distribution center in Modesto, California. This facility services the California area and also acts as the regional distribution center for the western United States and Canada. We also designed a new distribution center that is being built in Denton, Texas to replace our facility in Carrollton, Texas. Although the construction was delayed due to wet weather in the Dallas area, we still plan to move into the facility in mid 2008.

Our transportation group continued to improve the delivery times of product to our stores and customers. As I have stated in previous years, transportation is a very important part of what we do as a distributor. Many of our best competitors rely on outside carriers such as UPS and FedEx to deliver product to their customers. By using our own transportation fleet, we are not only more cost effective, but we’re also able to deliver the product earlier in the day. In fact, over 80.0% of our stores receive a delivery from the warehouse before 7:00 a.m., which allows us to get the product to the customer before their workday starts. Based on our research, the outside carriers typically arrive between 10:00 a.m. and noon; this gives us a distinct service advantage. Thanks to our investment in store inventory over the last five years, we also have the product on our local store shelves for over 60.0% of our sales transactions. This eliminates the need for rapid transportation on these items and allows us to provide same-day service.

The Information Systems (IS) group has not only kept up with the growth of Fastenal, they’ve also developed several customer solutions–all while growing their department by only a few people. In the last two years, the IS group has gone from mainly providing systems and support to being a producer of custom solutions for our people, and also for our customers. I spoke earlier about the rollout of the MC70 hand held device. They have also been working on several systems that will automate the tool cribs of our customers. The group set up a mock tool crib display at our employee product show in December, and the feedback from store personnel and our suppliers was tremendous. They demonstrated an automated scale system they have designed that allows the customer to know exactly how many pieces of a particular part they are using and who is using it, without having a person manning the crib. Bob Kierlin’s original idea for Fastenal was to sell product through vending machines. Based on the display I saw at the employee product show, we are closer than we have ever been to that dream.

None of the progress I have written about would have been possible without great people. In 2007, we have continued to invest in our people, and because of our profit growth we will be able to contribute 50.0% more to our 401(k) plan than in 2006. Our people in the human resources keep looking for new and creative ways to improve the benefits for our people.

The Fastenal School of Business (FSB) trained more people, in more places, on more subjects than ever before, and our training just keeps getting better. Early in the year, I challenged some of the people in FSB to try and think of ways to make learning about products more fun. So they developed a game they named Product Prodigy. One copy was produced for each store. The quality of this game is as good, if not better, than any you can buy in a department store. We then challenged each region to put together a district team and multiple store teams of employees to compete in a large tournament during our employee product show. There were 186 store teams and 16 district teams that competed. Over two days and a single elimination process, teams advanced until Friday afternoon when it was down to the final two in each group. These teams had to compete in front of over 2,000 fellow employees. It was very fun and exciting. The winning team for the store tournament was Tom Gundlach’s Salt Lake City, Utah district, and for the regional winners it was Ross Surrat’s Ohio district managers. Each of these people won a nice cash prize, and the grand prize winners will receive a ten day trip to Asia to learn even more about products. I tell you this story because it’s another good example of our people accepting a challenge and then far exceeding anyone’s expectations.

Although I believe we could have grown faster in 2007, I hope it’s clear that I am very proud of the accomplishments our team made in our effort to make Fastenal the best distributor of industrial and construction products in every market we serve. In the fourth quarter, I spent a great deal of time traveling to visit employees and I see the same thing wherever I go: great people pulling together to achieve a common goal – Growth Through Customer Service. I want to thank everyone on the Fastenal team for their dedication and the hard work that makes our success possible. As the leader of our company, I believe that if we continue to hire great people, give them good leadership and training, and allow them to make the decisions to serve our customers, we will always be successful.

Finally, I want to also thank you, our shareholders, for your continued support. And, as always, I will commit to work hard to lead this team of more than 12,000 people and achieve even greater success in the coming year.

Willard D. Oberton

Chief Executive Officer and President

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Six—Year Selected Financial Data 2007

(Amounts in Thousands except Per Share Information)

Operating Results 2007 Percent Change 2006 2005 2004 2003 2002

Net sales $ 2,061,819 14.0% $ 1,809,337 1,523,333 1,238,492 994,928 905,438

Gross profit1 1,047,574 15.4% 907,675 758,103 615,886 482,103 442,138

Earnings before income taxes 377,899 17.7% 321,029 269,056 208,336 136,336 121,2072

Net earnings 232,622 16.9% 199,038 166,814 130,989 84,120 75,5423

Basic and diluted earnings per share 1.55 17.4% 1.32 1.10 .86 .56 .50

Dividends 66,216 9.4% 60,548 46,935 30,350 15,935 3,794

Dividends per share .44 10.0% .40 .31.20 .105 .025

Value of shares repurchased $ 87,311 $ 17,294 18,739 — — —

Number of shares repurchased 2,086 474 700 — — —

Basic-weighted average shares outstanding 150,555 151,034 151,270 151,755 151,755 151,755

Diluted-weighted average shares outstanding 150,5554 151,1654 151,5084 151,9724 151,7844 151,755

Operating Results (as a percentage of net sales) 2007 2006 2005 2004 2003 2002

Gross profit1 50.8% 50.2% 49.8% 49.7% 48.5% 48.8%

Earnings before income taxes 18.3% 17.7% 17.7% 16.8% 13.7% 13.4%

Net earnings 11.3% 11.0% 11.0% 10.6% 8.5% 8.3%

Financial Position on December 31 2007 Percent Change 2006 2005 2004 2003 2002

Accounts receivable plus inventory $ 740,923 11.3% $ 665,529 545,117 469,833 361,640 322,815

Net working capital 742,980 11.9% 663,880 557,470 466,883 393,255 349,422

Total assets5 1,163,061 11.9% 1,039,016 890,035 775,362 652,875 563,384

Total stockholders’ equity $ 1,010,161 1.8% $ 992,093 783,549 684,369 576,740 499,871

All information contained in this Annual Report reflects the 2-for-1 stock splits effected in the form of a stock dividend in each of 2002 and 2005.

1 Reflects impact of reclassification of certain internal trucking costs between operating expenses and cost of goods sold related to the freight initiative, which decreased gross profit by $12,477, $8,447, $6,964, and $6,338 in 2005, 2004, 2003, and 2002, respectively.

2 Amount includes a gain on the sale of the Do-It-Yourself (DIY) Business of $5,934.

3 Amount includes an extraordinary gain, net of tax, of $716.

4 Reflects impact of stock options issued by the Company in April 2007 or May 2003 that were in the money and outstanding during the period.

5 Reflects impact of reclassification of prior years’ presentation to conform to current year presentation.

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2007 Stock and Financial Data

Common Stock Data

Our shares are traded on The NASDAQ Global Select Market under the symbol ‘FAST.’ The following table sets forth, by quarter, the high and low closing sale price of our shares on The NASDAQ Global Select Market for the last two years.

2007: High Low 2006: High Low

First quarter $ 38.18 34.03 First quarter $ 47.39 37.92

Second quarter $ 43.60 34.78 Second quarter $ 48.84 36.54

Third quarter $ 51.07 41.87 Third quarter $ 41.09 33.23

Fourth quarter $ 49.29 37.76 Fourth quarter $ 42.81 34.99

As of February 1, 2008, there were approximately 1,582 recordholders of our common stock, which includes nominees or broker dealers holding stock on behalf of an estimated 65,016 beneficial owners.

In 2007, we paid two dividends, one of $.21 per share and one of $.23 per share, and in 2006, we paid two dividends, each of $.20 per share. On January 21, 2008, we announced a semi-annual dividend of $.25 per share to be paid on February 29, 2008 to shareholders of record at the close of business on February 25, 2008.

We expect to continue paying comparable semi-annual cash dividends in the foreseeable future, provided that any future determination as to the payment of dividends will depend upon our financial condition and results of our operations and such other factors as are deemed relevant by our Board of Directors.

Selected Quarterly Financial Data (Unaudited)

(Amounts in Thousands Except Per Share Information)

2007 Net sales Gross profit Net earnings Basic earnings per share

First quarter $ 489,157 249,515 54,033 .36

Second quarter 519,706 261,469 60,256 .40

Third quarter 533,750 272,024 62,142 .41

Fourth quarter 519,206 264,566 56,191 .38

Total $ 2,061,819 1,047,574 232,622 1.55

2006 Net sales Gross profit Net earnings Basic earnings per share

First quarter $ 431,703 217,487 47,854 .32

Second quarter 458,817 229,005 51,513 .34

Third quarter 470,088 237,235 54,101 .36

Fourth quarter 448,729 223,948 45,570 .30

Total $ 1,809,337 907,675 199,038 1.32

A Look Back at Our First 40 Years

Since we opened the doors of our first store in 1967, Fastenal has grown into a $2 billion global supplier with 2,160 stores and more than 12,000 employees. Here’s a look back at some of the people, ideas and events that shaped our first 40 years and helped make Fastenal the business it is today …

FASTENAL FOUNDERS:

(left to right)

John D. Remick,

Stephen M. Slaggie,

Robert A. Kierlin,

Henry K. McConnon,

Michael M. Gostomski

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Stock Performance Highlights 2007

Fastenal Stock Performance 1, 2

Stock Value

Invested $9,000 on August 27, 1987 Value on December 31, 2007: $1,940,160

$3.0 Million

$2.0 Million

$1.0 Million

1987 1991 1995 1999 2003 2007

Initial Public Offering (IPO)

On August 27, 1987 (date of our initial public offering), 1,000 shares of our stock sold for $9,000. Approximately 20 years later, on December 31, 2007, those 1,000 shares, having split six times, were 48,000 shares worth $1,940,160, for a gain of approximately 30.8% compounded annually.

Ten Years

On December 31, 1997, 1,000 shares of our stock sold for $38,250. Ten years later, on December 31, 2007, those 1,000 shares, having split twice, were 4,000 shares worth $161,680, for a gain of approximately 15.5% compounded annually.

Five Years

On December 31, 2002, 1,000 shares of our stock sold for $37,390. Five years later, on December 31, 2007, those 1,000 shares, having split once, were 2,000 shares worth $80,840, for a gain of approximately 16.7% compounded annually.

Dividends and Stock Repurchases

We have paid dividends in every year since 1991.

During 2007, we issued three press releases announcing our Board of Directors had increased our authorization to purchase shares of our common stock (over and above previously authorized amounts). The date of these press releases and the number of additional shares authorized were as follows:

Date Number of New Shares Authorized

January 18, 2007 1,000,000

July 11, 2007 1,000,000

November 26, 2007 1,000,000

During 2007, we purchased 2,086,000 shares of our outstanding stock at an average price of approximately $41.86 per share. As of January 18, 2008, we have remaining authority to purchase up to approximately 1,000,000 additional shares of our common stock.

1 The share data featured represents past performance, which is no guarantee of future results.

2 Data on this page is in whole amounts, rather than the thousands truncation used throughout this document.

The Early Years

Fastenal Begins: November 28, 1967

“All five of us are risk takers who are willing to take a chance.”— BOB KIERLIN

The idea behind Fastenal was conceived by an 11-year-old Bob Kierlin, who observed that many customers at his father’s auto parts shop had to run around to several different stores to find the fasteners they were looking for, if they could find them at all. “I thought it would be nice if somebody had all the fasteners anyone would need all at one store,” recalls Kierlin.

