INSTEEL INDUSTRIES INC (Form: 10-K, Received: 11/18/2008 12:35:17)

H.O. Woltz III

President, Chief Executive Officer and a Director

Michael C. Gazmarian

Vice President, Chief Financial Officer and Treasurer

James F. Petelle

Vice President — Administration and Secretary

Richard T. Wagner

Vice President and General Manager of IWP

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 27, 2008


o		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 1-9929

INSTEEL INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)


North Carolina		56-0674867
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1373 Boggs Drive, Mount Airy, North Carolina 27030
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (336) 786-2141

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:


Title of Each Class		Name of Each Exchange on Which Registered

Common Stock (No Par Value)		NASDAQ Global Select Market

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

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

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

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 þ No o

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 registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. þ

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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
		(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 Act). Yes o No þ

As of March 28, 2008, the aggregate market value of the common stock held by non-affiliates of the registrant was $125,439,965 based upon the closing sale price as reported on the NASDAQ Global Select Market. As of November 17, 2008, there were 17,507,435 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant’s proxy statement to be delivered to shareholders in connection with the 2009 Annual Meeting of Shareholders are incorporated by reference as set forth in Part III hereof.

TABLE OF CONTENTS


PART I

Item 1. Business			4

Item 1A. Risk Factors			7

Item 1B. Unresolved Staff Comments			9

Item 2. Properties			10

Item 3. Legal Proceedings			10

Item 4. Submission of Matters to a Vote of Security Holders			10

PART II

Item 5. Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities			10

Item 6. Selected Financial Data			12

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12

Item 7A. Quantitative and Qualitative Disclosures About Market Risk			19

Item 8. Financial Statements and Supplementary Data			20

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			47

Item 9A. Controls and Procedures			47

Item 9B. Other Information			49

PART III

Item 10. Directors, Executive Officers and Corporate Governance			49

Item 11. Executive Compensation			49

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			49

Item 13. Certain Relationship and Related Transactions, and Director Independence			49

Item 14. Principal Accounting Fees and Services			49

PART IV

Item 15. Exhibits, Financial Statement Schedules			49

SIGNATURES			51

EXHIBIT INDEX			52
EX-10.22
EX-10.23
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I

Cautionary Note Regarding Forward-Looking Statements

This report contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, particularly in the “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this report. When used in this report, the words “believes,” “anticipates,” “expects,” “estimates,” “intends,” “may,” “should” and similar expressions are intended to identify forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, they are subject to a number of risks and uncertainties, and we can provide no assurances that such plans, intentions or expectations will be achieved. Many of these risks are discussed herein under the caption “Risk Factors” and are updated from time to time in our filings with the U.S. Securities and Exchange Commission (“SEC”). You should read these risk factors carefully.

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. All forward-looking statements speak only to the respective dates on which such statements are made and we do not undertake and specifically decline any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

It is not possible to anticipate and list all risks and uncertainties that may affect our future operations or financial performance; however, they would include, but are not limited to, the following:

	•		general economic and competitive conditions in the markets in which we operate;

	•		credit market conditions and the impact of the Emergency Economic Stabilization Act of 2008 on the relative availability of financing for us, our customers and the construction industry as a whole;

	•		the anticipated reduction in spending for nonresidential construction, particularly commercial construction, and the impact on demand for our concrete reinforcing products;

	•		the severity and duration of the downturn in residential construction activity and the impact on those portions of our business that are correlated with the housing sector;

	•		the cyclical nature of the steel and building material industries;

	•		fluctuations in the cost and availability of our primary raw material, hot-rolled steel wire rod, from domestic and foreign suppliers;

	•		our ability to raise selling prices in order to recover increases in wire rod costs;

	•		changes in U.S. or foreign trade policy affecting imports or exports of steel wire rod or our products;

	•		the impact of increased imports of prestressed concrete strand (“PC strand”);

	•		unanticipated changes in customer demand, order patterns or inventory levels;

	•		the impact of weak demand and reduced capacity utilization levels on our unit manufacturing costs;

	•		our ability to further develop the market for engineered structural mesh (“ESM”) and expand our shipments of ESM;

	•		the actual net proceeds realized and closure costs incurred in connection with our exit from the industrial wire business;

	•		legal, environmental or regulatory developments that significantly impact our operating costs;

	•		unanticipated plant outages, equipment failures or labor difficulties;

	•		continued escalation in certain of our operating costs; and

	•		the risks discussed herein under the caption “Risk Factors.”

Item 1. Business

General

Insteel Industries, Inc. (“we,” “us,” “our,” “the Company” or “Insteel”) is one of the nation’s largest manufacturers of steel wire reinforcing products for concrete construction applications. We manufacture and market PC strand and welded wire reinforcement (“WWR”) products, including concrete pipe reinforcement (“CPR”), ESM and standard welded wire reinforcement (“SWWR”). Our products are primarily sold to manufacturers of concrete products that are used in nonresidential construction. For fiscal 2008, we estimate that approximately 89% of our sales were related to nonresidential construction and 11% were related to residential construction.

Insteel is the parent holding company for two wholly-owned subsidiaries, Insteel Wire Products Company (“IWP”) and Intercontinental Metals Corporation. We were incorporated in 1958 in the State of North Carolina.

Our business strategy is focused on: (1) achieving leadership positions in our markets; (2) operating as the lowest cost producer; and (3) pursuing growth opportunities in our core businesses that further our penetration of current markets served or expand our geographic reach. Headquartered in Mount Airy, North Carolina, we operate six manufacturing facilities that are located in the U.S. in close proximity to our customers. Our growth initiatives are focused on organic opportunities as well as acquisitions in existing or related markets that leverage our infrastructure and core competencies in the manufacture and marketing of concrete reinforcing products.

Our exit from the industrial wire business in June 2006 (see Note 7 to the consolidated financial statements) was the last in a series of divestitures which served to narrow our strategic and operational focus to concrete reinforcing products. The results of operations for the industrial wire business have been reported as discontinued operations for all periods presented.

Internet Access to Company Information

Additional information about us and our filings with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments thereto, are available at no cost on our web site at http://investor.insteel.com/sec.cfm and the SEC’s web site at www.sec.gov as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information available on our web site and the SEC’s web site is not part of this report and shall not be deemed incorporated into any of our SEC filings.

Products

Our concrete reinforcing products consist of PC strand and WWR.

PC strand is a high strength seven-wire strand that is used to impart compression forces into precast concrete elements and structures, which may be either pretensioned or posttensioned, providing reinforcement for bridges, parking decks, buildings and other concrete structures. Pretensioned or “prestressed” concrete elements or structures are primarily used in nonresidential construction while posttensioned concrete elements or structures are used in both nonresidential and residential construction. For 2008, 2007 and 2006, PC strand sales represented 45%, 44% and 46%, respectively, of our consolidated net sales.

WWR is produced as either a standard or a specially engineered reinforcing product for use in nonresidential and residential construction. We produce a full range of WWR products, including CPR, SWWR and ESM. CPR is an engineered made-to-order product that is used as the primary reinforcement in concrete pipe, box culverts and precast manholes for drainage and sewage systems, water treatment facilities and other related applications. SWWR is a secondary reinforcing product that is produced in standard styles for crack control applications in residential and light nonresidential construction, including driveways, sidewalks and various slab-on-grade applications. ESM is an engineered made-to-order product that is used as the primary reinforcement for concrete elements or structures, frequently serving as a replacement for hot-rolled rebar due to the cost advantages that it offers. For 2008, 2007 and 2006, WWR sales represented 55%, 56% and 54%, respectively, of our consolidated net sales.

Marketing and Distribution

We market our products through sales representatives that are our employees and through a sales agent. Our sales force is organized by product line and trained in the technical applications of our products. Our products are sold nationwide as well as into Canada, Mexico, and Central and South America, and delivered primarily by truck, using common or contract carriers. The delivery method selected is dependent upon backhaul opportunities, comparative costs and scheduling requirements.

Customers

We sell our products to a broad range of customers which includes manufacturers of concrete products, and to a lesser extent, distributors and rebar fabricators. In fiscal 2008, we estimate that approximately 70% of our net sales were to manufacturers of concrete products and 30% were to distributors and rebar fabricators. In many cases we are unable to identify the specific end use for our products as a high percentage of our customers sell into both the nonresidential and residential construction sectors. There were no customers that represented 10% or more of our net sales in fiscal years 2008, 2007 or 2006.

Product Warranties

Our products are used in applications which are subject to inherent risks including performance deficiencies, personal injury, property damage, environmental contamination or loss of production. We warrant our products to meet certain specifications and actual or claimed deficiencies from these specifications may give rise to claims, although we do not maintain a reserve for warranties as the historical claims have been immaterial. We maintain product liability insurance coverage to minimize our exposure to such risks.

Seasonality and Cyclicality

Demand in our markets is both seasonal and cyclical, driven by the level of construction activity, but can also be impacted by fluctuations in the inventory positions of our customers. From a seasonal standpoint, the highest level of sales within the year typically occurs when weather conditions are the most conducive to construction activity. As a result, sales and profitability are usually higher in the third and fourth quarters of the fiscal year and lower in the first and second quarters. From a cyclical standpoint, the level of construction activity tends to be correlated with general economic conditions although there can be significant differences between the relative performance of the nonresidential versus residential construction sectors for extended periods.

Raw Materials

The primary raw material used to manufacture our products is hot-rolled carbon steel wire rod, which we purchase from both domestic and foreign suppliers. Wire rod can generally be characterized as a commodity product. We purchase several different grades and sizes of wire rod with varying specifications based on the diameter, chemistry, mechanical properties and metallurgical characteristics that are required for our end products. High carbon grades of wire rod are required for the production of PC strand while low carbon grades are used to manufacture WWR.

Pricing for wire rod tends to fluctuate based on domestic as well as global market conditions. As domestic demand for wire rod exceeds domestic production capacity, imports of wire rod are necessary to satisfy the supply requirements of the U.S. market. Trade actions initiated by domestic wire rod producers can significantly impact the pricing and availability of imported wire rod, which during fiscal years 2008 and 2007, represented approximately 7% and 36%, respectively, of our total wire rod purchases. We believe that the substantial volume and desirable mix of grades represented by our wire rod requirements constitutes a competitive advantage by making us a more attractive customer to our suppliers relative to other manufacturers of our products.

Domestic wire rod producers have invested heavily over the recent years to improve their quality capabilities and augment their product mix by increasing the proportion of higher value-added products. This evolution toward higher value-added products generally has benefited us in our sourcing of wire rod for PC strand as this grade is more metallurgically and technically sophisticated. At the same time, domestic producers have deemphasized the production of the less sophisticated, low carbon grades of wire rod due to the more intense competitive conditions that prevail in this market. As a result, we typically rely more heavily on imports for supplies of lower grade wire rod. Historically, when traditional offshore suppliers have withdrawn from the domestic market following the filing of trade cases by the domestic industry, new suppliers have filled the resulting gaps in supply.

Selling prices for our products tend to be correlated with changes in wire rod prices. The timing varies, however, based on market conditions and competitive factors. The relative supply and demand conditions in our markets determine whether our margins expand or contract during periods of rising or falling wire rod prices.

Wire rod prices were at historically high levels during fiscal 2006 and fluctuated within a narrower range through the year. Domestic wire rod producers operated at less than full operating schedules to manage the balance of supply and demand. The price of imported wire rod rose, driven by increased worldwide demand and higher raw material costs.

By mid-2007, the price of imported wire rod had escalated to where it was higher than domestic pricing, resulting in reduced purchases of imports after the first quarter of fiscal 2007. Domestic demand for wire rod decreased during 2007, largely

due to the drop-off in residential construction which allowed for supply requirements to be fulfilled with the reduced level of imports.