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2007 Stock Performance Highlights

Performance Graph

Set forth below is a graph comparing, for the five years ended December 31, 2007, the yearly cumulative total shareholder return on our common stock with the yearly cumulative total shareholder return of the NASDAQ Market Index and an index (the “Peer Group Index”) of a group of peer companies selected by us (the “Peer Group”). The companies in the Peer Group are Industrial Distribution Group, Inc., Lawson Products, Inc., MSC Industrial Direct Co., Inc., and W.W. Grainger, Inc. Fastenal is not included in the Peer Group.

In calculating the yearly cumulative total shareholder return of the Peer Group Index, the shareholder returns of the companies included in the Peer Group are weighted according to the stock market capitalization of such companies at the beginning of each period for which a return is indicated.

The comparison of total shareholder returns in the performance graph assumes that $100 was invested on December 31, 2002 in Fastenal, the NASDAQ Market Index and the Peer Group Index, and that dividends were reinvested when and as paid.

Comparison of Five Year Cumulative Total Return Among Fastenal, Peer Group Index, and NASDAQ Market Index

250

200

150

100

2002 2003 2004 2005 2006 2007

Fastenal Peer Group Index NASDAQ Market Index

2002 2003 2004 2005 2006 2007

Fastenal 100.00 133.79 166.75 214.16 198.37 225.87

Peer Group Index 100.00 101.35 143.60 154.79 156.20 189.14

NASDAQ Market Index 100.00 150.36 163.00 166.58 183.68 201.91

The Early Years

Opening Day

Despite a quarter-page newspaper ad announcing the grand opening, only seven people came into the store during the first two days, and the only sales were some 10 lb. bags of ‘farmer’s mix.’ To generate interest, co-founder Van McConnon began calling on local businesses. This was the beginning of the Fastenal we know today.

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Management’s Discussion & Analysis of Financial Condition & Results of Operations 2007

(Dollar Amounts in Millions except Per Share Information and as Otherwise Noted)

Results of Operations

Business Overview – Fastenal is a North American leader in the wholesale distribution of industrial and construction supplies We operate stores primarily located in North America. On December 31, 2007, we operated 2,160 company-owned or leased store locations.

Most of our customers are in the manufacturing and construction markets. The manufacturing market includes both original equipment manufacturers (OEM) and maintenance and repair operations (MRO). The construction market includes general, electrical, plumbing, sheet metal, and road contractors. Other users of our products include farmers, truckers, railroads, mining companies, federal, state, and local governmental entities, schools, and certain retail trades. Geographically, our customers are primarily located in North America.

Financial Overview – During 2007, the weakness of the global industrial environment negatively impacted our business. During most of 2006 and all of 2005, the strength of the global industrial environment positively impacted our performance.

The impact of the economy is best reflected in the growth performance of our stores opened greater than ten years ago (2007 group reflects stores opened in 1997 and earlier) and opened greater than five years ago (2007 group reflects stores opened in 2002 and earlier). These two groups of stores are more cyclical due to the increased market share they enjoy in their local markets. The stores opened greater than two years ago (2007 group reflects stores opened in 2005 and earlier) represent a consistent same-store view of our business. The net sales growth rate for each of the groups was as follows:

Store Age 2007 2006 2005

Opened Greater Than 10 Years Ago 4.4% 8.0% 10.0%

Opened Greater Than 5 Years Ago 6.1% 9.7% 12.0%

Opened Greater Than 2 Years Ago 7.3% 12.2% 15.6%

Net Sales – Net sales and growth rates in net sales were as follows:

2007 2006 2005

Net Sales $ 2,061.8 $ 1,809.3 $ 1,523.3

Percent Change 14.0% 18.8% 23.0%

The 2007, 2006, and 2005 net sales growth rate percentages reflect a weakening economy since late 2006 versus a strengthening economy from summer 2003 to late 2006 in the North American market. The increase in net sales in 2007, 2006, and 2005 came primarily from unit sales growth in existing stores opened more than two years, growth in our newer product lines, and new store openings.

Fast Fact: The candy shop up the street from the business dumped empty boxes in the dumpster. In the early years, Fastenal used these boxes for products.

Fastener Vending Machine Concept

An early plan was to franchise vending machines that dispensed fasteners, but it proved to be an idea that was ahead of its time and never got off the ground.

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2007 Management’s Discussion & Analysis of Financial Condition & Results of Operations

(Dollar Amounts in Millions except Per Share Information and as Otherwise Noted)

Stores opened in 2007 contributed approximately $35.4 (or 1.7%) to 2007 net sales. Stores opened in 2006 contributed approximately $119.1 (or 5.8%) to 2007 net sales and approximately $32.9 (or 1.8%) to 2006 net sales. The rate of growth in sales of store locations generally levels off after they have been open for five years, and, as stated earlier, the sales of older store locations typically vary more with the economy than do the sales of younger stores.

Monthly Daily Sales Growth – Our business had daily sales growth rates (compared to the comparable month in the preceding year) as follows:

Month 2007 2006 2005

January 12.6% 23.9% 26.2%

February 11.8% 21.3% 25.1%

March 15.5% 21.1% 22.5%

April 12.0% 19.1% 26.6%

May 13.2% 19.2% 22.9%

June 14.8% 20.6% 21.2%

July 13.9% 19.7% 21.8%

August 13.4% 20.7% 21.7%

September 13.7% 16.1% 26.8%

October 14.7% 15.9% 22.7%

November 15.2% 16.3% 21.7%

December 16.8% 17.7% 17.0%

Note: Daily sales are defined as the sales for a period divided by the number of business days in a period.

The January 2005 to November 2005 time frame generally represents improvement followed by stabilization in our daily sales trends. The January 2005 to November 2005 general improvement and stabilization reflects a continuation of the improvements we saw beginning in 2003 in the economy as it relates to the customers we sell to in North America and the impact of the Fastenal standard inventory stocking model (see reference below regarding the Customer Service Project, or CSP). The December 2005 daily sales growth rate was weaker than we expected; however, we believe this was an abnormality due to the following reasons: (1) historically we have seen fluctuations in December’s daily sales growth rates due to the presence of the various holidays and their impact on our customers’ buying patterns and (2) December 2004 experienced strong growth, which creates a more difficult comparison in the next year. In 2005, item (2) is also noticeable in months such as May, June, July, and, to a lesser degree, October. The noticeable exception to item (2) is the month of September, which experienced stronger growth due to the demand generated by Hurricane Katrina. The continued strong growth in the January 2006 to March 2006 time frame generally represents a continuation of the strong environments experienced in 2004 and 2005. The first two months of the second quarter of 2006 experienced weaker sales growth than we expected. The April 2006 growth was negatively impacted by Easter (which occurred in March during 2005) but was still weaker than we expected. The June to August 2006 time frame represents stronger sales activity than the preceding two to three month period. The daily sales growth amount in September 2006 appears weaker due to the difficult comparison with Hurricane Katrina’s added sales in September 2005 (approximately $4.0 impact); however, the increase in our daily sales number from August 2006 to September 2006, of 4.1%, is consistent with historical norms. The final three months of 2006 continued in the same variable fashion as the previous six months. The October growth number was negatively impacted by the difficult comparison with Hurricane Katrina’s added sales in October 2005 (approximately $1.5 impact). The months of November and December, like the months of April and May, were weaker than expected. The first five months of 2007 continued the trend of a weaker economic environment, as experienced during 2006 as described above. The month of March 2007 improved relative to January and February 2007. The month of June 2007 improved relative to April and May 2007. The June improvement was meaningful as it came in a month with fairly challenging comparisons from 2006. Unfortunately, the strength in June moderated in the third quarter. This pulled our daily sales growth rate from 14.8% in June to 13.7% in the third quarter of 2007. This moderation reflected a continuation of the weaker economic environment experienced in four of the first five months of the year. The final three months of 2007 continued in the same variable fashion as the previous nine months but showed consistent improvement from the third quarter daily sales growth rate of 13.7%. We believe the improvement in the final months of 2007 was driven, in part, by our ‘pathway to profit’ initiative discussed later.

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Management’s Discussion & Analysis of Financial Condition & Results of Operations 2007

(Dollar Amounts in Millions except Per Share Information and as Otherwise Noted)

Sales by Product Line – The following table indicates, by product line, the year of introduction and the percentage of net sales.

Type Introduced 2007 2006 2005

Fasteners1 1967 50.7% 51.5% 53.7%

Tools 1993 10.6% 10.9% 10.5%

Cutting Tools 1996 4.6% 4.8% 4.6%

Hydraulics & Pneumatics 1996 6.5% 6.2% 6.1%

Material Handling 1996 6.1% 6.3% 6.4%

Janitorial Supplies 1996 5.4% 5.3% 4.7%

Electrical Supplies 1997 4.1% 3.7% 3.3%

Welding Supplies 1997 3.6% 3.5% 3.4%

Safety Supplies 1999 5.7% 5.4% 5.0%

Metals 2001 0.7% 0.6% 0.6%

Direct Ship2 2004 1.8% 1.6% 1.5%

Other 0.2% 0.2% 0.2% 100.0% 100.0% 100.0%

1 Fastener product line represents fasteners and miscellaneous supplies.

2 Direct Ship represents a cross section of products from the ten product lines. The items included here represent certain items with historically low margins which are shipped direct from our suppliers to our customers.

Threaded fasteners accounted for approximately 90% of the fastener product line sales in 2007, 2006, and 2005 and approximately 46%, 46%, and 48% of consolidated net sales in 2007, 2006, and 2005, respectively.

Impact of Current Initiatives – During the last several years, Fastenal has been actively pursuing several initiatives to improve its operational performance. These include: (1) a new freight model, (2) tactical changes to our working capital model, (3) an expanded store model called CSP2, and (4) a ‘master stocking hub’ distribution model. (Note: See introduction of our ‘pathway to profit’ initiative discussed later.) The freight model represents a focused effort to haul a higher percentage of our products utilizing the Fastenal trucking network and to charge freight more consistently in our various operating units. The Fastenal trucking network (also known as Blue Global) operates at a substantial savings to external service providers due to our ability to leverage our existing routes. This initiative positively impacted the latter two-thirds of 2005, all of 2006, and all of 2007 despite the fact we experienced year-over-year increases of approximately 31.7%, 5.3%, and 21.1%, respectively, in per gallon diesel fuel costs during these three periods. The diesel fuel cost per gallon did soften in the last four months of 2006 as our average price per gallon dropped below $2.90. During 2007, our average price per gallon of diesel fuel was $2.59, $2.85, $2.94, and $3.25 in the first, second, third, and fourth quarters, respectively. Given the nature of our distribution business, these fluctuations in diesel fuel prices have a meaningful impact on our results. This impact is quantified in greater detail in our fuel price discussion.

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2007 Management’s Discussion & Analysis of Financial Condition & Results of Operations

(Dollar Amounts in Millions except Per Share Information and as Otherwise Noted)

The tactical changes to our working capital model include the establishment of a central call center for accounts receivable collection, the establishment of financial business rules for the purchasing of products outside the standard stocking model (formerly referred to as CSP) at the store level, and the continuous re-balancing of store inventory based on our expected short-term needs. The latter is accomplished through a process we call ‘inventory re-distribution.’ The balance sheet impacts of these changes are described below in the working capital discussion.

The CSP2 store model represented an expansion of the core stocking items and sales personnel in an existing store with the goal of driving additional product sales to existing customers, target customers, and specific geographic areas within established markets. During the third quarter of 2007, we chose to modify the CSP2 expansion from a ‘one size fits all’ approach to an ‘a la carte’ approach. This will emphasize inventory expansion based on local customer demographics and based on local product knowledge within our sales force. We believe this is a logical complement to our ‘pathway to profit’ initiative discussed later.

The ‘master stocking hub’ distribution model represents our ‘everything in the catalog’ location. Historically, we have stocked a core selection of products (approximately 6,500 stock keeping units, or SKUs) plus customer-specific products at each of our store locations. Our distribution centers would stock the core selection, plus other products with sufficient sales history in the region to warrant stocking in a distribution center. Our stores would utilize their local or distribution center inventory to satisfy most of their customers’ needs and would then directly purchase additional items to satisfy the rest of their customers’ needs. When analyzing this local (or store) spending we noted the following: (1) this is an inefficient transaction for our store, (2) we don’t always benefit from good price negotiation because it is a ‘one off’ purchase, (3) our freight costs on these transactions are meaningfully higher than our average transaction, and (4) in many cases, we have sufficient volume at the company-wide level to warrant stocking it somewhere. These and other factors convinced us to turn our Indianapolis, Indiana distribution center (DC) from a regional DC into both a regional DC and a North American ‘master stocking hub.’ This provides all of our locations easy access to a wide variety of product already in the network. It also allows us to turn the four points noted above into a competitive advantage at the store level. In the future, as volume justifies it, we anticipate that our Modesto, California distribution center will assume a similar role for our stores west of the Rocky Mountains.

Impact of Fuel Prices – Rising fuel prices did take a toll during both 2007 and 2006. There was some relief in the final four months of 2006 that continued into the first quarter of 2007. However, during the second, third, and fourth quarters of 2007 we began to see significant increases in per gallon fuel costs again. During 2006, our total vehicle fuel costs averaged approximately $1.9, $2.1, $2.2, and $1.9 million per month in the first, second, third, and fourth quarters, respectively. During 2007, total vehicle fuel costs averaged approximately $2.1, $2.5, $2.4, and $2.7 million per month in the first, second, third, and fourth quarters, respectively. The increase resulted from variations in fuel costs, the freight initiative discussed earlier, and the increase in sales and store locations. These fuel costs include the fuel utilized in our distribution vehicles (semi-tractors, straight trucks, and sprinter trucks), which is recorded in cost of goods, and the fuel utilized in our store delivery vehicles, which is included in operating and administrative expenses.

Gross Profit Margins – Gross profit as a percent of net sales was as follows:

2007 50.8%

2006 50.2%

2005 49.8%

The improvement in 2007 was driven by our freight initiative discussed earlier and by improvements in our direct sourcing operations. These improvements were partially offset by the rising diesel fuel cost discussed earlier. The improvement in 2006 was driven by our freight initiative discussed earlier and by improvements in our direct sourcing operations.

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Management’s Discussion & Analysis of Financial Condition & Results of Operations 2007

(Dollar Amounts in Millions except Per Share Information and as Otherwise Noted)

Operating and Administrative Expenses – Operating and administrative expenses as a percent of net sales were as follows:

2007 32.6%

2006 32.5%

2005 32.2%

Operating and administrative expenses grew at a rate faster than the net sales growth rate in 2007. This was primarily due to increases in payroll and related expenses associated with the addition of outside sales personnel for our ‘pathway to profit’ initiative discussed later, our stock option expense, and, to a lesser extent, the previously mentioned initiatives (most notably the CSP2 conversions). Similar to the last several years, we experienced rising fuel costs and also experienced negative leverage in occupancy costs (primarily due to store openings and, to a lesser degree, store relocations). Our occupancy expenses grew approximately 21.1% for the year compared to 2006 and approximately 16.4% in the fourth quarter compared to the fourth quarter of 2006. This improving trend has been driven by the completion of our standard stocking model (also referred to as CSP) store conversion and due to the decrease in store openings pursuant to our ‘pathway to profit’ initiative.

Operating and administrative expenses grew at a rate faster than the net sales growth rate in 2006. This was primarily due to (1) the previously mentioned initiatives (most notably the CSP2 conversions) and their impact on employee numbers throughout the organization during 2006, (2) the impact of rising fuel costs for the first eight months of the year, and (3) increases in occupancy costs. In addition, the loss of a business day for the year, which occurred in the third quarter, negatively impacted our ability to leverage operating and administrative expenses. During the fourth quarter, we were better able to leverage our operating and administrative expenses. This was primarily due to the tight management of headcount growth since early June when we first experienced weakness in our sales growth.

Operating and administrative expenses grew at a slower rate than net sales growth during 2005. This was primarily due to the tight management of employee numbers throughout the organization.

The operating and administrative expenses for 2007 and 2006 include $1.9 and $0.3, respectively, of additional compensation expense related to the adoption of new stock option accounting rules. The 2007 expense relates to options granted in April 2007. We anticipate these options, which vest over the next eight years, will result in compensation expense of approximately $0.7 per quarter for the next five years, dropping slightly in the remaining period. The 2006 expense occurred in the first five months of 2006, but ceased on June 1, 2006 as those outstanding options, which were granted in January 2003, became vested. No other stock based compensation was outstanding during these periods.

Payroll and related costs represent approximately 67%, 69%, and 68% of operating and administrative expenses in 2007, 2006, and 2005, respectively. In 2007 and 2005, payroll and related costs increased at a rate which was less than the rate of increase in net sales. In 2006, payroll and related cost grew faster than net sales growth primarily due to the impact of the additional employees from our CSP2 conversions, and from our master hub initiative. Effective management of this expense allows us to leverage the sales growth more effectively. This tight management was significant, given our store expansion discussed elsewhere and given our acceleration in the addition of outside sales personnel at existing stores discussed below. We were pleased with our organization’s ability to manage operating and administrative expenses in 2007, 2006, and 2005, while also contributing an annual profit sharing amount of approximately $4.7, $3.2, and $2.5, respectively, to our employees’ 401(k) plan accounts (RRSP in Canada). This was a new program introduced in 2005. The changes in payroll and related costs were due to the following average number of employees (numbers are presented on a full-time equivalent basis) as follows:

2007 2006 2005

Store personnel 6,808 5,951 5,234

Distribution and manufacturing personnel 1,992 1,839 1,583

Administrative and sales support personnel 1,363 1,261 1,053

Total 10,163 9,051 7,870

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2007 Management’s Discussion & Analysis of Financial Condition & Results of Operations

(Dollar Amounts in Millions except Per Share Information and as Otherwise Noted)

The rate of increase in store personnel in 2007 was faster than the sales growth rate due to the additional personnel as a result of our ‘pathway to profit’ initiative discussed later. The rate of increase in ‘distribution and manufacturing’ and ‘administrative and sales support’ personnel in 2007 was slower than the sales growth rate due to the tight management of headcount growth since early 2007 when we first introduced our ‘pathway to profit’ initiative discussed later in this report. The rate of increase in non-store personnel in 2006 was slower than the sales growth rate due to the tight management of headcount growth since early June 2006 when we first experienced weakness in our sales growth.

In 2007, 2006, and 2005, the rate of increase in occupancy costs was 21.1%, 29.7%, and 32.9%, respectively. This was greater than the rate of increase in net sales. Occupancy costs increased due to: (1) an 8.1%, 14.0%, and 14.5% increase in the number of store locations in 2007, 2006, and 2005, respectively, (2) the upgrade of store locations in connection with the store upgrade initiative (formerly referred to as CSP), and (3) the relocation of existing stores. During 2007, 2006, and 2005, we relocated approximately 8%, 12%, and 13% of our stores, respectively.

The loss on sale of property and equipment for 2006 and 2005 came primarily from the sale of used vehicles.

Net Earnings – Net earnings, net earnings per share (EPS), growth rates in net earnings, and growth rates in EPS, were as follows:

2007 2006 2005

Net earnings $ 232.6 $ 199.0 $ 166.8

Basic EPS $ 1.55 $ 1.32 $ 1.10

Diluted EPS $ 1.55 $ 1.32 $ 1.10

Percentage change

Net earnings 16.9% 19.3% 27.3%

Basic EPS 17.4% 20.0% 27.9%

Diluted EPS 17.4% 20.0% 27.9%

During 2007, 2006, and 2005, the net earnings growth rate was greater than that of net sales primarily because of the previously mentioned impact of payroll and related costs and the improvements in gross profit margins. The EPS growth rate was greater than that of net earnings due to the repurchase of shares in all three years.

Working Capital – Two components of working capital, accounts receivable and inventories, are highlighted below. The annual dollar increase and the annual rate of growth were as follows:

Dollar growth 2007 2006

Accounts receivable $ 26.8 $ 26.0

Inventories $ 48.6 $ 94.4

Annual Growth rate 2007 2006

Accounts receivable 12.8% 14.2%

Inventories 10.7% 26.1%

The Early Years:

Some Initial Customers:

1. Thurow Industries—Sale of $405

2. Melamine Plastics—Sale of $1,879

3. Froedert Malt Corp (Malt Making)—Sale of $2,600

4. Goodall Mfg. Co. (Automotive)—Sale of $396

5. Dunn Blacktop (Surfacing)—Sale of $37

1967—First month’s sales:

$157 (not in millions)

“The greatest benefit here is everybody gets to make their own decisions and be a part of the business. They all know they have an equal shot at everything.”

- BOB KIERLIN

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Management’s Discussion & Analysis of Financial Condition & Results of Operations 2007

(Dollar Amounts in Millions except Per Share Information and as Otherwise Noted)

These two assets were impacted by our initiatives to improve working capital. These initiatives include (1) the establishment of a centralized call center to facilitate accounts receivable management (this facility became operational early in 2005), and (2) the tight management of all inventory amounts not identified as either expected store inventory, new expanded inventory, inventory necessary for upcoming store openings, or inventory necessary for our ‘master stocking hub.

The accounts receivable increase of 12.8% from December 31, 2006 to December 31, 2007 represents a lag behind the 16.8% daily sales increase in December 2007. The accounts receivable increase of 14.2% from December 31, 2005 to December 31, 2006 represents a lag behind the 17.7% daily sales increase in December 2006. We were pleased with the improvement in accounts receivable during 2007 and 2006 and with the related reduction in bad debt expense when compared to historical amounts.

The inventory increase of 10.7% from December 31, 2006 to December 31, 2007 is less than sales growth of 14.0% for 2007. This represents a meaningful improvement from the inventory increase of 26.1% in 2006 versus sales growth in 2006 of 18.8%. This improvement relates to our conscious decision to limit the growth of inventory in the future, to halt growth or decrease inventory in the short-term, and to get everybody on the same page related to execution of this decision. We continue to be pleased with the improvement in inventory utilization but still have much to do to improve our inventory utilization.