During fiscal 2008, wire rod prices escalated to record high levels due to tight supply conditions resulting from reduced import availability and dramatic increases in the cost of scrap, energy and other raw materials for steel producers. The reduction in imports was largely driven by the redirection of wire rod by traditional offshore suppliers to other regions of the world experiencing stronger demand and offering more attractive pricing than the U.S. market. The most notable drop in wire rod imports from traditional sources to the United States was from China and Turkey, primarily due to policy changes implemented by the Chinese government to discourage the exporting of wire rod and more attractive conditions in other global markets . During this period we, as well as most of our competitors, adjusted the pricing for our products to reflect the replacement cost of wire rod rather than the lower inventory carrying value, which favorably impacted our profit margins during the year.

Competition

The markets in which our business is conducted are highly competitive. Some of our competitors are vertically integrated companies that produce both wire rod and concrete reinforcing products and offer multiple product lines over broad geographic areas, such as Nucor Corporation and Gerdau Ameristeel Corporation. Other competitors are smaller independent companies that offer limited competition in certain markets. Market participants compete on the basis of price, quality and service. Our primary competitors for WWR products are Ivy Steel & Wire, Nucor Corporation, Gerdau Ameristeel Corporation, Engineered Wire Products, Inc., Davis Wire Corporation, Oklahoma Steel & Wire Co., Inc., and Concrete Reinforcements Inc. Our primary competitors for PC strand are American Spring Wire Corporation, Sumiden Wire Products Corporation, Strand-Tech Martin, Inc. and MMI Strand Company, which is affiliated with Ivy Steel & Wire. We believe that we are the largest domestic producer of PC strand and the second largest domestic producer of WWR.

Quality and service expectations of customers have risen substantially over the years and are key factors that impact their selection of suppliers. Technology has become a critical factor in maintaining competitive levels of conversion costs and quality. In view of our technologically advanced manufacturing facilities, low cost production capabilities, strong market positions, and broad product offering and geographic reach, we believe that we are well-positioned to compete favorably with other producers of concrete reinforcing products.

Employees

As of September 27, 2008, we employed 523 people, of which 53 were represented by a labor union (49 employees at our Wilmington, Delaware facility and 4 employees at our Jacksonville, Florida facility). Following the expiration of the Delaware bargaining agreement on November 22, 2006, union employees continued to work without disruption while negotiations were in process on a new collective agreement, which was reached on August 18, 2008 and expires on November 10, 2012. The collective bargaining agreement with the union at the Jacksonville facility expires on April 30 of each year and is automatically renewed unless either party provides notification of its intent to modify or terminate the agreement. Should we experience a disruption of production at any facility, we have contingency plans in place that we believe would enable us to continue serving our customers, although there can be no assurances that a strike, slowdown or work stoppage would not adversely impact our operating costs and overall financial results.

Financial Information

For information with respect to revenue, operating profitability and identifiable assets attributable to our business and geographic areas, see the items referenced in Item 6, Selected Financial Data, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 11 to the consolidated financial statements.

Environmental Matters

We believe that we are in compliance in all material respects with applicable environmental laws and regulations. We have experienced no material difficulties in complying with legislative or regulatory standards and believe that these standards have not materially impacted our financial position or results of operations. Our future compliance with additional environmental requirements could necessitate capital outlays. However, we do not believe that these expenditures would ultimately result in a material adverse effect on our financial position or results of operations. We do not expect to incur material capital expenditures for environmental control facilities during fiscal years 2009 and 2010.

Executive Officers of the Company

Our executive officers are as follows:

H. O. Woltz III, 52, was elected Chief Executive Officer in 1991 and has been employed by us and our subsidiaries in various capacities since 1978. He was named President and Chief Operating Officer in 1989. He served as our Vice President from 1988 to 1989 and as President of Rappahannock Wire Company, formerly a subsidiary of our Company from 1981 to 1989. Mr. Woltz has been a Director since 1986 and also serves as President of Insteel Wire Products Company. Mr. Woltz served as President of Florida Wire and Cable, Inc. until its merger with Insteel Wire Products Company in 2002. Mr. Woltz serves on the Executive Committee of our Board of Directors.

Michael C. Gazmarian, 49, was elected Vice President, Chief Financial Officer and Treasurer in February 2007. He had previously served as Chief Financial Officer and Treasurer since 1994, the year he joined us. Before joining us, Mr. Gazmarian had been employed by Guardian Industries Corp., a privately-held glass manufacturer, since 1986, serving in various financial capacities.

James F. Petelle, 58 , joined us in October 2006. He was elected Vice President and Assistant Secretary on November 14, 2006 and Vice President — Administration and Secretary on January 12, 2007. Previously he was employed by Andrew Corporation, a publicly-held manufacturer of telecommunications infrastructure equipment, having served as Secretary from 1990 to May 2006, and Vice President — Law from 2000 to October 2006.

Richard T. Wagner, 49, joined us in 1992 and has served as Vice President and General Manager of the Concrete Reinforcing Products Business Unit of the Company’s subsidiary, Insteel Wire Products Company, since 1998. In February 2007, Mr. Wagner was appointed Vice President of the parent company, Insteel Industries, Inc. Prior to 1992, Mr. Wagner served in various positions with Florida Wire and Cable, Inc., a manufacturer of PC strand and galvanized strand products, since 1977.

The executive officers listed above were elected by our Board of Directors at its annual meeting held February 19, 2008 for a term that will expire at the next annual meeting of the Board of Directors or until their successors are elected and qualify. The next meeting at which officers will be elected is expected to be February 10, 2009. Although our bylaws permit the Chairman of the Board to be designated an officer of the Company, Howard O. Woltz, Jr., the current Chairman of the Board, has not been so designated and is not otherwise an employee of the Company. Howard O. Woltz, Jr. is the father of H.O. Woltz III.

Item 1A. Risk Factors

You should carefully consider all of the information set forth in this Form 10-K, including the following risk factors, before investing in any of our securities. The risks described below are not the only ones we face. Additional risks that are currently unknown to us or that we currently consider to be immaterial may also impair our business or adversely affect our financial condition and results of operations. Our business, financial condition and results of operations could be adversely affected by any of these risks. We may amend or supplement these risk factors from time to time by other reports that we file with the SEC in the future.

Our business is cyclical and can be negatively impacted by prolonged economic downturns or tightening in the credit markets that reduce the level of construction activity and demand for our products.

Demand for our concrete reinforcing products is cyclical in nature and sensitive to changes in the economy and in the credit markets. Our products are sold primarily to manufacturers of concrete products for the construction industry and used for a broad range of nonresidential and residential construction applications. Demand in these markets is driven by the level of construction activity, which tends to be correlated with conditions in the general economy as well as other factors beyond our control. The recent tightening in the credit markets could unfavorably impact demand for our products by reducing the availability of financing to our customers and the construction industry as a whole. Although the implementation of the Emergency Economic Stabilization Act of 2008 and related measures is expected to improve liquidity in the financial markets and increase the availability of financing, the timing and magnitude of the impact is highly uncertain at this time. Future prolonged periods of economic weakness or reduced availability of financing could have a material adverse impact on our business, results of operations, financial condition and cash flows.

Demand for our products is highly variable and difficult to forecast due to our minimal backlog and the unanticipated changes that can occur in customer order patterns or inventory levels.

Demand for our products is highly variable. The short lead times for customer orders and minimal backlog that characterize our business make it difficult to forecast the future level of demand for our products. In some cases, unanticipated downturns in demand have been exacerbated by inventory reduction measures pursued by our customers. The combination of these factors may cause significant fluctuations in our sales, profitability and cash flows.

Our financial results can be negatively impacted by the volatility in the cost and availability of our primary raw material, hot-rolled carbon steel wire rod.

The primary raw material used to manufacture our products is hot-rolled carbon steel wire rod, which we purchase from both domestic and foreign suppliers. We do not use derivative commodity instruments to hedge our exposure to changes in the price of wire rod as such instruments are currently unavailable in the financial markets. Beginning in fiscal 2004, a tightening of supply in the rod market together with fluctuations in the raw material costs of rod producers resulted in increased price volatility which has continued through fiscal 2008, when wire rod prices rose to a record high. Wire rod producers have resorted to increasing the frequency of price adjustments, typically on a monthly basis as well as unilaterally changing the terms of prior commitments.

Although changes in our wire rod costs and selling prices tend to be correlated, depending upon market conditions, there may be periods during which we are unable to fully recover increased rod costs through higher selling prices, which would reduce gross profit and cash flow from operations. Additionally, should raw material costs decline, our financial results may be negatively impacted if the selling prices for our products decrease to an even greater degree and to the extent that we are consuming higher cost material from inventory.

Our financial results can also be significantly impacted if raw material supplies are inadequate to satisfy our purchasing requirements. Trade actions by domestic wire rod producers against offshore suppliers can also have a substantial impact on the availability and cost of imported wire rod. The imposition of anti-dumping margins by the Department of Commerce against exporting countries can have the effect of reducing or eliminating their activity in the domestic market, which is of increasing significance in view of the reductions in domestic wire rod production capacity that have occurred in recent years. If we were unable to obtain adequate and timely delivery of our raw material requirements, we may be unable to manufacture sufficient quantities of our products or operate our manufacturing facilities in an efficient manner which could result in lost sales and higher operating costs.

Foreign competition could adversely impact our financial results.

Our PC strand business has experienced increasing competitive pressures from offshore producers exporting into the domestic market, particularly from China. Beginning in the second half of fiscal 2007, we elected not to pursue certain PC strand business that had been negatively impacted by low-priced import competition. If we are unable to purchase raw materials and achieve manufacturing costs that are competitive with those of foreign producers, or if the margin and return requirements of foreign producers are substantially lower, our market share and profit margins could be negatively impacted.

In 2003, we, together with a coalition of U.S. producers of PC strand, obtained a favorable determination from the ITC in response to the petitions we had filed alleging that imports of PC strand from Brazil, India, Korea, Mexico and Thailand were being “dumped” or sold in the United States at a price that was lower than the price in their home markets or their cost and had injured the domestic PC strand industry. The International Trade Commission (“ITC”) imposed anti-dumping duties ranging from 12% up to 119% which had the effect of limiting the participation of these companies in the domestic market. Should domestic market conditions deteriorate in the future to where U.S. producers could demonstrate that imports were being “dumped” in the U.S. market and were causing or threatening to cause material injury to the domestic industry, we would anticipate coordinating with other U.S. producers to pursue similar trade cases, although no assurances can be provided that the outcome of such actions would be favorable.

Our manufacturing facilities are subject to unexpected equipment failures, operational interruptions and casualty losses.

Our manufacturing facilities are subject to risks that may limit our ability to manufacture products, including unexpected equipment failures and catastrophic losses due to other unanticipated events such as fires, explosions, accidents, adverse weather conditions and transportation interruptions. Any such equipment failures or events can subject us to material plant shutdowns, periods of reduced production or unexpected downtime. Furthermore, any operational interruptions may require significant capital expenditures to remedy. Although our insurance coverage could offset the losses or expenditures relating to some of these events, our results of operations and cash flows could be negatively impacted to the extent that such claims were not covered or only partially covered by our insurance.

Our financial results could be adversely impacted by the continued escalation in certain of our operating costs.

Our employee benefit costs, particularly our medical and workers’ compensation costs, have increased substantially in recent years and are expected to continue to rise. In addition, higher prices for natural gas, electricity, fuel and consumables increase our manufacturing and distribution costs. Most of our sales are made under terms whereby we incur the fuel costs and surcharges associated with the delivery of products to our customers. Although we have implemented numerous measures to offset the impact of the ongoing escalation in these costs, there can be no assurance that such actions will be effective. If we are unable to pass these additional costs through by raising selling prices, our financial results could be adversely impacted.

Our capital resources may not be adequate to provide for our capital investment and maintenance expenditures if we were to experience a substantial downturn in our financial performance.

Our operations are capital intensive and require substantial recurring expenditures for the routine maintenance of our equipment and facilities. Although we expect to finance our business requirements through internally generated funds or from borrowings under our $100.0 million revolving credit facility, we cannot provide any assurances these resources will be sufficient to support our business. A material adverse change in our operations or financial condition could limit our ability to borrow funds under our credit facility which could further adversely impact our liquidity and financial condition. Any significant future acquisitions could require additional financing from external sources and may not be available on favorable terms which could adversely impact our operations, growth plans, financial condition and results of operations.