As we indicated in earlier communications, our goals center on our ability to move the ratio of annual sales to accounts receivable and inventory (Annual Sales: AR&I) back to better than a 3.0:1 ratio. On December 31, 2007, 2006, and 2005, we had a ratio of 2.8:1, 2.7:1, and 2.8:1, respectively. Historically, we have been able to achieve a 20% after tax return on total assets (our historical internal goal) when our Annual Sales: AR&I ratio is at or above 3.0:1. In 2007, we made considerable improvement as detailed above. During 2006, the incremental investments, including CSP2 conversions and our ‘master stocking hub model,’ did not allow us to improve our ratio. We need to continue executing better on the inventory portion of these working capital initiatives in 2008. Please refer to our discussion on ‘pathway to profit’ below.

Pathway to Profit – During April 2007 we disclosed our intention to alter the growth drivers of our business. For most of the last decade, we have used store openings as the primary growth driver of our business (opening approximately 14.0% new stores each year). In the future, we plan to add outside sales personnel into existing stores at a faster rate than historical patterns. We intend to fund this sales force expansion with the occupancy savings generated by opening stores at the rate of 7.0% to 10.0% per year (we opened approximately 8.1% new stores in 2007, or 161 stores). Our goal is four-fold: (1) to continue growing our business at a similar rate with the new outside sales investment model, (2) to grow the sales of our average store from $80 thousand per month (Spring 2007) to $125 thousand per month (five years or 2012), (3) to enhance the profitability of the overall business by capturing the expense leverage that has historically occurred in our existing stores as their sales grow, and (4) to improve the performance of our business due to the more efficient use of working capital (primarily inventory) as our average store size increases.

Fastenal Breaks Even: 1969

Fastenal’s First Sign

Hand-painted by co-founders

Bob Kierlin and Jack Remick

Store Openings:

1971—Rochester, MN

1974—La Crosse, WI

1975—Dubuque, IA

1976—Eau Claire, WI

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2007 Management’s Discussion & Analysis of Financial Condition & Results of Operations

(Dollar Amounts in Millions except Per Share Information and as Otherwise Noted)

In implementing the ‘pathway to profit,’ we have equivalent (FTE) head count as follows:

December 2007 September 2007 June 2007 March 2007

Store count 8.1% 9.7% 12.5% 13.4%

Store personnel – FTE 18.8% 18.4% 13.7% 13.0%

Distribution and manufacturing personnel – FTE 7.7% 12.8% 9.2% 8.9%

Administrative and sales support personnel – FTE 1.5% 2.1% 4.4% 15.2%

Total – FTE 14.1% 15.0% 11.5% 12.5%

Fiscal 2008 Reporting – During 2008, we intend to focus our commentary away from the four initiatives discussed earlier (new freight model, working capital model, expanded store model called CSP2, and ‘master stocking hub’ distribution model); instead we will focus our commentary on the ‘pathway to profit.’ Some key aspects we will focus on include the full-time equivalent statistics shown above, as well as information on the productivity of our outside sales personnel. The latter is information we intend to start disclosing after the second quarter when we are one year into the ‘pathway to profit’ initiative, which began in the spring of 2007.

Effects of Inflation – Price inflation related to certain products positively impacted net sales in 2005 and, to a lesser degree, in 2006 and 2007.

Critical Accounting Policies – Our estimates related to certain assets and liabilities are an integral part of our consolidated financial statements. These estimates are considered critical because they require subjective and complex judgments.

Allowance for Doubtful Accounts – This reserve is for accounts receivable balances that are potentially uncollectible. The reserve is based on an analysis of customer accounts and our historical experience with accounts receivable write-offs. The analysis includes the aging of accounts receivable, the financial condition of a customer or industry, and general economic conditions. Historically, results have reflected the reserves previously recorded. We believe the results could be materially different if historical trends do not reflect actual results or if economic conditions worsen for our customers.

Inventory reserve – This reserve is for potentially obsolete inventory and shrinkage. The reserve is based on an analysis of inventory trends. The analysis includes inventory levels, sales information, physical inventory counts, cycle count adjustments, and the on-hand quantities relative to the sales history for the product. Historically, results have reflected the reserves previously recorded. We believe the results could be materially different if historical trends do not reflect actual results.

Fastenal Firsts

Fastenal’s first semis were bought in the 1980s.

Three of the first drivers were Steve Thicke, Rick Todd, and Bob “Witt” Wittenberg, who recently celebrated 25 years with Fastenal.

1981—Fastenal’s first catalog (bound in

a three-ring binder)

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2007

Management’s Discussion & Analysis of

Financial Condition & Results of Operations

(Dollar Amounts in Millions except Per Share Information and as Otherwise Noted)

Health insurance reserve – This reserve is for incurred but not reported as well as reported and unpaid health claims. The reserve is based on an analysis of external data related to our historical claim reporting trends. Historically, results have reflected the reserves previously recorded. We believe the results could be materially different if historical trends do not reflect actual results.

General insurance reserve – This reserve is for general claims related to workers’ compensation, property and casualty losses, and other self-insured losses. The reserve is based on an analysis of external data related to our historical general claim trends. Historically, results have reflected the reserves previously recorded. We believe the results could be materially different if historical trends do not reflect actual results.

Liquidity and Capital Resources

Net Cash Provided by Operating Activities – Net cash provided by operating activities was as follows:

2007 $ 227.9

2006 $ 97.9

2005 $ 121.9

The 2007 increase in net cash provided by operating activities was primarily due to the continued improvement in accounts receivable and inventory as noted in the working capital discussion above. The 2006 decrease in net cash provided by operating activities was primarily due to improvements in working capital management in accounts receivable being more than offset due to the growth in inventory discussed previously. The percentage mix of inventory stocked at our stores versus our distribution center (DC) locations was as follows on December 31:

2007 2006 2005

Store 63% 62% 65%

DC 37% 38% 35%

Total 100% 100% 100%

New stores open with the standard store model, which consists of a core stocking level of approximately $62 thousand per location. This inventory level grows as the level of business in a store grows. The CSP2 store model, introduced in 2005, represented an expansion of the core stocking items and sales personnel in an existing store with the goal of driving additional product sales to existing customers, target customers, and specific geographic areas within established markets. During the third quarter of 2007, we chose to modify the CSP2 expansion from a ‘one size fits all’ approach to an ‘a la carte’ approach. This will emphasize inventory

expansion based on local customer demographics and based on local product knowledge within our sales force. We believe this is a logical complement to our ‘pathway to profit’ initiative discussed earlier. During 2006, the store-to-DC relationship was altered by our expansion of products in our master DC, also discussed earlier. This expansion relates to our desire to stock a more expansive assortment of products within our network.

1984—Fastenal’s first computer purchased

New Distribution Centers Open:

1987 – IHUB—Indianapolis, IN

1989 – SHUB—Scranton, PA

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2007 Management’s Discussion & Analysis of Financial Condition & Results of Operations

(Dollar Amounts in Millions except Per Share Information and as Otherwise Noted)

Net Cash Used in Investing Activities – Net used in investing activities was as follows:

2007 $ 37.7

2006 $ 74.2

2005 $ 33.6

The 2007 decrease is primarily due to a decrease in property and equipment expenditures of approximately $21.8 and the impact of approximately $12.4 due to sales of marketable securities in 2007. The 2006 increase is primarily due to an increase in property and equipment expenditures of approximately $11.6. We have future commitments for leased facilities and for leased vehicles at December 31, 2007. The future contractual cash obligations related to the commitments are as follows:

Total 2008 2009 & 2010 2011 & 2012 After 2012

Facilities $189.4 $73.6 $91.6 $23.8 $0.4

Vehicles 26.6 16.8 9.8 — —

Total $216.0 $90.4 $101.4 $23.8 $0.4

Property and equipment expenditures in 2007 and 2006 consisted of: (1) the purchase of software and hardware for Fastenal’s information processing systems, (2) the addition of certain pick-up trucks, (3) the purchase of signage, shelving, and other fixed assets related to store openings and conversion of existing stores to the CSP2 stocking model, (4) the addition of manufacturing and warehouse equipment, (5) the expansion or improvement of certain owned or leased store properties, and (6) the expansion of Fastenal’s distribution/trucking fleet. The 2006 amount was also influenced by the purchase of a building and the equipment for our new distribution center in Modesto, California. Disposals of property and equipment consisted of the planned disposition of certain pick-up trucks, semi-tractors, and trailers in the normal course of business and the disposition of real estate relating to several store locations. We expect to incur approximately $77 in total capital expenditures in 2008, consisting of approximately $44 for manufacturing, warehouse and packaging equipment and facilities (this item is influenced by the construction of our distribution center near Dallas, Texas and expansion of our distribution center in Indianapolis, Indiana), $7 for shelving and related supplies for our store openings and ‘a la carte’ store expansions, $15 for data processing equipment, $5 for store buildings and improvement to store buildings, and $6 for vehicles. We have expanded the number of owned store locations over the last several years and expect to purchase additional locations in the future. As of December 31, 2007, we had no material outstanding commitments for capital expenditures. We anticipate funding our current expansion plans with cash generated from operations, from available cash and cash equivalents, and, to a lesser degree, from our borrowing capacity. In addition to opening new stores in the United States, we plan to continue opening additional stores in our foreign markets.

Net Cash Used in Financing Activities – Net cash used in financing activities was as follows:

2007 $ 153.5

2006 $ 60.7

2005 $ 65.7

1980s—Securing a Foothold in the Industry

Every Monday, Bob Kierlin handtyped his weekly newsletter to all employees.

Fast Fact

- Employees coming to Winona for meetings slept in bunk beds in a room at the distribution center.

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2007 Management’s Discussion & Analysis of Financial Condition & Results of Operations

(Dollar Amounts in Millions except Per Share Information and as Otherwise Noted)

The 2007 increase in cash used is due to our increase in dividends and stock purchases discussed below.

press releases announcing that our Board of Directors had increased our authorization to purchase shares of our common stock (over and above previously authorized amounts). The date of these press releases and the number of additional shares authorized were as follows (Shares presented in whole amount):

Date Number of New Shares Authorized

January 18, 2007 1,000,000

July 11, 2007 1,000,000

November 26, 2007 1,000,000

Dividends – We declared a semi-annual dividend of $.25 per share on January 21, 2008. We paid aggregate annual dividends per share of $.44, $.40, and $.31 in 2007, 2006, and 2005, respectively.

Line of Credit – We have a $40 line of credit under which $0 was outstanding at December 31, 2007. The line bears interest at 0.9% over the LIBOR rate.

Market Risk Management

We are exposed to certain market risks from changes in foreign currency exchange rates and commodity pricing. Changes in these factors cause fluctuations in our earnings and cash flows. We evaluate and manage exposure to these market risks as follows:

Foreign Currency Exchange Rates – Foreign currency fluctuations can affect our net investments and earnings denominated in foreign currencies. Our primary exchange rate exposure is with the Canadian dollar against the United States dollar. Our estimated net earnings exposure for foreign currency exchange rates was not material at December 31, 2007.

Commodity Steel Pricing – We buy and sell various types of steel products which consist primarily of different types of threaded fasteners. During the last decade, there has been nominal movement in overall product pricing, with some deflation occurring in the wake of the economic crisis of the Far East markets that occurred in the late 1990s. This trend reversed due to inflation in late 2003 and early 2004. Fluctuations in pricing of certain commodities like steel can affect our cost structure and pricing. We are exposed to the impact of commodity steel pricing and our related ability to pass through the impacts to our end customers.

Commodity Fuel Prices – We have market risk for changes in gasoline and diesel fuel; however, this risk is largely mitigated by our ability to pass freight cost to our customers and the efficiency of our trucking distribution network.

Geographic Information

Information regarding our revenues and long-lived assets by geographic area is set forth in note 8 to the “Notes to Consolidated Financial Statements.” Risks related to our foreign operations are described under “Certain Risks and Uncertainties” on the following page.

“For the first ten years I worked here, we just went and sold product. We had no name, but we got people to believe in us, and we just built the company.”

- BOB STRAUSS,

VP OF BUSINESS DEVELOPMENT

August 27, 1987-

Fastenal goes public at $9 a share

1987- Fastenal’s corporate office moves to 2001 Theurer Blvd. Winona, MN

The building was expanded in 1996

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2007 Management’s Discussion & Analysis of Financial Condition & Results of Operations

(Dollar Amounts in Millions except Per Share Information and as Otherwise Noted)

Certain Risks and Uncertainties

Certain statements in this annual report, in our annual report on form 10-K for the fiscal year ended December 31, 2007, in our future filings with the Securities and Exchange Commission, in our press releases and in oral statements made by or with approval of our executive officers constitute or will constitute “forward-looking statements” under the Reform Act. The following factors are among those that could cause our actual results to differ materially from those predicted in such forward-looking statements: (i) an upturn or downturn in the economy could impact sales at existing stores, the rate of new store openings, the rate at which additional outside sales personnel are added, our ability to grow average store sales by adding outside sales personnel, our ability to capture earnings leverage and achieve our pretax earnings goals, our ability to manage support labor, and the time it typically takes a new store to achieve profitability or operating results comparable to existing stores, (ii) an upturn or downturn in the economy, a change in product mix, a change in inbound inventory costs, a change in the ability to increase selling prices in response to increased inventory costs, and a change in inventory buying patterns could impact gross margins, (iii) a change, from that projected, in the number of markets able to support future store sites could impact the rates of new store openings and additions of new employees, (iv) our ability to develop product expertise at the store level, to identify future products and product lines that complement existing products and product lines, to expand the inventory selection at our master stocking hub, to transport and store certain hazardous products and to otherwise integrate new products and product lines into our existing stores and distribution network could impact sales and margins, (v) increases or decreases in fuel and utility costs could impact our distribution and occupancy expenses, (vi) our ability to successfully attract and retain qualified personnel to staff our stores could impact sales at existing stores and the rate of new store openings, (vii) changes in governmental regulations related to product quality or product source traceability could impact our cost of regulatory compliance, (viii) inclement weather could impact our distribution network, (ix) foreign currency fluctuations, changes in trade relations, or fluctuations in the relative strength of foreign economies could impact our ability to procure products overseas at competitive prices and our foreign sales, (x) changes in the rate of new store openings could impact expenditures for computers and other capital equipment, and our ability to fund additional outside sales personnel, (xi) changes in the stocking and buying patterns related to product, both domestic and imported, could impact our ability to slow our inventory growth and could have a negative impact on cash flows from operating activities, (xii) actions of competitors, suppliers, and customers could impact our ability to raise prices, (xiii) a change in the economy from that currently being experienced, a change in buying patterns, a change in forecast or a change in vendor production lead times could cause working capital (including inventory) to change from expected amounts, (xiv) our ability to successfully change our sales process could adversely impact our ability to grow average store sales, and (xv) a change in the number of markets served by sales specialists and a change in the number of markets able to support future store sites could change the management of headcount, which in turn, together with changes in sales growth and store openings, could impact labor efficiency. A discussion of other risks and uncertainties which could cause our operating results to vary from anticipated results or which could materially adversely effect our business, financial condition, or operating results is included in our annual report on form 10-K for the fiscal year ended December 31, 2007.

A Place to Grow

In 1988, with only seven pickers in the Winona hub, Fastenal’s yearly sales reached $26,200,000

100th store opens:

1990 Sioux City, IA

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Consolidated Balance Sheets 2007

(Dollar and Share Amounts in Thousands except Per Share Information and as Otherwise Noted)

2007 2006

Assets

Current assets:

Cash and cash equivalents $ 57,220 19,346

Marketable securities 159 10,835

Trade accounts receivable net of allowance for doubtful accounts of $2,265 and $2,119, respectively 236,331 209,532

Inventories 504,592 455,997

Deferred income tax assets 14,702 11,709

Other current assets 67,767 60,357

Total current assets 880,771 767,776

Marketable securities 1,950 3,695

Property and equipment, less accumulated depreciation 276,627 264,030

Other assets, net 3,713 3,515

Total assets $ 1,163,061 1,039,016

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable $ 55,353 41,371

Accrued expenses 75,565 61,544

Income taxes payable 6,873 981

Total current liabilities 137,791 103,896

Deferred income tax liabilities 15,109 13,027

Stockholders’ equity:

Preferred stock, 5,000 shares authorized — —

Common stock, 200,000 shares authorized, 149,121 and 151,207 shares issued and outstanding, respectively 1,491 1,512

Additional paid-in capital 227 12,697

Retained earnings 996,050 902,550

Accumulated other comprehensive income 12,393 5,334

Total stockholders’ equity Commitments and Contingencies (notes 5, 9, and 10) 1,010,161 922,093

Total liabilities and stockholders’ equity $ 1,163,061 1,039,016

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

1990s—Growth Through Customer Service Fast Fact – Fastenal was recognized by Forbes magazine’s list of the “200 Best Small Companies” throughout the 1990s, until outgrowing the list’s revenue criteria.

“An organization… will succeed to the extent that everyone shares a common goal. Everybody here has the goal of making this organization the best, and they do.”

BOB KIERLIN

1994—First Fastenal store opens in Canada

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2007 Consolidated Statements of Earnings

(Dollar and Share Amounts in Thousands except Per Share Information and as Otherwise Noted)

2007 2006 2005

Net sales $ 2,061,819 1,809,337 1,523,333

Cost of sales 1,014,245 901,662 765,230

Gross profit 1,047,574 907,675 758,103

Operating and administrative expenses 671,248 587,610 489,792

Gain (loss) on sale of property and equipment 99 (223) (447)

Operating income 376,425 319,842 267,864

Interest income 1,474 1,187 1,192

Earnings before income taxes 377,899 321,029 269,056

Income tax expense 145,277 121,991 102,242

Net earnings $ 232,622 199,038 166,814

Basic and diluted earnings per share $ 1.55 1.32 1.10

Basic-weighted average shares outstanding 150,555 151,034 151,270

Diluted-weighted average shares outstanding 150,555 151,165 151,508

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

1990s—New Media, New Connections

1996- Fastenal’s online storefront goes live at www.fastenal.com

All Inclusive Catalog

1999-Fastenal’s Stores become Connected through the company’s ‘FastNet’ intranet solution

Standards

Pocket Catalog(Late 80s—Early 90s)

2008 Big BlueCatalog

Fastenal Distribution Goes National

1991—DHUB—Dallas, TX

1993—KHUB—Seattle, WA

1993—AHUB—Atlanta, GA

1994—PACK—Memphis, TN

1995—FHUB—Fresno, CA

1996—OHUB—Akron, OH

1997—UHUB—Salt Lake, UT

1998—MHUB—Kansas City, MO

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Consolidated Statements of Stockholders’ Equity and Comprehensive Income 2007

(Dollar and Share Amounts in Thousands except Per Share Information and as Otherwise Noted)

Common Stock

Shares Amount

Additional Paid-in Capital

Retained Earnings

Accumulated Other Comprehensive Income (Loss)

Total Stockholders’ Equity

Balances as of December 31, 2004 151,755 $ 1,518 12,934 662,517 7,400 684,369

Dividends paid in cash — — — (46,935) — (46,935)

Purchase of common stock (700) (7) (12,934) (5,798) — (18,739)

Net earnings for the year — — — 166,814 — 166,814

Change in marketable securities — — — — (279) (279)

Translation adjustment (net of tax effect of $3,572) — — — — (1,681) (1,681)

Total comprehensive income 164,854

Balances as of December 31, 2005 151,055 1,511 — 776,598 5,440 783,549

Dividends paid in cash — — — (60,548) — (60,548)

Purchase of common stock (474) (5) (4,751) (12,538) — (17,294)

Stock options exercised 626 6 12,516 — — 12,522

Stock option expense — — 279 — — 279

Tax benefit from exercise of stock options — — 4,653 — — 4,653

Net earnings for the year — — — 199,038 — 199,038

Change in marketable securities — — — — 147 147

Translation adjustment (net of tax effect of $61) — — — — (253) (253)

Total comprehensive income 198,932

Balances as of December 31, 2006 151,207 1,512 12,697 902,550 5,334 922,093

Dividends paid in cash — — — (66,216) — (66,216)

Purchase of common stock (2,086) (21) (14,385) (72,906) — (87,312)

Stock option expense — — 1,915 — — 1,915

Net earnings for the year — — — 232,622 — 232,622

Change in marketable securities — — — — 102 102

Translation adjustment (net of tax effect of $4,918) — — — — 6,957 6,957

Total comprehensive income 239,681

Balances as of December 31, 2007 149,121 $ 1,491 227 996,050 12,393 1,010,161

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

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2007 Consolidated Statements of Cash Flows

(Dollar and Share Amounts in Thousands except Per Share Information and as Otherwise Noted)

2007 2006 2005

Cash flows from operating activities:

Net earnings $ 232,622 199,038 166,814

Adjustments to reconcile net earnings to net cash provided by operating activities:

Depreciation of property and equipment 37,332 33,530 29,006

(Gain) loss on sale of property and equipment (99) 223 447

Bad debt expense 5,343 3,722 5,933

Deferred income taxes (911) (3,705) (3,165)

Stock based compensation 1,915 279 —

Amortization of non-compete agreement 67 67 67

Changes in operating assets and liabilities:

Trade accounts receivable (32,142) (29,698) (26,989)

Inventories (48,595) (94,436) (54,228)

Other current assets (7,410) (23,264) (9,225)

Accounts payable 13,982 2,799 (704)

Accrued expenses 14,021 11,286 13,497

Income taxes 5,892 (1,727) 2,434

Other 5,878 (239) (1,975)

Net cash provided by operating activities 227,895 97,875 121,912

Cash flows from investing activities:

Purchase of property and equipment (55,759) (77,581) (65,910)

Proceeds from sale of property and equipment 5,929 4,246 5,455

Net decrease (increase) in marketable securities 12,421 (633) 27,067

Increase in other assets (265) (231) (164)

Net cash used in investing activities (37,674) (74,199) (33,552)

Cash flows from financing activities:

Proceeds from exercise of stock options — 12,522 —

Tax benefit from exercise of stock options — 4,653 —

Purchase of common stock (87,312) (17,294) (18,739)

Payment of dividends (66,216) (60,548) (46,935)

Net cash used in financing activities (153,528) (60,667) (65,674)

Effect of exchange rate changes on cash 1,181 133 15

Net increase (decrease) in cash and cash equivalents 37,874 (36,858) 22,701

Cash and cash equivalents at beginning of year 19,346 56,204 33,503

Cash and cash equivalents at end of year $ 57,220 19,346 56,204

Supplemental disclosure of cash flow information:

Cash paid during each year for income taxes $ 144,318 122,831 106,545

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

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Notes to Consolidated Financial Statements 2007

(Dollar and Share Amounts in Thousands except Per Share Information and as Otherwise Noted)

1 Business Overview and Summary of Significant Accounting Policies

Business Overview

Fastenal is a North American leader in the wholesale distribution of industrial and construction supplies. We operate stores primarily located in North America. On December 31, 2007, we operated 2,160 company owned or leased store locations.