Environmental compliance and remediation could result in substantially increased capital investments and operating costs.

Our business is subject to numerous federal, state and local laws and regulations pertaining to the protection of the environment that could result in substantially increased capital investments and operating costs. These laws and regulations, which are constantly evolving, are becoming increasingly stringent and the ultimate impact of compliance is not always clearly known or determinable because regulations under some of these laws have not yet been promulgated or are undergoing revision.

Our production and earnings could be reduced by strikes or work stoppages by our unionized employees.

As of September 27, 2008, we employed 523 people, of which 53 were represented by a labor union (49 employees at our Wilmington, Delaware facility and 4 employees at our Jacksonville, Florida facility). Following the expiration of the Delaware bargaining agreement on November 22, 2006, union employees continued to work without disruption while negotiations were in process on a new collective agreement, which was reached on August 18, 2008 and expires on November 10, 2012. The collective bargaining agreement with the union at the Jacksonville facility expires on April 30 of each year and is automatically renewed unless either party provides notification of its intent to modify or terminate the agreement. Should we experience a disruption of production at any facility, we have contingency plans in place that would enable us to continue serving our customers, although there can be no assurances that a strike, slowdown or work stoppage would not adversely impact our operating costs and overall financial results.

Our stock price can be volatile, often in connection with matters beyond our control.

Equity markets in the United States have often been volatile. During fiscal 2008, our common stock traded as high as $20.17 and as low as $7.36. The following factors could cause the price of our common stock to fluctuate significantly, several of which are beyond our control: variations in our quarterly and annual operating results; changes in our business outlook; changes in market valuations of companies in our markets; changes in the expectations for nonresidential and residential construction; and announcements by us, our competitors or industry participants that may be perceived to impact us or our operations.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Insteel’s corporate headquarters and IWP’s sales and administrative offices are located in Mount Airy, North Carolina. We operate seven manufacturing facilities located in Dayton, Texas; Gallatin, Tennessee; Hickman, Kentucky; Mount Airy, North Carolina; Sanderson, Florida; Wilmington, Delaware; and Jacksonville, Florida. In connection with our exit from the industrial wire business, we are pursuing the sale of an idle facility located in Fredericksburg, Virginia.

We own all of our real estate, all of which is pledged as security under the Credit Agreement pertaining to our revolving credit facility. We believe that our properties are in good operating condition and that our machinery and equipment have been well maintained. We also believe that our manufacturing facilities are suitable for their intended purposes and have capacities adequate for current and projected needs for existing products.

Item 3. Legal Proceedings.

On November 19, 2007, Dywidag Systems International, Inc. (“DSI”) filed a third-party lawsuit in the Ohio Court of Claims alleging that certain epoxy-coated strand sold by us to DSI in 2002, and supplied by DSI to the Ohio Department of Transportation (“ODOT”) for a bridge project, was defective. The third-party action seeks recovery of any damages which may be assessed against DSI in the action filed against it by ODOT, which allegedly could be in excess of $8.3 million, plus $2.7 million in damages allegedly incurred by DSI. We had previously filed a lawsuit against DSI in the North Carolina Superior Court in Surry County on July 25, 2007 seeking recovery of $1.4 million (plus interest) owed for other products sold by us to DSI and a judgment declaring that we had no liability to DSI arising out of the ODOT bridge project. Our North Carolina lawsuit was subsequently removed by DSI to the U.S. District Court for the Middle District of North Carolina. On March 5, 2008, the Magistrate Judge in the U.S. District Court issued his recommendation that our motion to remand the matter to the Surry County Court should be granted. DSI has appealed the Magistrate’s recommendation to the District Judge, who has not yet ruled on DSI’s appeal. On April 17, 2008, the Ohio Court of Claims reached a preliminary ruling denying our motion to stay the proceedings against us in that court. On June 24, 2008, the Ohio Court of Claims reached a final ruling that DSI’s action against us may proceed in that court. We subsequently filed a motion to dismiss the Ohio action on the grounds that it is barred by the relevant Statute of Limitations. The Ohio Court has not yet ruled on this motion. In any event, we intend to vigorously defend the claims asserted against us by DSI in addition to pursuing full recovery of the amounts owed to us by DSI.

We are also, from time to time, involved in various other lawsuits, claims, investigations and proceedings, including commercial, environmental and employment matters, which arise in the ordinary course of business. We do not anticipate that the ultimate cost to resolve these other matters will have a material adverse effect on our financial position, results of operations or cash flows.

Item 4. Submission of Matters to a Vote of Security Holders .

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2008.

PART II


Item 5.		Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.

Our common stock is listed on the NASDAQ Global Select Market under the symbol “IIIN” and has been trading on NASDAQ since September 28, 2004. At November 14, 2008, there were 1,025 shareholders of record. The following table summarizes the high and low sales prices as reported on the NASDAQ Global Select Market and the cash dividend per share declared in fiscal 2008 and fiscal 2007:


	Fiscal 2008						Fiscal 2007
					Cash						Cash
	High		Low		Dividends		High		Low		Dividends
First Quarter	$	16.35	$	10.00	$	0.03	$	21.97	$	16.58	$	0.03
Second Quarter		12.45		7.36		0.03		19.06		15.89		0.03
Third Quarter		19.14		9.96		0.03		19.66		16.43		0.03
Fourth Quarter		20.17		13.77		0.53		23.00		15.35		0.03

On December 5, 2007, our board of directors approved a new share repurchase authorization to buy back up to $25.0 million of our outstanding common stock over a period of up to twelve months ending December 5, 2008. Repurchases may be made from time to time in the open market or in privately negotiated transactions subject to market conditions, applicable legal requirements and other factors. We are not obligated to acquire any particular amount of common stock under the authorization and it may be suspended at any time at our discretion. The new authorization replaces the previous $25.0 million share repurchase authorization that was to expire on January 5, 2008, under which we repurchased 208,585 shares or $2.5 million of our common stock.

The following table summarizes the repurchases of common stock during the year ended September 27, 2008:


					Total Number of		Maximum Number (or
					Shares Purchased		Approximate Dollar Value) of
			Average Price		as Part of Publicly		Shares That May Yet Be
	Total Number of		Paid per		Announced Plan or		Purchased Under the Plan or
(In thousands except per share amounts)	Shares Purchased		Share		Program		Program
September 30, 2007 - November 3, 2007		133	$	12.50		133	$	23,300	(1)
November 4, 2007 - December 1, 2007		75	$	11.46		75	$	22,500	(1)
December 2, 2007 - December 29, 2007		—		—		—	$	25,000	(2)
December 30, 2007 - February 2, 2008		565	$	8.31		565	$	20,305	(2)
February 3, 2008 - March 1, 2008		133	$	11.04		133	$	18,837	(2)
March 2, 2008 - March 29, 2008 (3)		7	$	10.99		7	$	18,837	(2)
March 30, 2008 - September 27, 2008		—		—		—	$	18,837	(2)

		913				913


(1)		Under our previous $25.0 million share repurchase authorization announced on January 10, 2007 that was scheduled to expire on January 5, 2008 but was replaced by a new $25.0 million share repurchase authorization announced on December 5, 2007.

(2)		Under the $25.0 million share repurchase authorization announced on December 5, 2007 that expires on December 5, 2008 .

(3)		Represents 6,870 shares surrendered by employees to satisfy tax withholding obligations upon the vesting of restricted stock awards.

On May 16, 2006, the Board of Directors approved a two-for-one split of our common stock payable in the form of a stock dividend. The stock split entitled each shareholder of record on June 2, 2006 to receive one share of common stock for each outstanding share of common stock held on that date and was distributed on June 16, 2006. Unless otherwise indicated, the capital stock accounts and all share and earnings per share amounts in this report give effect to the stock split, applied retroactively, to all periods presented.

In July 2005, we resumed our quarterly cash dividend of $0.03 per share. On August 12, 2008, our Board of Directors approved a special cash dividend of $0.50 per share that was paid on October 3, 2008. While we intend to pay regular quarterly cash dividends for the foreseeable future, the declaration and payment of future dividends, if any, are discretionary and will be subject to determination by the board of directors each quarter after taking into account various factors, including general business conditions and our financial condition, operating results, cash requirements and expansion plans.

In April 1999, our Board of Directors adopted a Rights Agreement between us and First Union National Bank, as Rights Agent. In connection with adopting the Rights Agreement, we declared a dividend of one right per share of our common stock to shareholders of record as of May 17, 1999. Generally, the Rights Agreement provides that one right will attach to each share of our common stock issued after that date. Each right entitles the registered holder to purchase from us on certain dates described in the Rights Agreement one one-hundredth of a share of our Series A Junior Participating Preferred Stock. For more information regarding our Rights Agreement, see Note 15 to the consolidated financial statements.

Equity Compensation Plan Information
September 27, 2008
(In thousands, except exercise price amount)

(c)

Number of Securities

(a)

(b)

Remaining Available for

Number of Securities to be

Weighted-Average Exercise

Future Issuance Under

Issued Upon Exercise of

Price of Outstanding

Equity Compensation Plans

Outstanding Options,

Options, Warrants and

(Excluding Securities

Plan Category

Warrants and Rights

Rights

Reflected in Column (a))

Equity compensation plans approved by security holders

531

11.17

1,035

⁽¹⁾


⁽¹⁾		In addition to being available for future issuance upon the exercise of stock options that may be granted after September 27, 2008, the securities shown are available for future issuance in the form of restricted stock (or other stock-based awards) made under our 2005 Equity Incentive Plan, as amended.

We do not have any equity compensation plans that have not been approved by shareholders.

Item 6. Selected Financial Data.

Financial Highlights
(In thousands, except per share amounts)


	Year Ended
	(52 weeks)		(52 weeks)		(52 weeks)		(52 weeks)		(53 weeks)
	September 27,		September 29,		September 30,		October 1,		October 2,
	2008		2007		2006		2005		2004
Net sales	$	353,862	$	297,806	$	329,507	$	309,320	$	298,754
Earnings from continuing operations		43,717		24,284		34,377		24,499		32,035
Net earnings		43,752		24,162		33,040		25,045		31,489
Earnings per share from continuing operations (basic)		2.49		1.34		1.88		1.31		1.85
Earnings per share from continuing operations (diluted)		2.47		1.33		1.86		1.29		1.78
Net earnings per share (basic)		2.49		1.33		1.80		1.34		1.82
Net earnings per share (diluted)		2.47		1.32		1.79		1.32		1.75
Cash dividends declared		0.62		0.12		0.12		0.06		—
Total assets		228,220		173,529		166,596		138,276		151,291
Total long-term debt		—		—		—		11,860		52,368
Shareholders’ equity		169,847		143,850		122,438		97,036		71,211

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The matters discussed in this section include forward-looking statements that are subject to numerous risks. You should carefully read the “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” in this Form 10-K.

Overview

Following our exit from the industrial wire business (see Note 7 to the consolidated financial statements), our operations are entirely focused on the manufacture and marketing of concrete reinforcing products for the concrete construction industry. The results of operations for the industrial wire business have been reported as discontinued operations for all periods presented. Our business strategy is focused on: (1) achieving leadership positions in our markets; (2) operating as the lowest cost producer; and (3) pursuing growth opportunities within our core businesses that further our penetration of current markets served or expand our geographic reach.

Critical Accounting Policies

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. Our discussion and analysis of our financial condition and results of operations are based on these financial statements. The preparation of our financial statements requires the application of these accounting principles in addition to certain estimates and judgments based on current available information, actuarial estimates, historical results and other assumptions believed to be reasonable. Actual results could differ from these estimates.

Following is a discussion of our most critical accounting policies, which are those that are both important to the depiction of our financial condition and results of operations and that require judgments, assumptions and estimates.