Principles of Consolidation

The consolidated financial statements include the accounts of Fastenal Company and its wholly-owned subsidiaries (collectively referred to as ‘Fastenal’ or by such terms as ‘we,’ ‘our,’ or ‘us.’). All material intercompany balances and transactions have been eliminated in consolidation.

Revenue Recognition and Accounts Receivable

Net sales include products, services, and freight and handling costs billed, net of any related sales incentives paid to customers and net of an estimate for product returns. We recognize revenue when persuasive evidence of an arrangement exists, title and risk of ownership have passed, the sales price is fixed or determinable, and collectibility is probable. These criteria are met at the time the product is shipped to, or picked up by, the customer. We recognize billings for freight and handling charges at the time the products are shipped to, or picked up by, the customer. We recognize services at the time the service is provided to the customer. We estimate product returns based on historical return rates. Accounts receivable are stated at their estimated net realizable value. The allowance for doubtful accounts is based on an analysis of customer accounts and our historical experience with accounts receivable write-offs.

Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales in the accompanying consolidated statements of earnings.

Foreign Currency Translation and Transactions

The functional currency of our foreign operations is the applicable local currency. The functional currency is translated into U.S. dollars for balance sheet accounts (with the exception of retained earnings) using current exchange rates as of the balance sheet date, for retained earnings at historical exchange rates, and for revenue and expense accounts using a weighted-average exchange rate during the year. The translation adjustments are deferred as a separate component of stockholders’ equity, captioned accumulated other comprehensive income. Gains or losses resulting from transactions denominated in foreign currencies are included in operating and administrative expenses in the consolidated statements of earnings.

Financial Instruments

All financial instruments are carried at amounts that approximate estimated fair value.

Cash Equivalents

For purposes of the consolidated statements of cash flows, we consider all highly-liquid debt instruments purchased with original maturities of three months or less to be cash equivalents.

Inventories

Inventories, consisting of merchandise held for resale, are stated at the lower of cost (first in, first out method) or market.

1990s—Fastenal Introduces Industrial Services

Today, Industrial Services have become an integral part of our business. Our current lineup of services include:

• Bandsaw Blade Welding • Chain & Cable Cutting • Chain Sling Fabrication & Inspection

• Custom Manufacturing • Custom Packaging • Hose Assemblies

• Inventory Management • Laboratory Services • Metals Services

• Product Sourcing • Tool & Cutter Grinding • Tool & Hoist Repair

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2007 Notes to Consolidated Financial Statements

(Dollar and Share Amounts in Thousands except Per Share Information and as Otherwise Noted)

1 Business Overview and Summary of Significant Accounting Policies (cont.)

Marketable Securities

Marketable securities as of December 31, 2007 and 2006 consist of debt securities. We classify our debt securities as available-for-sale. Available-for-sale securities are recorded at fair value based on current market value. Unrealized holding gains and losses on available-for-sale securities are excluded from earnings but are included in comprehensive income and are reported as a separate component of stockholders’ equity until realized, provided that a decline in the market value of any available-for-sale security below cost that is deemed other than temporary is charged to earnings, resulting in the establishment of a new cost basis for the security.

Property and Equipment

Property and equipment are stated at cost. Depreciation on buildings and equipment is provided for using the straight-line method over the anticipated economic useful lives of the related property.

Leases

We lease space under non-cancelable operating leases for our Utah, Washington, and Nuevo Leon, Mexico distribution centers and certain store locations with initial terms of one to 60 months. Most store locations have initial lease terms of 36 to 48 months. These leases do not have significant rent escalation holidays, concessions, leasehold improvement incentives, or other build-out clauses. Any such terms are recognized as rent expense over the term of the lease. Further, the leases do not contain contingent rent provisions. Leasehold improvements on operating leases are amortized over a 36-month period. We lease certain semi-tractors and pick-ups under operating leases. The semi-tractor leases typically have a 36-month term. The pick-up leases typically have a 72-month term and include an early buyout clause, which we generally exercise, thereby giving the leases an effective term of 12-15 months.

Other Assets and Long-Lived Assets

Other assets consist of prepaid security deposits, goodwill, and a non-compete agreement.

Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Net goodwill was $1,400 in all three years. The non-compete is amortized on a straight-line basis over 15 years. Net non-compete was $357, $424, and $491 at December 31, 2007, 2006, and 2005, respectively. Total non-compete amortization costs were $67 per year in 2007, 2006, and 2005.

Goodwill and other tangible and identifiable intangible long-lived assets are reviewed whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, or on an annual basis if no event or change occurs, to determine that the unamortized balances are recoverable. Recoverability is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset, and, in the case of goodwill, by also looking at an adverse change in legal factors or the business climate, a transition to a new product or services strategy, a significant change in the customer base, and/or a realization of failed marketing efforts. If the asset is deemed to be impaired, the amount of impairment is charged to earnings as a part of operating and administrative expenses in the current period. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.

1990s—Investing in Our People

1999 – Fastenal opens its corporate university, the Fastenal School of Business (FSB). Today, thousands of employees attend FSB each year to expand their product knowledge and skills.

“We think our biggest assets are people [and] we should invest in that. Through the leadership of our company, we’re able to give people the big picture and sense of community.”

PETER GUIDINGER, FASTENAL SCHOOL OF BUSINESS DIRECTOR

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Notes to Consolidated Financial Statements 2007

(Dollar and Share Amounts in Thousands except Per Share Information and as Otherwise Noted)

1 Business Overview and Summary of Significant Accounting Policies (cont.)

Accounting Estimates

The preparation of financial statements in conformity with the U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

Insurance Reserves

We are self-insured for certain losses relating to medical, workers’ compensation, and other casualty losses. Specific stop loss coverage is provided for catastrophic claims in order to limit exposure to significant claims. Losses and claims are charged to operations when it is probable a loss has been incurred and the amount can be reasonably estimated. Accrued insurance liabilities are based on claims filed and estimates of claims incurred but not reported.

Product Warranties

We offer a basic limited warranty for certain of our products. The specific terms and conditions of those warranties vary depending upon the product sold. We typically recoup these costs through product warranties we hold with the original equipment manufacturers. Our warranty expense has historically been minimal.

Stockholders’ Equity and Stock-Based Compensation

At December 31, 2007 and 2006, we had one stock option employee compensation plan (Fastenal Option Plan). The Fastenal Option Plan was approved by our shareholders in April 2003 and amended by our shareholders in April 2007.

We granted options to purchase our common stock to certain of our employees under the Fastenal Option Plan in May 2003. These options became vested and exercisable in June 2006 and lapsed, to the extent not exercised, in November 2006.

On April 17, 2007, the Compensation Committee of our Board of Directors approved the grant, effective at the close of business that day, of options to purchase approximately 2,200 shares of our common stock at a strike price of $45 per share. These options vest and become exercisable over a period of up to eight years. Each option will terminate, to the extent not previously exercised, 13 months after the end of the relevant vesting period. None of these options were vested as of December 31, 2007. Compensation expense equal to the grant date fair value is recognized for these awards over the vesting period.

Prior to January 1, 2006, we accounted for the Fastenal Option Plan under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and related interpretations. Accordingly, no stock-based employee compensation cost was reflected in net earnings prior to January 1, 2006, as all options to purchase our common stock had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant.

Mr. Kierlin Goes to Saint Paul

“Life isn’t about getting your name on buildings or your picture in magazines. Life is about passing on what we have received and learned to those who come after us.”

– Bob Kierlin , The Power of Fastenal People

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2007 Notes to Consolidated Financial Statements

(Dollar and Share Amounts in Thousands except Per Share Information and as Otherwise Noted)

1 Business Overview and Summary of Significant Accounting Policies (cont.)

Effective January 1, 2006, we began recording compensation expense associated with stock-based awards in accordance with Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS No.123R), as interpreted by SEC Staff Accounting Bulletin No. 107. SFAS No. 123R supersedes APB No. 25 and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No.123R is similar to the approach described in SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). However, SFAS No. 123R requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values at the date of grant. The stock-based compensation expense amount recorded was $1,915 and $279 (pretax amount) in 2007 and 2006, respectively. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123R for all awards in 2005:

2005

Net earnings, as reported $ 166,814

Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects 560

Pro forma net earnings $ 166,254

Basic and diluted earnings per share, as reported $ 1.10

Pro forma basic and diluted earnings per share $ 1.10

Income Taxes

We account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences

are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Beginning with the adoption of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN No. 48), as of January 1, 2007, we recognize the effect of income tax positions only if those

2000s—Upgrading for Business, Keeping Our Values

Fast Fact – In 2000, our Oak Creek, WI, store sold one million bolts for the retractable roof at Milwaukee’s Miller Park. This was Fastenal’s largest order to date.

1,000th Store Opens: Kapolei, HI

2,000th Store Opens: Seattle, WA

Fastenal Goes Global

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Notes to Consolidated Financial Statements 2007

(Dollar and Share Amounts in Thousands except Per Share Information and as Otherwise Noted)

1 Business Overview and Summary of Significant Accounting Policies (cont.)

positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Prior to the adoption of FIN No. 48, we recognized the effect of income tax positions if such positions were probable of being sustained. We record interest and penalties related to unrecognized tax benefits in income tax expense.

Comprehensive Income

We comply with the provisions of SFAS No. 130, Reporting Comprehensive Income, which establishes standards for the reporting of comprehensive income and its components. The components of comprehensive income are as follows:

2007 2006 2005

Net earnings, as reported $ 232,622 199,038 166,814

Change in marketable securities 102 147 (279 )

Translation adjustment (net of tax) 6,957 (253 ) (1,681 )

Comprehensive income $ 239,681 198,932 164,854

Earnings Per Share

Basic net earnings per share is calculated using net earnings available to common stockholders divided by the weighted average number of shares of common stock outstanding during the year. Diluted net earnings per share is similar to basic net earnings per share except that the weighted average number of shares of common stock outstanding plus the assumed issuance of contingent shares is increased to include the number of additional shares of common stock that would have been outstanding assuming the issuance of all potentially dilutive shares, such as common stock to be issued upon exercise of options. The following table presents a reconciliation of the denominators used in the computation of basic and diluted earnings per share related to the Fastenal Option Plan:

2007 2006 2005

Basic-weighted shares outstanding 150,555 151,034 151,270

Weighted shares assumed upon exercise of stock options — 131 238

Diluted-weighted shares outstanding 150,555 151,165 151,508

Segment Reporting

We have reviewed SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, and determined that we meet the aggregation criteria outlined as our various operations have similar (1) economic characteristics, (2) products and services, (3) customers, (4) distribution channels, and (5) regulatory environments. Therefore we report as a single business segment.

Passing the Torch

“We believe that all people will rise to a higher level if you allow them. If you truly believe that, you get more out of people, and that’s what it’s all about.”– WILL OBERTON

Fast Fact – Will Oberton began his Fastenal career in 1980 as a warehouse assistant.

Will Oberton becomes Fastenal’s President in July 2001 and CEO in December 2002

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2007 Notes to Consolidated Financial Statements

(Dollar and Share Amounts in Thousands except Per Share Information and as Otherwise Noted)

2 Investments

Available-for-sale securities at December 31 consist of the following:

2007 Amortized Gross Gross unrealized gains Gross unrealized losses Fair value

State and municipal bonds $ 2,137 — (30) 2,107

Certificates of deposit or money market 2 — — 2

Total available-for-sale securities $ 2,139 — (30) 2,109

2006 Amortized Gross Gross unrealized gains Gross unrealized losses Fair value

Federal mortgage backed security $ 10,000 — (132) 9,868

State and municipal bonds 3,695 — — 3,695

Certificates of deposit or money market 967 — — 967

Total available-for-sale securities $ 14,662 — (132) 14,530

We recorded gains related to our available-for-sale securities which were immaterial in 2007, 2006, and 2005. Gains and losses from the sale of investments are calculated based on the specific identification method.

Maturities of our available-for-sale securities at December 31, 2007 consist of the following:

Less than 12 months Greater than 12 months

Amortized cost Fair value Amortized cost Fair value

State and municipal bonds $ 157 157 1,980 1,950

Certificates of deposit or money market 2 2 — —

Total available-for-sale securities $ 159 159 1,980 1,950

3 Property and Equipment

Property and equipment as of December 31 consists of the following:

Depreciable life in years 2007 2006

Land — $ 23,393 21,854

Buildings and improvements 31 to 39 126,094 123,905

Equipment and shelving 3 to 10 252,425 231,269

Transportation equipment 3 to 5 40,857 36,601

Construction in progress — 22,724 9,495

465,493 423,124

Less accumulated depreciation (188,866 ) (159,094 )

Net property and equipment $ 276,627 264,030

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Notes to Consolidated Financial Statements 2007

(Dollar and Share Amounts in Thousands except Per Share Information and as Otherwise Noted)

3 Property and Equipment (cont.)

Construction in progress at December 31, 2007 and 2006 consists primarily of the construction cost for our new Texas distribution center building and automated racking system and the construction costs associated with the expansion of our Indiana distribution center.

4 Accrued Expenses

Accrued expenses as of December 31 consist of the following:

2007 2006

Payroll and related taxes $ 13,609 13,072

Bonuses and commissions 11,033 8,828

Profit sharing contribution 4,743 3,153

Insurance 18,997 17,662

Sales, real estate, and personal property taxes 8,002 5,871

Vehicle loss reserve and deferred rebates 6,597 4,937

Other 12,584 8,021

$ 75,565 61,544

5 Stockholders’ Equity

Preferred stock has a par value of $.01 per share. There were 5,000,000 shares authorized and no shares issued as of December 31, 2007 and 2006. Common stock has a par value of $.01 per share. There were 200,000,000 shares authorized and 149,120,712 shares issued and outstanding as of December 31, 2007, and 200,000,000 shares authorized and 151,206,712 shares issued and outstanding as of December 31, 2006 (please note, these share amounts are not reflected in thousands).

Dividends

On January 21, 2008, our Board of Directors declared a semi-annual dividend of $.25 per share of common stock to be paid in cash on February 29, 2008 to shareholders of record at the close of business on February 25, 2008.

Stock Options

On April 17, 2007, the Compensation Committee of our Board of Directors approved the grant, effective at the close of business that day, of options to purchase approximately 2,200 shares of our common stock at a strike price of $45 per share. These options vest and become exercisable over a period up to eight years. Each option will terminate, to the extent not previously exercised, 13 months after the end of the relevant vesting period. None of these options under this grant were vested as of December 31, 2007. Compensation expense equal to the grant date fair value is recognized for these awards over the vesting period.

The fair value of each stock option is estimated as of the grant date using the Black-Scholes option-pricing model. The assumptions used and the estimated fair values are as follows:

Year of grant

Risk-free interest rate

Expected life of option in years

Expected dividend yield

Expected stock volatility

Estimated fair value of stock option

2007 4.6% 4.85 1.0% 31.59% $ 11.36

2003 4.5% 3.42 0.2% 30.33% $ 3.55

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2007 Notes to Consolidated Financial Statements

(Dollar and Share Amounts in Thousands except Per Share Information and as Otherwise Noted)

5 Stockholders’ Equity (cont.)

A summary of activity under the Fastenal Option

Options Outstanding Price1 Life2

Outstanding as of January 1, 2007 — — —

Granted 2,200,000 $ 45.00 8.49

Exercised /earned — —

Cancelled/forfeited (60,000) $ 45.00

Outstanding as of December 31, 2007 2,140,000 7.81

Exercisable as of December 31, 2007

1 Weighted-average exercise price

2 Weighted-average contractual life in years

Total stock-based compensation expense for the Fastenal Option Plan was $1,915, $279, and $0 in 2007, 2006, and 2005, respectively.

Unrecognized compensation expense related to outstanding stock options as of December 31, 2007, 2006, and 2005 was $16,208, $0, and $0 pretax, respectively, and is expected to be recognized over the weighted average periods noted in the table above and will be adjusted for any future changes in estimated forfeitures.

6 Retirement Savings Plan

The Fastenal Company and Subsidiaries 401(k) Plan covers all of our employees in the United States. Our employees in Canada may participate in a RRSP. The general purpose of these plans is to provide additional financial security during retirement by providing employees with an incentive to make regular savings. We contributed $4,743, $3,153, and $2,532 to our employees’ retirement accounts for 2007, 2006, and 2005, respectively.

7 Income Taxes

Earnings (losses) before income taxes were derived from the following sources:

2007 2006 2005

Domestic $ 374,920 319,494 273,145

Foreign 2,979 1,535 (4,089 )

$ 377,899 321,029 269,056

2000s—A Store Is (Re-)Born

2002 – Fastenal launched its Customer Service Project (CSP) to standardize and upgrade Fastenal stores with a consistent core product inventory and marketing scheme.

Original Store Model CSP Upgrade—2002 CSP II Upgrade—2005

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Notes to Consolidated Financial Statements 2007

(Dollar and Share Amounts in Thousands except Per Share Information and as Otherwise Noted)

7 Income Taxes (cont.)

Components of income tax expense (benefit) are as follows:

2007: Current Deferred Total

Federal $ 127,675 (3,051 ) 124,624

State 18,289 (266 ) 18,023

Foreign 3,536 (906 ) 2,630

$ 149,500 (4,223 ) 145,277

2006: Current Deferred Total

Federal $ 109,595 (1,864 ) 107,731

State 14,539 (284 ) 14,255

Foreign 278 (273 ) 5

$ 124,412 (2,421 ) 121,991

2005: Current Deferred Total

Federal $ 94,323 (4,495 ) 89,828

State 12,992 (614 ) 12,378

Foreign — 36 36

$ 107,315 (5,073 ) 102,242

Income tax expense in the accompanying consolidated financial statements differs from the expected expense as follows:

2007 2006 2005

Federal income tax expense at the “expected” rate of 35% $ 132,265 112,360 94,170

Increase (decrease) attributed to:

State income taxes, net of federal benefit 11,715 9,266 8,046

Other, net 1,297 365 26

Total income tax expense $ 145,277 121,991 102,242

Global Expansion

VHUB—Kitchener, Ontario—2003

2003—Fastenal opens the Fastenal Asia Shanghai Trading Co. (FASTCO) in China to source products directly from Asia.

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2007 Notes to Consolidated Financial Statements

(Dollar and Share Amounts in Thousands except Per Share Information and as Otherwise Noted)

7 Income Taxes (cont.)

The tax effects of temporary differences that give rise to deferred tax assets and liabilities as of December 31 are as follows:

2007 2006

Deferred tax asset (liability):

Inventory costing and valuation methods $ 4,906 4,444

Allowance for doubtful accounts receivable 894 821

Insurance claims payable 7,509 5,632

Fixed assets (14,130 ) (13,854 )

Promotions payable 1,416 795

Other, net (1,002 ) 844

Net deferred tax liability $ (407 ) (1,318 )

No valuation allowance for deferred tax assets was necessary as of December 31, 2007 and 2006. The character of the deferred tax assets is such that they can be realized through carryback to prior tax periods or offset against future taxable income.

During 2007, 2006, and 2005, $0, $4,653, and $0, respectively, were added to additional paid-in capital reflecting the permanent book to tax difference in accounting for tax benefits related to employee stock option transactions.

We adopted the provisions of FIN No. 48 on January 1, 2007. Implementation of FIN No. 48 resulted in no adjustment to the liability for unrecognized tax benefits. A reconciliation of the beginning and ending amount of total gross unrecognized tax benefits is as follows:

Balance at January 1, 2007 $ 4,676

Increase related to prior year tax position 2,324

Decrease related to prior year tax position (289 )

Increase related to current year tax positions 1,051

Settlements (2,619 )

Balance at December 31, 2007 $ 5,143

2000s—Reaching New Heights

“We’ve never really cared how everybody else does things or tried to follow them. We’ve found that hard work and good thinking have led to the best possible results.” BOB KIERLIN

2004—Fastenal signs US Air Force contract for Supply Chain Lean Transformation

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Notes to Consolidated Financial Statements 2007

(Dollar and Share Amounts in Thousands except Per Share Information and as Otherwise Noted)

7 Income Taxes (cont.)

Included in the liability for unrecognized tax benefits is an immaterial amount for interest and penalties, both of which we classify as a component of income tax expense.

Fastenal, or one of its subsidiaries, files income tax returns in the U.S. Federal jurisdiction, all states, and various foreign jurisdictions. With limited exceptions, we are no longer subject to income tax examinations by taxing authorities for taxable years before 2004, in the case of United States Federal and non-United States examinations, and 2001, in the case of state and local examinations.

8 Geographic Information

Our revenues and long-lived assets relate to the following geographic areas:

Revenues 2007 2006 2005

United States $ 1,902,066 1,683,271 1,427,605

Canada 124,037 98,491 76,783

Other foreign countries 35,716 27,575 18,945

$ 2,061,819 1,809,337 1,523,333

Long-Lived Assets 2007 2006 2005

United States $ 267,609 257,075 218,468

Canada 9,888 8,546 8,261

Other foreign countries 2,843 1,924 1,070

$ 280,340 267,545 227,799

Accounting policies of the operations in the various geographic areas are the same as those described in the summary of significant accounting policies. Long-lived assets consist of property and equipment, location security deposits, goodwill, and other intangibles.

Revenues are attributed to countries based on the location of the store from which the sale occurred. No single customer represents more than 10% of our consolidated net sales.