Revenue recognition . We recognize revenue from product sales in accordance with Staff Accounting Bulletin (“SAB”) No. 104 when products are shipped and risk of loss and title has passed to the customer. Sales taxes collected from customers are recorded on a net basis and as such, are excluded from revenue.

Concentration of credit risk. Financial instruments that subject us to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. We are exposed to credit risk in the event of default by institutions in which our cash and cash equivalents are held and customers to the extent of the amounts recorded on the balance sheet. We invest excess cash primarily in money market funds, which are highly liquid securities that bear minimal risk.

Most of our accounts receivable are due from customers that are located in the United States and we generally require no collateral depending upon the creditworthiness of the account. We utilize credit insurance on certain accounts receivable due from customers located outside of the United States. We provide an allowance for doubtful accounts based upon our assessment of the credit risk of specific customers, historical trends and other information. There is no disproportionate concentration of credit risk.

Allowance for doubtful accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the potential inability of our customers to make required payments. If the financial condition of our customers were to change significantly, adjustments to the allowances may be required. While we believe our recorded trade receivables will be collected, in the event of default in payment of a trade receivable, we would follow normal collection procedures.

Excess and obsolete inventory reserves. We write down the carrying value of our inventory for estimated obsolescence to reflect the lower of the cost of the inventory or its estimated net realizable value based upon assumptions about future demand and market conditions. If actual market conditions for our products are substantially different than our projections, adjustments to these reserves may be required.

Accruals for self-insured liabilities and litigation. We accrue estimates of the probable costs related to self-insured medical and workers’ compensation claims and legal matters. These estimates have been developed in consultation with actuaries, our legal counsel and other advisors and are based on our current understanding of the underlying facts and circumstances. Because of uncertainties related to the ultimate outcome of these issues as well as the possibility of changes in the underlying facts and circumstances, adjustments to these reserves may be required in the future.

Recent accounting pronouncements . In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (SFAS”) No. 157, “Fair Value Measurements” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for us beginning in fiscal 2009. We do not expect the adoption of SFAS No. 157 to have a material effect on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”). SFAS No. 141R requires the acquiring entity in a business combination to recognize all the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose all of the information required to evaluate and understand the nature and financial effect of the business combination. This statement is effective for acquisition dates on or after the beginning of the first annual reporting period beginning after December 15, 2008 and is not expected to have a material effect on our consolidated financial statements to the extent that we do not enter into business combinations subsequent to adoption.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” SFAS No. 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to establish accounting and reporting standards for non-controlling interests in subsidiaries and for the deconsolidation of subsidiaries. This statement clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008 and is not expected to have a material effect on our consolidated financial statements to the extent that we do not obtain any minority interests in subsidiaries subsequent to adoption.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” SFAS No. 161 requires enhanced disclosures on an entity’s derivative and hedging activities. SFAS No. 161 will become effective for us beginning in fiscal 2009 and is not expected to have any impact on our disclosures to the extent that we do not initiate any such activities subsequent to adoption.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” We do not expect the adoption of SFAS No. 162 to have a material effect on our consolidated financial statements.

In June 2008, the FASB issued FASB Staff Position (“FSP”) No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transaction Are Participating Securities.” FSP No. EITF 03-6-1 requires that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years, and requires that all prior period earnings per share data presented (including interim financial statements, summaries of earnings and selected financial data) be adjusted retrospectively to conform with its provisions. We are currently evaluating the impact, if any, that the adoption of FSP EITF 03-6-1 will have on our consolidated financial statements.

Results of Operations

Statements of Operations – Selected Data
(Dollars in thousands)


	Year Ended
	September 27,						September 29,						September 30,
	2008			Change			2007			Change			2006
Net sales	$	353,862			18.8	%	$	297,806			(9.6	%)	$	329,507
Gross profit		86,755			54.8	%		56,061			(20.9	%)		70,871
Percentage of net sales		24.5	%					18.8	%					21.5	%
Selling, general and administrative expense	$	18,623			5.9	%	$	17,583			3.5	%	$	16,996
Percentage of net sales		5.3	%					5.9	%					5.2	%
Other expense (income), net		85			N/M			4			N/M			(446	)
Interest expense		594			0.3	%		592			(11.5	%)		669
Interest income		(721	)		73.7	%		(415	)		62.7	%		(255	)
Effective income tax rate		35.9	%					36.6	%					36.2	%
Earnings from continuing operations	$	43,717			80.0	%	$	24,284			(29.4	%)	$	34,377
Earnings (loss) from discontinued operations		35			N/M			(122	)		N/M			(1,337	)
Net earnings		43,752			81.1	%		24,162			(26.9	%)		33,040


“NM” = not meaningful

2008 Compared with 2007

Net Sales

Net sales increased 18.8% to $353.9 million in 2008 from $297.8 million in 2007. Average selling prices for the year increased 28.7% while shipments decreased 7.7% from the prior year levels. The increase in average selling prices was driven by price increases that were implemented during the year to recover the unprecedented escalation in our raw material costs. The reduction in shipments was primarily due to the continuation of weak demand from customers that have been negatively impacted by the downturn in residential construction activity.

Gross Profit

Gross profit increased 54.8% to $86.8 million, or 24.5% of net sales in 2008 from $56.1 million, or 18.8% of net sales in 2007 primarily due to higher spreads between average selling prices and raw material costs, which more than offset lower shipments and higher unit conversion costs. The widening in spreads during the current year was primarily driven by the price increases that were implemented together with the consumption of lower cost inventory under the first-in, first-out (“FIFO”) method of accounting.

Selling, General and Administrative Expense

Selling, general and administrative expense (“SG&A expense”) increased 5.9% to $18.6 million, or 5.3% of net sales in 2008 from $17.6 million, or 5.9% of net sales in 2007 primarily due to increases in employee benefit costs ($812,000), bad debt expense ($630,000), compensation expense ($370,000) and supplemental employee retirement plan expense ($291,000), which were partially offset by the net gain on life insurance settlements ($661,000) and decreases in consulting expense ($204,000), travel expense ($167,000) and legal fees ($79,000).

Interest Expense

Interest expense for 2008 was relatively flat at $594,000 compared to $592,000 in 2007, primarily consisting of non-cash amortization expense associated with capitalized financing costs.

Interest Income

Interest income for 2008 increased $306,000, or 73.7%, to $721,000 from $415,000 in 2007 primarily due to higher average cash balances.

Income Taxes

Our effective income tax rate decreased to 35.9% in 2008 from 36.6% in 2007 due to an increase in permanent differences resulting from higher tax credits attributable to domestic production activities and nontaxable proceeds associated with life insurance settlements.

Earnings From Continuing Operations

Earnings from continuing operations for 2008 increased to $43.7 million, or $2.47 per diluted share, compared to $24.3 million, or $1.33 per diluted share in 2007 primarily due to the increases in sales and gross profit which more than offset the increase in SG&A expense.

Earnings (Loss) From Discontinued Operations

Earnings from discontinued operations for 2008 were $35,000, which had no effect on diluted earnings per share, compared with a loss of $122,000, or $0.01 per diluted share in 2007. The earnings in 2008 resulted from escrow payments we received that were forfeited by a prospective buyer of our Fredericksburg, Virginia manufacturing facility, which we had closed in 2006 in connection with our exit from the industrial wire business.

Net Earnings

Net earnings for 2008 increased to $43.8 million, or $2.47 per diluted share, compared to $24.2 million, or $1.32 per diluted share in 2007 primarily due to the increases in sales and gross profit which more than offset the increase in SG&A expense.

2007 Compared with 2006

Net Sales

Net sales decreased 9.6% to $297.8 million in 2007 from $329.5 million in 2006. Shipments for the year decreased 11.4% while average selling prices rose 2.0% from the prior year. The reduction in shipments was driven by a combination of factors including: (1) the continuation of weak demand and inventory reduction measures pursued by customers that have been negatively impacted by the downturn in residential construction activity; (2) our decision to solicit minimal new business from posttension customers in the PC strand market due to low-priced import competition; and (3) less favorable weather conditions in certain of our markets relative to the prior year which reduced the level of construction activity.

Gross Profit

Gross profit decreased 20.9% to $56.1 million, or 18.8% of net sales in 2007 from $70.9 million, or 21.5% of net sales in 2006 primarily due to the reduction in shipments, higher unit manufacturing costs resulting from lower operating levels and higher raw material costs which were partially offset by the increase in average selling prices.

Selling, General and Administrative Expense

Selling, general and administrative expense (“SG&A expense”) increased 3.5% to $17.6 million, or 5.9% of net sales in 2007 from $17.0 million, or 5.2% of net sales in 2006 primarily due to higher compensation expense ($989,000) which was partially offset by lower employee benefit costs ($387,000).

Other Expense (Income), Net

Other expense was $4,000 in 2007 compared with income of $446,000 in 2006. The income for 2006 was primarily related to a $247,000 litigation settlement and $128,000 of duties related to the dumping and countervailing duty cases that were filed by a coalition of domestic PC strand producers which included us.

Interest Expense

Interest expense decreased $77,000, or 12%, to $592,000 in 2007 from $669,000 in 2006 primarily due to lower average outstanding balances on the revolving credit facility in 2007 together with lower amortization expense associated with capitalized financing costs.

Income Taxes

Our effective income tax rate was relatively flat for 2007 at 36.6% compared with 36.2% in 2006.

Earnings From Continuing Operations

Earnings from continuing operations for 2007 decreased to $24.3 million, or $1.33 per diluted share, compared to $34.4 million, or $1.86 per diluted share in 2006 primarily due to the lower sales and gross profit.

Earnings (Loss) From Discontinued Operations

The loss from discontinued operations for 2007 was $122,000, or $0.01 per diluted share compared to $1.3 million, or $0.07 per diluted share in 2006. The 2007 loss reflects the closure costs incurred to exit the industrial wire business and close our Fredericksburg, Virginia manufacturing facility. The 2006 loss reflects the operating losses incurred by the industrial wire business together with the closure costs which were partially offset by a $1.3 million pre-tax gain on the sale of certain machinery and equipment associated with the industrial wire business for $6.0 million.

Net Earnings

Net earnings for 2007 decreased to $24.2 million, or $1.32 per diluted share, compared to $33.0 million, or $1.79 per diluted share in 2006 primarily due to the lower sales and gross profit which was partially offset by the reduction in the loss from discontinued operations associated with our exit from the industrial wire business and closure of our Fredericksburg, Virginia manufacturing facility.

Liquidity and Capital Resources

Selected Financial Data
(Dollars in thousands)


	Year Ended
	September 27,			September 29,			September 30,
	2008			2007			2006
Net cash provided by operating activities of continuing operations	$	36,808		$	17,065		$	42,650
Net cash used for investing activities of continuing operations		(8,249	)		(17,062	)		(19,472	)
Net cash used for financing activities of continuing operations		(10,710	)		(1,842	)		(22,008	)

Net cash provided (used for) by operating activities of discontinued operations		(59	)		(147	)		2,185
Net cash provided by investing activities of discontinued operations		—			—			5,963

Working capital		97,566			70,697			56,938
Total long-term debt		—			—			—
Percentage of total capital		—			—			—
Shareholders’ equity	$	169,847		$	143,850		$	122,438
Percentage of total capital		100	%		100	%		100	%
Total capital (total long-term debt + shareholders’ equity)	$	169,847		$	143,850		$	122,438

Cash Flow Analysis

Operating activities of continuing operations provided $36.8 million of cash in 2008 compared with $17.1 million in 2007 and $42.7 million in 2006. The year-over-year increase in 2008 was largely due to the $19.4 million increase in earnings from continuing operations. In 2008 and 2007, the net change in receivables, inventory and accounts payable and accrued expenses used $20.2 million and $14.6 million, respectively, of cash while providing $4.3 million in 2006. The cash used by working capital in the current year was due to the $23.8 million increase in inventory and $15.1 million increase in accounts receivable, which were in turn largely driven by the sharp escalation in raw material costs and selling prices. These increases were partially offset by the $18.7 million increase in accounts payable and accrued expenses, which was primarily due to the higher raw material costs. Depreciation and amortization rose $1.6 million, or 27.3% from the prior year as a result of the elevated level of capital expenditures and related asset additions over the previous two years. Cash provided by deferred income taxes decreased $1.5 million to $484,000 in 2008 from $2.0 million in 2007.

Investing activities of continuing operations used $8.2 million of cash in 2008 compared with $17.1 million in 2007 and $19.5 million in 2006. The decrease was primarily due to the $7.5 million reduction in capital expenditures and $1.1 million of proceeds from claims on life insurance policies. Capital expenditures amounted to $9.5 million, $17.0 million and $19.0 million in 2008, 2007 and 2006, respectively, with the current year outlays primarily associated with the upgrading of our Florida PC strand facility in addition to recurring maintenance requirements. During 2007 and 2006, the higher levels of capital expenditures were primarily related to the expansion of our Tennessee PC strand facility, the addition of new ESM production lines at our North Carolina and Texas facilities, and the addition of a new SWWR production line at our Delaware facility. Maintenance-related capital expenditures are expected to total less than $5.0 million in 2009. The actual timing of these expenditures as well as the amounts are subject to change based on future market conditions, our financial performance and additional growth opportunities that may arise. Investing activities from discontinued operations did not provide or use cash in 2008 and 2007 while providing $6.0 million in 2006 from the net proceeds on the sale of certain machinery and equipment associated with our discontinued industrial wire business.

Financing activities of continuing operations used $10.7 million of cash in 2008 compared with $1.8 million in 2007 and $22.0 million in 2006. The year-over-year increase in 2008 was primarily due to the $8.7 million of share repurchases in the current year. Subsequent to the end of the fiscal year, on October 3, 2008, we paid a cash dividend to our shareholders totaling $9.3 million in the aggregate or $0.53 per share, which included a special cash dividend of $8.8 million, or $0.50 per share in addition to our regular quarterly cash dividend of $525,000, or $0.03 per share.

Credit Facilities

As of September 27, 2008, we had a $100.0 million revolving credit facility in place to supplement our operating cash flow in funding our working capital, capital expenditure and general corporate requirements. No borrowings were outstanding on the credit facility as of September 27, 2008 and September 29, 2007 and outstanding letters of credit totaled $1.2 million and $1.9 million, respectively. As of September 27, 2008, $80.0 million of borrowing capacity was available on the credit facility (see Note 4 to the consolidated financial statements).

Our balance sheet was debt-free as of September 27, 2008 and September 29, 2007. We believe that, in the absence of significant unanticipated cash demands, net cash generated by operating activities and amounts available under our revolving credit facility will be sufficient to satisfy our expected short-term and long-term requirements for working capital, capital expenditures, dividends and share repurchases, if any.

Impact of Inflation

We are subject to inflationary risks arising from fluctuations in the market prices for our primary raw material, hot-rolled steel wire rod, and, to a much lesser extent, freight, energy and other consumables that are used in our manufacturing processes. We have generally been able to adjust our selling prices to pass through increases in these costs or offset them through various cost reduction and productivity improvement initiatives. However, our ability to raise our selling prices depends on market conditions and competitive dynamics, and there may be periods during which we are unable to fully recover increases in our costs. During 2008, we implemented price increases in response to the unprecedented escalation in wire rod costs, materially increasing our net sales and earnings from continuing operations due to the consumption of lower cost inventory. During 2007 and 2006, inflation did not have a material impact on our net sales or earnings from continuing operations.

Off-Balance Sheet Arrangements

We do not have any material transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons, as defined by Item 303(a)(4) of Regulation S-K of the SEC, that have or are reasonably likely to have a material current or future impact on our financial condition, results of operations, liquidity, capital expenditures, capital resources or significant components of revenues or expenses.

Contractual Obligations

Our contractual obligations and commitments at September 27, 2008 are as follows:

Payments Due by Period
(In thousands)


			Less Than						More Than
	Total		1 Year		1 - 3 Years		3 – 5 Years		5 Years
Contractual obligations:
Operating leases	$	1,146	$	587	$	548	$	11	$	—
Raw material purchase commitments ⁽¹⁾		89,652		89,652		—		—		—
Supplemental employee retirement plan obligations		19,095		155		398		487		18,055
Pension benefit obligations		8,769		607		1,099		665		6,398
Trade letters of credit		1,154		1,154		—		—		—
Other unconditional purchase obligations ⁽²⁾		1,115		1,115		—		—		—
Commitment fee on unused portion of credit facility		492		295		197		—		—
FIN No. 48 obligations including interest and penalties		48		48		—		—		—

Total	$	121,471	$	93,613	$	2,242	$	1,163	$	24,453


⁽¹⁾		Non-cancelable fixed price purchase commitments for raw materials.

⁽²⁾		Contractual commitments for capital expenditures.

Outlook

Our visibility for business conditions in fiscal 2009 is clouded by the increased uncertainty regarding future global economic conditions, tightening in the credit markets and the anticipated reduction in steel prices. Although we expect nonresidential construction, our primary demand driver, to decline from the levels of recent years, the magnitude of the decrease is highly uncertain at this time. We anticipate residential construction will remain weak, which would continue to adversely affect shipments to customers that have greater exposure to the housing sector.

Prices for our primary raw material, hot-rolled steel wire rod, have begun to soften in recent months following the unprecedented escalation that we experienced during fiscal 2008 as scrap costs for steel producers have plummeted and the availability of competitively priced imports has increased. Purchasers at all levels of the supply chain have scaled back their commitments to minimize inventories in response to the heightened level of uncertainty regarding future demand and speculation that prices could fall further. These pricing pressures could be exacerbated in our PC strand business by the increase in irrationally priced imports from China.

In response to these challenges, we will continue to focus on the operational fundamentals of our business: closely managing and controlling our expenses; aligning our production schedules with demand in a proactive manner as there are changes in market conditions to minimize our cash operating costs; and pursuing further improvements in the productivity and effectiveness of all of our manufacturing, selling and administrative activities. We also expect gradually increasing contributions from the substantial investments we have made in our facilities in recent years to expand and reconfigure our Tennessee and Florida PC strand facilities, and add new ESM production lines in our North Carolina and Texas plants and a new standard welded wire reinforcing line at our Delaware facility. As we ramp up production on the new equipment, we anticipate dual benefits in the form of reduced operating costs and additional capacity to support future growth when market conditions improve (see “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors”). In addition to these organic growth and cost reduction initiatives, we are continually evaluating potential acquisitions in our existing businesses that further our penetration in current markets served or expand our geographic reach.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Our cash flows and earnings are subject to fluctuations resulting from changes in commodity prices, interest rates and foreign exchange rates. We manage our exposure to these market risks through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. We do not use financial instruments for trading purposes and we are not a party to any leveraged derivatives. We monitor our underlying market risk exposures on an ongoing basis and believe that we can modify or adapt our hedging strategies as necessary.

Commodity Prices

We are subject to significant fluctuations in the cost and availability of our primary raw material, hot-rolled carbon steel wire rod, which we purchase from both domestic and foreign suppliers. We negotiate quantities and pricing for both domestic and foreign steel wire rod purchases for varying periods (most recently monthly for domestic suppliers), depending upon market conditions, to manage our exposure to price fluctuations and to ensure adequate availability of material consistent with our requirements. We do not use derivative commodity instruments to hedge our exposure to changes in prices as such instruments are not currently available for steel wire rod. Our ability to acquire steel wire rod from foreign sources on favorable terms is impacted by fluctuations in foreign currency exchange rates, foreign taxes, duties, tariffs and other trade actions. Although changes in wire rod costs and our selling prices may be correlated over extended periods of time, depending upon market conditions and competitive dynamics, there may be periods during which we are unable to fully recover increased rod costs through higher selling prices, which would reduce our gross profit and cash flow from operations. Additionally, should wire rod costs decline, our financial results may be negatively impacted if the selling prices for our products decrease to an even greater degree and to the extent that we are consuming higher cost material from inventory. Based on our 2008 shipments and average rod cost reflected in cost of sales, a 10% increase in the price of steel wire rod would have resulted in a $19.7 million decrease in our annual pre-tax earnings (assuming there was not a corresponding change in our selling prices).

Interest Rates

Although we were debt-free as of September 27, 2008, future borrowings under our senior secured credit facility are sensitive to changes in interest rates.

Foreign Exchange Exposure

We have not typically hedged foreign currency exposures related to transactions denominated in currencies other than U.S. dollars and any such transactions have not been material in the past. We will occasionally hedge firm commitments for equipment purchases that are denominated in foreign currencies. The decision to hedge any such transactions is made by us on a case-by-case basis. There were no forward contracts outstanding as of September 27, 2008. During fiscal 2008, a 10% increase or decrease in the value of the U.S. dollar relative to foreign currencies to which we are typically exposed would not have had a material impact on our financial position, results of operations or cash flows.

Item 8. Financial Statements and Supplementary Data.

(a) Financial Statements


Consolidated Balance Sheets as of September 27, 2008 and September 29, 2007			22
Consolidated Statements of Operations for the years ended September 27, 2008, September 29, 2007 and September 30, 2006			23
Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the years ended September 27, 2008, September 29, 2007 and September 30, 2006			24
Consolidated Statements of Cash Flows for the years ended September 27, 2008, September 29, 2007 and September 30, 2006			25
Notes to Consolidated Financial Statements			26
Report of Independent Registered Public Accounting Firm – Consolidated Financial Statements			45
Schedule II – Valuation and Qualifying Accounts for the years ended September 27, 2008, September 29, 2007 and September 30, 2006			46
Report of Independent Registered Public Accounting Firm – Internal Control Over Financial Reporting			48

(b) Supplementary Data

Selected quarterly financial data for 2008 and 2007 is as follows:

Financial Information by Quarter (Unaudited)
(In thousands, except for per share and price data)


	Quarter Ended
	December 29			March 29		June 28			September 27
2008
Operating results:
Net sales	$	65,980		$	77,260	$	104,332		$	106,290
Gross profit		10,620			15,787		30,885			29,463
Earnings from continuing operations		4,231			6,892		16,948			15,646
Earnings (loss) from discontinued operations		(7	)		26		(21	)		37
Net earnings		4,224			6,918		16,927			15,683
Per share data:
Basic:
Earnings from continuing operations		0.23			0.40		0.98			0.90
Earnings (loss) from discontinued operations		—			—		—			—
Net earnings		0.23			0.40		0.98			0.90
Diluted:
Earnings from continuing operations		0.23			0.39		0.97			0.89
Earnings (loss) from discontinued operations		—			—		—			—
Net earnings		0.23			0.39		0.97			0.89


	Quarter Ended
	December 30			March 31			June 30			September 29
2007
Operating results:
Net sales	$	69,716		$	74,766		$	78,966		$	74,358
Gross profit		13,624			12,358			17,352			12,727
Earnings from continuing operations		5,931			4,944			8,344			5,065
Earnings (loss) from discontinued operations		(152	)		(31	)		(37	)		98
Net earnings		5,779			4,913			8,307			5,163
Per share data:
Basic:
Earnings from continuing operations		0.33			0.27			0.46			0.28
Earnings (loss) from discontinued operations		(0.01	)		—			—			—
Net earnings		0.32			0.27			0.46			0.28
Diluted:
Earnings from continuing operations		0.32			0.27			0.46			0.28
Earnings (loss) from discontinued operations		—			—			(0.01	)		—
Net earnings		0.32			0.27			0.45			0.28

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except for per share amounts)


	September 27,			September 29,
	2008			2007
Assets:
Current assets:
Cash and cash equivalents	$	26,493		$	8,703
Accounts receivable, net		49,581			34,518
Inventories		71,220			47,401
Prepaid expenses and other		3,122			4,640

Total current assets		150,416			95,262
Property, plant and equipment, net		69,105			67,147
Other assets		5,064			7,485
Non-current assets of discontinued operations		3,635			3,635

Total assets	$	228,220		$	173,529


Liabilities and shareholders’ equity:
Current liabilities:
Accounts payable	$	23,581		$	16,705
Accrued expenses		29,081			7,613
Current liabilities of discontinued operations		188			247

Total current liabilities		52,850			24,565
Other liabilities		5,306			4,862
Long-term liabilities of discontinued operations		217			252
Commitments and contingencies
Shareholders’ equity:
Preferred stock, no par value
Authorized shares: 1,000
None issued		—			—
Common stock, no par value
Authorized shares: 20,000
Issued and outstanding shares: 2008, 17,507; 2007, 18,303		17,507			18,303
Additional paid-in capital		43,202			48,939
Deferred stock compensation		(1,456	)		(1,132	)
Retained earnings		112,479			79,859
Accumulated other comprehensive loss		(1,885	)		(2,119	)

Total shareholders’ equity		169,847			143,850

Total liabilities and shareholders’ equity	$	228,220		$	173,529

See accompanying notes to consolidated financial statements.