9 Operating Leases

We lease space under non-cancelable operating leases for our Utah, Washington, and Nuevo Leon, Mexico distribution centers and certain store locations with initial terms of one to 60 months. Most store locations have initial lease terms of 36 to 48 months. These leases do not have significant rent escalation holidays, concessions, leasehold improvement incentives, or other build-out clauses. Any such terms are recognized as rent expense over the term of the lease. Further, the leases do not contain contingent rent provisions. Leasehold improvements, with a net book value of $3,230 at December 31, 2007, on operating leases are amortized over a 36-month period. We lease certain semi-tractors and pick-ups under operating leases. The semi-tractor leases typically have a 36-month term. The pick-up leases typically have a 72-month term and include an early buy out clause we generally exercise, thereby giving the leases an effective term of 12-15 months. Future minimum annual rentals for the leased facilities and the leased vehicles are as follows:

“Driving” New Efficiencies

Semi

Sprinter

Fleet Pick-up

Having increased our delivery fleet by more than 40% since 2005, Fastenal’s estimated 4,100 company-owned vehicles travel more than 8 million miles a month – driving significantly lower transportation costs along the way.

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2007 Notes to Consolidated Financial Statements

(Dollar and Share Amounts in Thousands except Per Share Information and as Otherwise Noted)

9 Operating Leases (cont.)

Leased facilities Leased vehicles Total

2008 $ 73,607 16,771 90,378

2009 55,702 8,849 64,551

2010 35,932 928 36,860

2011 18,989 — 18,989

2012 4,796 — 4,796

2013 and thereafter 421 — 421

$ 189,447 26,548 215,995

Rent Expense under all operating leases was as follow:

Leased facilities Leased vehicles Total

2007 $ 77,263 23,675 100,938

2006 $ 60,915 21,577 82,492

2005 $ 45,613 17,414 63,027

Certain operating leases for vehicles contain residual value guarantee provisions which would become due at the expiration of the operating lease agreement if the fair value of the leased vehicles is less than the guaranteed residual value. The aggregate residual value at lease expiration, of the leases that contain residual value guarantees, is approximately $12,827. We believe the likelihood of funding the guarantee obligation under any provision of the operating lease agreements is remote, except for a $2,675 loss on disposal reserve provided at December 31, 2007.

10 Commitments and Contingencies

We have a line of credit arrangement with a bank which expires June 1, 2008. The line allows for borrowings of up to $40,000 at 0.9% over the LIBOR rate. On December 31, 2007 there was $0 outstanding on the line. We have a letter of credit issued on our behalf to our insurance carrier. As of December 31, 2007, the total undrawn balance of this letter of credit was $13,000.

During 2001, we completed the construction of a new building for our Kansas City warehouse and completed an expansion of this warehouse in 2004. We were required to obtain financing for the construction and expansion of this facility under an Industrial Revenue Bond (IRB). We subsequently purchased 100% of the outstanding bonds under the IRB at par. In addition to purchasing the outstanding obligations, we have a right of offset included in the IRB debt agreement. Accordingly, we have netted the impact of the IRB in the accompanying consolidated financial statements. The outstanding balance of the IRB was $9,733 at December 31, 2007 and 2006.

2007—Celebrating 40 Years of Service and Success

Fastenal signs a multi-year deal with Chip Ganassi Racing with Felix Sabates to sponsor the No. 40 Dodge in the NASCAR Nationwide Series.

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Notes to Consolidated Financial Statements 2007

(Dollar and Share Amounts in Thousands except Per Share Information and as Otherwise Noted)

10 Commitments and Contingencies (cont.)

On October 18, 2007, a complaint was filed in the United States District Court for the Northern District of California against Fastenal on behalf of two former employees claiming to represent all employees employed in the store position of Assistant General Manager in the United States within three years prior to the filing date (four years for California employees). The suit alleges Fastenal misclassified its Assistant General Managers as exempt for purposes of the overtime provisions of the Fair Labor Standards Act (FLSA) and California and Pennsylvania state statutes.

This suit also alleges that Assistant General Managers in California did not receive sufficient meal breaks and paid rest periods under the California Labor Code. The plaintiffs seek class action status. This action is in a preliminary stage. We are not currently able to predict the outcome of this action or reasonably estimate a range of potential loss. We intend to vigorously defend this action.

11 Sales by Product Line

The percentages of our net sales by product line are as follows:

Type Introduced 2007 2006 2005

Fasteners1 1967 50.7% 51.5% 53.7%

Tools 1993 10.6% 10.9% 10.5%

Cutting Tools 1996 4.6% 4.8% 4.6%

Hydraulics & Pneumatics 1996 6.5% 6.2% 6.1%

Material Handling 1996 6.1% 6.3% 6.4%

Janitorial Supplies 1996 5.4% 5.3% 4.7%

Electrical Supplies 1997 4.1% 3.7% 3.3%

Welding Supplies 1997 3.6% 3.5% 3.4%

Safety Supplies 1999 5.7% 5.4% 5.0%

Metals 2001 0.7% 0.6% 0.6%

Direct Ship2 2004 1.8% 1.6% 1.5%

Other 0.2% 0.2% 0.2%

100.0% 100.0% 100.0%

1 Fastener product line represents fasteners and miscellaneous

2 Direct Ship represents a cross section The items included hereof products from the historically low margins which are shipped direct from our

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2007 Management Report on Internal Control

Over Financial Reporting

The Board of Directors and Stockholders Fastenal Company:

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a15-(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

(ii) provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision of our principal executive officer and our principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment and those criteria, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2007. There was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Chief Executive Officer & President

Executive Vice-President & President Chief Financial Officer

Winona, Minnesota

February 21, 2008

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Report of Independent Registered 2007

Public Accounting Firm

The Board of Directors and Stockholders Fastenal Company:

We have audited the accompanying consolidated balance sheets of Fastenal Company as of December 31, 2007 and 2006, and the related consolidated statements of earnings, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2007. In connection with our audits of the consolidated financial statements, we also have audited financial statement Schedule II—Valuation and Qualifying Accounts. We also have audited Fastenal Company’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Fastenal Company’s management is responsible for these consolidated financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fastenal Company as of December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. In is also our opinion, Fastenal Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

As discussed in Note 7 to the consolidated financial statements, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48 “Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No.109,” as of January 1, 2007.

Minneapolis, Minnesota

February 21, 2008

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DIRECTORS

Robert A. Kierlin

Chairman of the Board

Former Minnesota State Senator

Former Chief Executive Officer and President

Fastenal Company

Stephen M. Slaggie

Retired

Former Secretary, Shareholder Relations

Director, and Insurance Risk Manager

Fastenal Company

Michael M. Gostomski

Chief Executive Officer

Winona Heating & Ventilating Company

(sheet metal and roofing contractor)

Henry K. McConnon

President

Wise Eyes, Inc.

(eyeglass retailer and wholesaler)

Robert A. Hansen

Associate Professor of Marketing and

Logistics Management,

Carlson School of Management,

University of Minnesota

Willard D. Oberton

Michael J. Dolan

Self-Employed Business Consultant

Former Executive Vice President and Chief

Operating Officer

The Smead Manufacturing Company

(document management company)

Reyne K. Wisecup

Hugh L. Miller

Chief Executive Officer

RTP Company

(thermoplastics materials manufacturer)

Willard D. Oberton

Chief Executive Officer and President

Daniel L. Florness

Executive Vice President and Chief Financial Officer

Nicholas J. Lundquist

Executive Vice President—Sales

Leland J. Hein

Executive Vice President—Sales

Steven A. Rucinski

Executive Vice President—Sales

Reyne K. Wisecup

Executive Vice President—Human Resources

James C. Jansen

Executive Vice President—Internal Operations

CORPORATE INFORMATION

Annual Meeting

The annual meeting of shareholders

will be held at 10:00 a.m., central time,

Tuesday, April 15, 2008, at Corporate

Headquarters, 2001 Theurer Boulevard,

Winona, Minnesota

Corporate Headquarters

Fastenal Company

2001 Theurer Boulevard

Winona, Minnesota 55987-0978

Phone: (507) 454-5374

Fax: (507) 453-8049

Legal Counsel

Faegre & Benson LLP

Minneapolis, Minnesota

Streater & Murphy, PA

Winona, Minnesota

Transfer Agent

Wells Fargo Bank, National Association

Minneapolis, Minnesota

Form 10-K

A copy of our 2007 Annual Report on Form 10-K to the

Securities and Exchange Commission is available without

charge to shareholders upon written request to our Controller at

the address listed on this page for our corporate headquarters.

Copies of our latest press release, unaudited supplemental

company information, and monthly sales information are available

at our World Wide Web site at: www.investor.fastenal.com

Auditors

KPMG LLP

Minneapolis, Minnesota

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Growth through Customer Service

Fastenal

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Printed in the USA 9701941

Exhibit 21

Subsidiaries of Fastenal Company.


Subsidiary name	Doing business as	Year incorporated	Jurisdiction of incorporation
Fastenal Canada Company	Same	1993	Minnesota
Fastenal Company Purchasing	Same	1997	Minnesota
Fastenal Company Leasing	Same	1997	Minnesota
Fastenal IP Company	Same	2005	Minnesota
Fastenal Mexico Services S. de R.L. de C.V.	Same	1999	Monterrey, Mexico
Fastenal Mexico S. de R.L. de C.V.	Same	1999	Monterrey, Mexico
Fastenal Singapore P.T.E. Ltd.	Same	2000	Singapore
Fastenal Asia Pacific, Limited	Same	2003	Hong Kong, China
FASTCO (Shanghai) Trading Co., Ltd.	Same	2003	Shanghai, China
Fastenal Europe, B.V.	Same	2003	Rotterdam, Netherlands
Fastenal Air Fleet, LLC	Same	2006	Minnesota

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Fastenal Company:

We consent to the incorporation by reference in the registration statements (no. 333-52765 and no. 333-134211) on Form S-8 of Fastenal Company of our report dated February 21, 2008, relating to the consolidated balance sheets of Fastenal Company and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of earnings, stockholders’ equity and comprehensive income, and cash flows, and the related financial statement schedule for each of the years in the three-year period ended December 31, 2007, and the effectiveness of internal control over financial reporting as of December 31, 2007, which report is included in the annual report on Form 10-K for the year ended December 31, 2007, of Fastenal Company.

Our report refers to the Company’s adoption of the provisions of Financial Accounting Standards Board Interpretation No. 48 “Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109,” as of January 1, 2007.

/s/ KPMG LLP

Minneapolis, Minnesota

February 21, 2008

Exhibit 31

CERTIFICATIONS

I, Willard D. Oberton, certify that:

1.	I have reviewed this annual report on Form 10-K of Fastenal Company;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date February 21, 2008

/s/ Willard D. Oberton

Willard D. Oberton

Chief Executive Officer

(Principal Executive Officer)

Exhibit 31 (Continued)

I, Daniel L. Florness, certify that:

1.	I have reviewed this annual report on Form 10-K of Fastenal Company;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date February 21, 2008

/s/ Daniel L. Florness

Daniel L. Florness

Chief Financial Officer

(Principal Financial Officer)

Exhibit 32

CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned certifies that this periodic report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in this periodic report fairly presents, in all material respects, the financial condition and results of operations of Fastenal Company.

A signed original of this written statement required by Section 906 has been provided to Fastenal Company and will be retained by Fastenal Company and furnished to the Securities and Exchange Commission or its staff upon request.


Date	February 21, 2008

	/s/ Willard D. Oberton	/s/ Daniel L. Florness
	Willard D. Oberton	Daniel L. Florness
	Chief Executive Officer	Chief Financial Officer
	(Principal Executive Officer)	(Principal Financial Officer)