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per share amounts)


	Year Ended
	September 27,			September 29,			September 30,
	2008			2007			2006
Net sales	$	353,862		$	297,806		$	329,507
Cost of sales		267,107			241,745			258,636

Gross profit		86,755			56,061			70,871
Selling, general and administrative expense		18,623			17,583			16,996
Other expense (income), net		85			4			(446	)
Interest expense		594			592			669
Interest income		(721	)		(415	)		(255	)

Earnings from continuing operations before income taxes		68,174			38,297			53,907
Income taxes		24,457			14,013			19,530

Earnings from continuing operations		43,717			24,284			34,377
Earnings (loss) from discontinued operations net of income taxes of $23, ($77) and ($851)		35			(122	)		(1,337	)

Net earnings	$	43,752		$	24,162		$	33,040


Per share amounts:
Basic:
Earnings from continuing operations	$	2.49		$	1.34		$	1.88
Earnings (loss) from discontinued operations		—			(0.01	)		(0.08	)

Net earnings	$	2.49		$	1.33		$	1.80


Diluted:
Earnings from continuing operations	$	2.47		$	1.33		$	1.86
Earnings (loss) from discontinued operations		—			(0.01	)		(0.07	)

Net earnings	$	2.47		$	1.32		$	1.79


Cash dividends declared	$	0.62		$	0.12		$	0.12


Weighted shares outstanding:
Basic		17,547			18,142			18,307

Diluted		17,712			18,314			18,473

See accompanying notes to consolidated financial statements.

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(In thousands)


																Accumulated
							Additional									Other			Total
	Common Stock						Paid-In			Deferred			Retained			Comprehensive			Shareholders’
	Shares			Amount			Capital			Compensation			Earnings			Income (Loss) ⁽¹⁾			Equity
Balance at October 1, 2005		18,860		$	18,861		$	45,003		$	(508	)	$	34,772		$	(1,092	)	$	97,036

Comprehensive income:
Net earnings														33,040						33,040
Reduction in pension plan liability ⁽¹⁾																	1,092			1,092

Comprehensive income ⁽¹⁾																				34,132
Stock options exercised		101			101			259												360
Restricted stock granted		51			50			742			(792	)								—
Restricted stock shares from dividend		1			1			7												8
Compensation expense associated with stock-based plans								535			638									1,173
Excess tax benefits from stock-based compensation								459												459
Repurchases of common stock		(800	)		(800	)								(7,729	)					(8,529	)
Cash dividends declared														(2,201	)					(2,201	)

Balance at September 30, 2006		18,213		$	18,213		$	47,005		$	(662	)	$	57,882		$	—		$	122,438

Comprehensive income:
Net earnings														24,162						24,162
Recognition of additional pension plan liability ⁽¹⁾																	(9	)		(9	)
Adjustment to adopt SFAS No. 158																	(2,110	)		(2,110	)

Comprehensive income ⁽¹⁾																				22,043
Stock options exercised		23			23			139												162
Restricted stock granted		67			67			1,148			(1,215	)								—
Restricted stock shares from dividend								12												12
Compensation expense associated with stock-based plans								513			745									1,258
Excess tax benefits from stock-based compensation								122												122
Cash dividends declared														(2,185	)					(2,185	)

Balance at September 29, 2007		18,303		$	18,303		$	48,939		$	(1,132	)	$	79,859		$	(2,119	)	$	143,850

Comprehensive income:
Net earnings														43,752						43,752
Adjustment to defined benefit plan liability ⁽¹⁾																	234			234

Comprehensive income ⁽¹⁾																				43,986
Stock options exercised		24			24			96												120
Restricted stock granted		93			93			1,092			(1,185	)								—
Compensation expense associated with stock-based plans								898			861									1,759
Adjustment to adopt FIN No. 48														(256	)					(256	)
Excess tax benefits from stock-based compensation								31												31
Repurchases of common stock		(906	)		(906	)		(7,785	)											(8,691	)
Restricted stock surrendered for withholding taxes payable		(7	)		(7	)		(69	)											(76	)
Cash dividends declared														(10,876	)					(10,876	)

Balance at September 27, 2008		17,507		$	17,507		$	43,202		$	(1,456	)	$	112,479		$	(1,885	)	$	169,847


⁽¹⁾		Activity within accumulated other comprehensive income (loss) is reported net of related income taxes: 2006 — ($702), 2007 — $1,299, 2008 — ($143)

See accompanying notes to consolidated financial statements.

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)


	Year Ended
	September 27,			September 29,			September 30,
	2008			2007			2006
Cash Flows From Operating Activities:
Net earnings	$	43,752		$	24,162		$	33,040
Loss (earnings) from discontinued operations		(35	)		122			1,337

Earnings from continuing operations		43,717			24,284			34,377
Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities of continuing operations:
Depreciation and amortization		7,271			5,711			4,578
Amortization of capitalized financing costs		498			498			529
Stock-based compensation expense		1,759			1,258			1,173
Excess tax benefits from stock-based compensation		(31	)		(122	)		(459	)
Loss on sale of property, plant and equipment		289			301			82
Deferred income taxes		484			2,003			(1,627	)
Gain from life insurance proceeds		(661	)		—			—
Increase in cash surrender value of life insurance over premiums paid		—			(277	)		(193	)
Net changes in assets and liabilities:
Accounts receivable, net		(15,063	)		3,001			1,082
Inventories		(23,819	)		(604	)		(15,228	)
Accounts payable and accrued expenses		18,699			(17,019	)		18,456
Other changes		3,665			(1,969	)		(120	)

Total adjustments		(6,909	)		(7,219	)		8,273

Net cash provided by operating activities — continuing operations		36,808			17,065			42,650
Net cash provided by (used for) operating activities — discontinued operations		(59	)		(147	)		2,185

Net cash provided by operating activities		36,749			16,918			44,835


Cash Flows From Investing Activities:
Capital expenditures		(9,456	)		(17,013	)		(18,959	)
Proceeds from sale of assets held for sale		—			590			—
Proceeds from sale of property, plant and equipment		116			—			52
Proceeds from surrender of life insurance policies		170			—			—
Increase in cash surrender value of life insurance policies		(190	)		(639	)		(565	)
Proceeds from life insurance claims		1,111			—			—

Net cash used for investing activities — continuing operations		(8,249	)		(17,062	)		(19,472	)
Net cash provided by investing activities — discontinued operations		—			—			5,963

Net cash used for investing activities		(8,249	)		(17,062	)		(13,509	)


Cash Flows From Financing Activities:
Proceeds from long-term debt		951			16,999			135,219
Principal payments on long-term debt		(951	)		(16,999	)		(147,079	)
Financing costs		—			—			(307	)
Cash received from exercise of stock options		120			162			360
Excess tax benefits from stock-based compensation		31			122			459
Repurchases of common stock		(8,691	)		—			(8,529	)
Cash dividends paid		(2,141	)		(2,176	)		(2,222	)
Other		(29	)		50			91

Net cash used for financing activities — continuing operations		(10,710	)		(1,842	)		(22,008	)

Net cash used for financing activities		(10,710	)		(1,842	)		(22,008	)


Net increase (decrease) in cash and cash equivalents		17,790			(1,986	)		9,318
Cash and cash equivalents at beginning of period		8,703			10,689			1,371

Cash and cash equivalents at end of period	$	26,493		$	8,703		$	10,689


Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	95		$	93		$	202
Income taxes		11,563			16,785			17,489
Non-cash financing activity:
Purchases of property, plant and equipment in accounts payable		178			937			—
Issuance of restricted stock		1,185			1,215			792
Declaration of cash dividends to be paid		9,279			544			543
Restricted stock surrendered for withholding taxes payable		76			—			—

See accompanying notes to consolidated financial statements.

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 27, 2008, SEPTEMBER 29, 2007 AND SEPTEMBER 30, 2006

(1) Description of Business

Insteel Industries, Inc. (“Insteel” or “the Company”) is one of the nation’s largest manufacturers of steel wire reinforcing products for concrete construction applications. Insteel is the parent holding company for two wholly-owned subsidiaries,, Insteel Wire Products Company (“IWP”) and Intercontinental Metals Corporation. The Company manufactures and markets PC strand and welded wire reinforcement products, including concrete pipe reinforcement, engineered structural mesh and standard welded wire reinforcement. The Company’s products are primarily sold to manufacturers of concrete products and to a lesser extent to distributors and rebar fabricators that are located nationwide as well as in Canada, Mexico, and Central and South America.

In 2006, the Company exited the industrial wire business in order to narrow its strategic and operational focus to concrete reinforcing products (see Note 7 to the consolidated financial statements). The results of operations for the industrial wire business have been reported as discontinued operations for all periods presented.

(2) Summary of Significant Accounting Policies

Fiscal year. The Company’s fiscal year is the 52 or 53 weeks ending on the Saturday closest to September 30. Fiscal years 2008, 2007 and 2006 were 52-week fiscal years. All references to years relate to fiscal years rather than calendar years.

Principles of consolidation . The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.

Use of estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. There is no assurance that actual results will not differ from these estimates.

Cash equivalents . The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

Concentration of credit risk. Financial instruments that subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. The Company is exposed to credit risk in the event of default by these institutions and customers to the extent of the amount recorded on the balance sheet. The Company invests excess cash primarily in money market funds, which are highly liquid securities.

The majority of the Company’s accounts receivable are due from customers that are located in the United States and the Company generally requires no collateral depending upon the creditworthiness of the account. The Company utilizes credit insurance on certain accounts receivable due from customers located outside of the United States. The Company provides an allowance for doubtful accounts based upon its assessment of the credit risk of specific customers, historical trends and other information. The Company writes off accounts receivable when they become uncollectible and payments subsequently received are credited to the allowance for doubtful accounts. There is no disproportionate concentration of credit risk.

Stock-based compensation . The Company accounts for stock-based compensation in accordance with the fair value recognition provisions of Statement of Financial Accounting Standard (“SFAS”) No. 123R, “Share-Based Payment”, which requires stock-based compensation expense to be recognized in net earnings based on the fair value of the award on the date of the grant. The Company determines the fair value of stock options issued by using a Monte Carlo valuation model at the grant date. The Monte Carlo valuation model considers a range of assumptions including the expected term, volatility, dividend yield and risk-free interest rate. Excess tax benefits generated from option exercises during 2008, 2007 and 2006 were $31,000, $122,000 and $459,000, respectively.

Revenue recognition . The Company recognizes revenue from product sales in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition” when the products are shipped and risk of loss and title has passed to the customer. Sales taxes collected from customers are recorded on a net basis and as such, are excluded from revenue.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Shipping and handling costs . The Company includes all of the outbound freight, shipping and handling costs associated with the shipment of products to customers in cost of sales. Any amounts paid by customers to the Company for shipping and handling are recorded in net sales on the consolidated statement of operations.

Inventories . Inventories are valued at the lower of weighted average cost (which approximates computation on a first-in, first-out basis) or market (net realizable value or replacement cost).

Property, plant and equipment. Property, plant and equipment are recorded at cost or otherwise at reduced values to the extent there have been asset impairment write-downs. Expenditures for maintenance and repairs are charged directly to expense when incurred, while major improvements are capitalized. Depreciation is computed for financial reporting purposes principally by use of the straight-line method over the following estimated useful lives: machinery and equipment, 3 — 15 years; buildings, 10 — 30 years; land improvements, 5 — 15 years. Depreciation expense was approximately $7.3 million in 2008, $5.7 million in 2007, and $4.6 million in 2006. Capitalized software is amortized over the shorter of the estimated useful life or 5 years. No interest costs were capitalized in 2008, 2007 or 2006.

Other assets. Other assets consist principally of non-current deferred tax assets, capitalized financing costs, the cash surrender value of life insurance policies and assets held for sale. Capitalized financing costs are amortized using the straight-line method, which approximates the effective interest method over the life of the related credit agreement.

Long-lived assets . Long-lived assets include property, plant and equipment and identifiable intangible assets with definite useful lives. The Company assesses the impairment of long-lived assets whenever events or changes in circumstance indicate that the carrying value may not be fully recoverable. When the Company determines that the carrying value of such assets may not be recoverable, it measures recoverability based on the undiscounted cash flows expected to be generated by the related asset or asset group. If it is determined that an impairment loss has occurred, the loss is recognized during the period incurred and is calculated as the difference between the carrying value and the present value of estimated future net cash flows or comparable market values. There were no impairment losses in 2008, 2007, or 2006.

Fair value of financial instruments. The carrying amounts for cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses approximate fair value because of their short maturities.

Income taxes. Income taxes are based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. The Company assesses the need to establish a valuation allowance against its deferred tax assets to the extent the Company no longer believes it is more likely than not that the tax assets will be fully utilized. The Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN No. 48”) effective September 30, 2007, the beginning of fiscal year 2008. The cumulative effect of adopting FIN No. 48 resulted in a $256,000 increase in tax reserves and a corresponding decrease in the Company’s retained earnings balance as of September 30, 2007.

Earnings per share. Basic earnings per share (“EPS”) are computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted EPS are computed by dividing net earnings by the weighted average number of common shares and other dilutive equity securities outstanding during the period. Securities that have the effect of increasing EPS are considered to be antidilutive and are not included in the computation of diluted EPS.

Recent accounting pronouncements . In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for the Company beginning in fiscal 2009. The Company does not expect the adoption of SFAS No. 157 to have a material effect on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”). SFAS No. 141R requires the acquiring entity in a business combination to recognize all the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose all of the information required to evaluate and understand the nature and financial effect of the business combination. This statement is effective for acquisition dates on or after the beginning of the first annual reporting period beginning after December 15, 2008 and is not expected to have a material effect on the Company’s consolidated financial statements to the extent that it does not enter into business combinations subsequent to adoption.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” SFAS No. 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to establish accounting and reporting standards for non-controlling interests in subsidiaries and for the deconsolidation of subsidiaries. This statement clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008 and is not expected to have a material effect on the Company’s consolidated financial statements to the extent that it does not obtain any minority interests in subsidiaries subsequent to adoption.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” SFAS No. 161 requires enhanced disclosures on an entity’s derivative and hedging activities. SFAS No. 161 will become effective for the Company beginning in fiscal 2009 and is not expected to have any impact on its disclosures to the extent that it does not initiate any such activities subsequent to adoption.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company does not expect the adoption of SFAS No. 162 to have a material effect on its consolidated financial statements.

In June 2008, the FASB issued FASB Staff Position (“FSP”) No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transaction Are Participating Securities.” FSP No. EITF 03-6-1 requires that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years, and requires that all prior period earnings per share data presented (including interim financial statements, summaries of earnings and selected financial data) be adjusted retrospectively to conform with its provisions. The Company is currently evaluating the impact, if any, that the adoption of FSP EITF 03-6-1 will have on its consolidated financial statements.

(3) Stock Split

On May 16, 2006, the Board of Directors approved a two-for-one split of the Company’s common stock payable in the form of a stock dividend. The stock split entitled each shareholder of record on June 2, 2006 to receive one share of common stock for each outstanding share of common stock held on that date and was distributed on June 16, 2006. Unless otherwise indicated, the capital stock accounts and all share and earnings per share amounts in this report give effect to the stock split, applied retroactively, to all periods presented.

(4) Credit Facilities

As of September 27, 2008, the Company had a $100.0 million revolving credit facility in place to supplement its operating cash flow in funding its working capital, capital expenditures and general corporate requirements. No borrowings were outstanding on the credit facility as of September 27, 2008 and September 29, 2007 and outstanding letters of credit totaled $1.2 million and $1.9 million, respectively. As of September 27, 2008, $80.0 million of borrowing capacity was available on the credit facility.

Advances under the credit facility are limited to the lesser of the revolving credit commitment or a borrowing base amount that is calculated based upon a percentage of eligible receivables and inventories plus, upon the Company’s request and subject to certain conditions, a percentage of eligible equipment and real estate. Interest rates on the revolver are based upon (1) a base rate that is established at the higher of the prime rate or 0.50% plus the federal funds rate, or (2) at the election of the Company, a LIBOR rate, plus in either case, an applicable interest rate margin. The applicable interest rate margins are adjusted on a quarterly basis based upon the amount of excess availability on the revolver within the range of 0.00% — 0.50% for the base rate and 1.25% — 2.00% for the LIBOR rate. In addition, the applicable interest rate margins would be adjusted to the highest percentage indicated for each range upon the occurrence of certain events of default provided for under the credit facility. Based on the Company’s excess availability as of September 27, 2008, the applicable interest rate margins were 0.00% for the base rate and 1.25% for the LIBOR rate on the revolver.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company’s ability to borrow available amounts under the revolving credit facility will be restricted or eliminated in the event of certain covenant breaches, events of default or if the Company is unable to make certain representations and warranties.

Financial Covenants

The terms of the credit facility require the Company to maintain a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of not less than: (1) 1.10 at the end of each fiscal quarter for the twelve-month period then ended when the amount of excess availability on the revolving credit facility is less than $10.0 million and the applicable borrowing base only includes eligible receivables and inventories; or (2) 1.15 at the end of each fiscal quarter for the twelve-month period then ended when the amount of excess availability on the revolving credit facility is less than $10.0 million and the applicable borrowing base includes eligible receivables, inventories, equipment and real estate. As of September 27, 2008, the Company was in compliance with all of the financial covenants under the credit facility.

Negative Covenants

In addition, the terms of the credit facility restrict the Company’s ability to, among other things: engage in certain business combinations or divestitures; make investments in or loans to third parties, unless certain conditions are met with respect to such investments or loans; pay cash dividends or repurchase shares of the Company’s stock subject to certain minimum borrowing availability requirements; incur or assume indebtedness; issue securities; enter into certain transactions with affiliates of the Company; or permit liens to encumber the Company’s property and assets. As of September 27, 2008, the Company was in compliance with all of the negative covenants under the credit facility.

Events of Default

Under the terms of the credit facility, an event of default will occur with respect to the Company upon the occurrence of, among other things: a default or breach by the Company or any of its subsidiaries under any agreement resulting in the acceleration of amounts due in excess of $500,000 under such agreement; certain payment defaults by the Company or any of its subsidiaries in excess of $500,000; certain events of bankruptcy or insolvency with respect to the Company; an entry of judgment against the Company or any of its subsidiaries for greater than $500,000, which amount is not covered by insurance; or a change of control of the Company.

Amortization of capitalized financing costs associated with the senior secured facility was $498,000 in 2008 and 2007, respectively, and $529,000 in 2006. Accumulated amortization of capitalized financing costs was $3.1 million and $2.6 million as of September 27, 2008 and September 29, 2007, respectively. The Company expects the amortization of capitalized financing costs to approximate the following amounts for the next five fiscal years:


Fiscal year	In thousands
2009	$	508
2010		336
2011		—
2012		—
2013		—

(5) Stock-Based Compensation

Under the Company’s equity incentive plans, employees and directors may be granted stock options, restricted stock, restricted stock units and performance awards. As of September 27, 2008 there were 1,035,000 shares available for future grants under the plans.

Stock option awards . Under the Company’s equity incentive plans, employees and directors may be granted options to purchase shares of common stock at the fair market value on the date of the grant. Options granted under these plans generally vest over three years and expire ten years from the date of the grant. Compensation expense associated with stock options during 2008, 2007 and 2006, respectively, was as follows:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Year Ended

September 27,

September 29,

September 30,

(In thousands)

2008

2007

2006

Stock options:

Compensation expense

898

513

535

The remaining unrecognized compensation cost related to unvested options at September 27, 2008 was $974,000 which is expected to be recognized over a weighted average period of 1.35 years.

The fair value of each option award granted is estimated on the date of grant using a Monte Carlo valuation model. The weighted-average estimated fair values of stock options granted during 2008, 2007, and 2006 were $6.00, $8.69 and $8.82 per share, respectively, based on the following weighted-average assumptions:


	Year Ended
	September 27,			September 29,			September 30,
	2008			2007			2006
Expected term (in years)		4.03			3.16			3.20
Risk-free interest rate		2.65	%		4.70	%		4.82	%
Expected volatility		66.62	%		65.84	%		74.72	%
Expected dividend yield		1.01	%		0.65	%		0.70	%

The assumptions utilized in the Monte Carlo valuation model are evaluated and revised, as necessary, to reflect market conditions and actual historical experience. The risk-free interest rate for periods within the contractual life of the option was based on the U.S. Treasury yield curve in effect at the time of the grant. The dividend yield was calculated based on the Company’s annual dividend as of the option grant date. The expected volatility was derived using a term structure based on historical volatility and the volatility implied by exchange-traded options on the Company’s stock. The expected term for options was based on the results of a Monte Carlo simulation model, using the model’s estimated fair value as an input to the Black-Scholes-Merton model, and then solving for the expected term.

The following table summarizes stock option activity during 2006, 2007 and 2008:


				Exercise Price				Contractual	Aggregate
				Per Share				Term -	Intrinsic
	Options					Weighted		Weighted	Value
(Share amounts in thousands)	Outstanding			Range		Average		Average	(in thousands)
Outstanding at October 1, 2005		328		$	0.18 - $9.12	$	4.48
Granted		55			15.64 - 20.26		17.54
Exercised		(101	)		0.18 - 9.12		3.56		$	1,396

Outstanding at September 30, 2006		282			0.18 - 20.26		7.37

Granted		79			17.11 - 20.27		18.54
Exercised		(23	)		4.56 - 15.64		7.12			228
Forfeited		(2	)		20.26 - 20.26		20.26

Outstanding at September 29, 2007		336			0.18 - 20.27		9.95

Granted		219			11.15 - 16.69		12.37
Exercised		(24	)		3.19 - 9.12		4.96			148

Outstanding at September 27, 2008		531			0.18 - 20.27		11.17	7.31 years		2,174

Vested and anticipated to vest in future at September 27, 2008		522					11.13	7.28 years		2,160

Exercisable at September 27, 2008		247					8.24	5.09 years		1,684

Restricted Stock Awards. Under the Company’s equity incentive plans, employees and directors may be granted restricted stock awards which are valued based upon the fair market value on the date of the grant. Restricted stock granted under these plans generally vests one to three years from the date of the grant. Restricted stock grants and amortization expense for restricted stock during 2008, 2007 and 2006, respectively, are as follows:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	Years Ended
	September 27,		September 29,		September 30,
(In thousands except share amounts)	2008		2007		2006
Restricted stock grants:
Shares		93		67		51
Market value	$	1,185	$	1,215	$	792
Amortization expense		861		745		638

The remaining unrecognized compensation cost related to unvested awards at September 27, 2008 was $1.5 million which is expected to be recognized over a weighted average period of 1.67 years.

For the year ended September 27, 2008, 44,533 shares of employee restricted stock awards vested with a fair value of $489,000. Upon vesting, employees have the option of remitting payment for the minimum tax obligation to the Company or net-share settling such that the Company will withhold shares with a value equivalent to the employees’ minimum tax obligation. A total of 6,870 shares were withheld during 2008 to satisfy employees’ minimum tax obligations. No shares vested during 2007 and 2006.

The following table summarizes restricted stock activity during 2006, 2007 and 2008:


	Restricted			Weighted Average
	Stock Awards			Grant Date
(Share amounts in thousands)	Outstanding			Fair Value
Balance, October 1, 2005		82		$	8.98
Granted		51			15.64
Released		(30	)		8.72

Balance, September 30, 2006		103			12.27

Granted		67			18.18
Released		(28	)		12.51

Balance, September 29, 2007		142			15.00

Granted		93			12.77
Released		(70	)		11.68

Balance, September 27, 2008		165			15.16

(6) Income Taxes

The components of the provision for income taxes on continuing operations are as follows:


	Year Ended
	September 27,			September 29,			September 30,
(Dollars in thousands)	2008			2007			2006
Provision for income taxes:
Current:
Federal	$	21,720		$	10,801		$	18,603
State		2,253			1,209			2,554

		23,973			12,010			21,157

Deferred:
Federal		440			1,821			(1,437	)
State		44			182			(190	)

		484			2,003			(1,627	)


Income taxes	$	24,457		$	14,013		$	19,530


Effective income tax rate		35.9	%		36.6	%		36.2	%

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The reconciliation between income taxes computed at the federal statutory rate and the provision for income taxes on continuing operations is as follows:


	Year Ended
(Dollars in thousands)	September 27, 2008					September 29, 2007					September 30, 2006
Provision for income taxes at federal statutory rate	$	23,861		35.0	%	$	13,403		35.0	%	$	18,867		35.0	%
State income taxes, net of federal tax benefit		1,886		2.8			904		2.4			1,381		2.6
Qualified production activities deduction		(1,322	)	(1.9	)		(374	)	(1.0	)		(490	)	(0.9	)
Stock option expense benefit		240		0.3			126		0.3			151		0.3
Valuation allowance		—		—			—		—			(37	)	(0.1	)
Revisions to estimates based on filing of final tax return		293		0.4			(32	)	(0.1	)		(21	)	(0.1	)
Other, net		(501	)	(0.7	)		(14	)	(0.0	)		(321	)	(0.6	)

Provision for income taxes	$	24,457		35.9	%	$	14,013		36.6	%	$	19,530		36.2	%

The components of deferred tax assets and liabilities are as follows:


	September 27,			September 29,
(In thousands)	2008			2007
Deferred tax assets:
Accrued expenses or asset reserves for financial statements, not yet deductible for tax purposes	$	3,524		$	2,492
State net operating loss carryforwards		602			601
Goodwill, amortizable for tax purposes		2,004			2,346
Defined benefit plans		1,156			1,299
Nonqualified stock options not deductible in current year		328			239
Valuation allowance		(602	)		(601	)

Gross deferred tax assets		7,012			6,376

Deferred tax liabilities:
Plant and equipment principally due to differences in depreciation and impairment charges		(4,489	)		(3,001	)
Other reserves		(445	)		(671	)

Gross deferred tax liabilities		(4,934	)		(3,672	)

Net deferred tax asset	$	2,078		$	2,704

The Company has recorded the following amounts for deferred taxes on its consolidated balance sheet as of September 27, 2008: a current deferred tax asset (net of valuation allowance) of $2.5 million in prepaid expenses and other, and a non-current deferred tax liability (net of valuation allowance) of $435,000 in other liabilities. As of September 29, 2007, the Company recorded a current deferred tax asset of $1.2 million in prepaid expenses and other and a $1.5 million non-current deferred tax asset in other assets. The Company has $9.7 million of gross state operating loss carryforwards that begin to expire in 2013, but principally expire in 2018 — 2024.

The realization of the Company’s deferred tax assets is entirely dependent upon the Company’s ability to generate future taxable income in applicable jurisdictions. GAAP requires that the Company periodically assess the need to establish a valuation allowance against its deferred tax assets to the extent the Company no longer believes it is more likely than not that they will be fully utilized. As of September 27, 2008, the Company had recorded a valuation allowance of $602,000 pertaining to various state NOLs that were not anticipated to be utilized. The valuation allowance established by the Company is subject to periodic review and adjustment based on changes in facts and circumstances and would be reduced should the Company utilize the state net operating loss carryforwards against which an allowance had been provided or determine that such utilization is more likely than not.

The Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN No. 48”) effective September 30, 2007, the beginning of its fiscal year. The cumulative effect of adopting FIN No. 48 resulted in a $256,000 increase in tax reserves and a corresponding decrease in the Company’s retained earnings balance as of September 30, 2007.

Upon adoption of FIN No. 48, the Company had $561,000 of gross unrecognized tax benefits, of which $394,000 would, if recognized, reduce its income tax rate in future periods. As of September 27, 2008, the Company had approximately $48,000 of gross unrecognized tax benefits classified as other liabilities on its consolidated balance sheet, of which $46,000,

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

if recognized, would reduce its income tax rate in future periods. The reduction in gross unrecognized tax benefits is due to the resolution of outstanding state tax issues and the Company anticipates the remaining unrecognized tax benefit will be resolved in fiscal 2009.

A reconciliation of the beginning and ending balance of total unrecognized tax benefits for 2008 is as follows:


(Dollars in thousands)
Balance at September 30, 2007	$	561
Increase in tax positions of prior years		48
Reductions for tax positions of prior years		(426	)
Settlements		(135	)

Balance at September 27, 2008	$	48

The Company has elected to classify interest and penalties, which are required to be accrued under FIN No. 48, as part of income tax expense. Upon the adoption of FIN No. 48, the Company recorded accrued interest and penalties of $168,000 related to unrecognized tax benefits. As of September 27, 2008, the Company has accrued interest and penalties related to unrecognized tax benefits of $15,000. For the year ended September 27, 2008 the Company recorded $17,000 of expense related to interest and penalties.

The Company files U.S. federal income tax returns as well as state and local income tax returns in various jurisdictions. Federal and various state tax returns filed by the Company subsequent to tax year 2003 remain subject to examination together with certain state tax returns filed by the Company subsequent to tax year 2002.

(7) Discontinued Operations

In April 2006, the Company decided to exit the industrial wire business with the closure of its Fredericksburg, Virginia facility which manufactured tire bead wire and other industrial wire for commercial and industrial applications. The Company’s decision was based on the weakening in the business outlook for the facility and the expected continuation of difficult market conditions and reduced operating levels. Manufacturing activities at the Virginia facility ceased in June 2006 and the Company is currently in the process of liquidating the remaining assets of the business.

The Company has determined that the exit from the industrial wire business meets the criteria of a discontinued operation in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Accordingly, the results of operations and related non-recurring closure costs associated with the industrial wire business have been reported as discontinued operations for all periods presented. Additionally, the assets and liabilities of the discontinued operations have been segregated in the accompanying consolidated balance sheets.

The following table summarizes the results of discontinued operations for 2006, 2007 and 2008:


	Year Ended
	September 27,			September 29,			September 30,
(In thousands)	2008			2007			2006
Net sales	$	—		$	—		$	22,544
Earnings (loss) before income taxes		58			(199	)		(2,188	)
Income taxes		(23	)		77			851
Net earnings (loss)		35			(122	)		(1,337	)

Included within results from discontinued operations is an allocation of interest expense which was calculated based on the net assets of the industrial wire business relative to the consolidated net assets of the Company. Interest expense allocated to discontinued operations was $64,000 for the year ended September 30, 2006.

The net loss from discontinued operations for the year ended September 30, 2006 includes a pre-tax gain of $1.3 million on the sale of certain machinery and equipment associated with the industrial wire business.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Assets and liabilities of discontinued operations as of September 27, 2008 and September 29, 2007 are as follows:


(In thousands)	September 27,		September 29,
	2008		2007
Assets:
Other assets	$	3,635	$	3,635

Total assets	$	3,635	$	3,635


Liabilities:
Current liabilities:
Accounts payable	$	1	$	4
Accrued expenses		187		243

Total current liabilities		188		247
Other liabilities		217		252

Total liabilities	$	405	$	499

As of September 27, 2008 there was approximately $251,000 of accrued expenses and other liabilities related to ongoing lease obligations and closure-related liabilities incurred as a result of the Company’s exit from the industrial wire business.

(8) Employee Benefit Plans

On September 29, 2007, the Company adopted the recognition and disclosure provisions of SFAS No. 158, “Employers Accounting for Defined Benefit Pension and Other Postretirement Plans.” SFAS No. 158 requires that an employer recognize the overfunded or underfunded status of a defined benefit postretirement plan on its balance sheet and changes in the funded status through other comprehensive income in the year in which the changes occur. SFAS No. 158 also requires the measurement of defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end balance sheet, which is effective for the Company beginning in fiscal 2009. As a result of adopting SFAS No. 158, the Company recorded a $2.1 million reduction in shareholders’ equity, net of tax, as of September 29, 2007.

Retirement plans . The Company has one defined benefit pension plan, the Insteel Wire Products Company Retirement Income Plan for Hourly Employees, Wilmington, Delaware (“the Delaware Plan”). The Delaware Plan provides benefits for eligible employees based primarily upon years of service and compensation levels. The Company’s funding policy is to contribute amounts at least equal to those required by law . The Company did not make any contributions to the Delaware Plan in 2008 and it does not expect to make any contributions in 2009. In connection with the collective bargaining agreement that was reached between the Company and the labor union at the Delaware facility in 2008, the Delaware Plan will be frozen effective September 30, 2008 whereby participants will no longer earn additional benefits.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The reconciliation of the projected benefit obligation, plan assets, funded status of the plan and amounts recognized in the Company’s consolidated balance sheets at September 27, 2008, September 29, 2007 and September 30, 2006 is as follows:


	Year Ended
	September 27,			September 29,			September 30,
(In thousands)	2008			2007			2006
Change in benefit obligation:
Benefit obligation at beginning of year	$	4,435		$	4,527		$	4,702
Service cost		65			78			82
Interest cost		257			269			253
Actuarial loss (gain)		(171	)		203			(306	)
Distributions		(209	)		(642	)		(204	)

Benefit obligation at end of year	$	4,377		$	4,435		$	4,527


Change in plan assets:
Fair value of plan assets at beginning of year	$	4,421		$	4,527		$	3,334
Actual return on plan assets		(448	)		536			79
Employer contributions		—			—			1,318
Distributions		(209	)		(642	)		(204	)

Fair value of plan assets at end of year	$	3,764		$	4,421		$	4,527


Reconciliation of funded status to net amount recognized:
Funded status	$	(613	)	$	(14	)	$	—
Unrecognized net loss		—			—			1,476
Unrecognized prior service cost		—			—			2

Net amount recognized	$	(613	)	$	(14	)	$	1,478


Amounts recognized in the consolidated balance sheet:
Current prepaid pension asset	$	—		$	—		$	236
Non-current prepaid pension asset		—			—			1,242
Accrued benefit liability		(613	)		(14	)		—
Accumulated other comprehensive loss (net of tax)		1,091			827			—

Net amount recognized	$	478		$	813		$	1,478


Amounts recognized in accumulated other comprehensive income:
Unrecognized net loss	$	1,759		$	1,333
Unrecognized prior service cost		—			1

Net amount recognized	$	1,759		$	1,334


Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Net loss (gain)	$	426		$	(143	)
Amortization of prior service cost		(1	)		(1	)

Total recognized in other comprehensive income	$	425		$	(144	)

Net periodic pension cost includes the following components:


	Year Ended
	September 27,			September 29,			September 30,
(In thousands)	2008			2007			2006
Service cost	$	65		$	78		$	82
Interest cost		257			269			253
Expected return on plan assets		(325	)		(324	)		(243	)
Amortization of prior service cost		1			1			1
Recognized net actuarial loss		67			134			143

Net periodic pension cost	$	65		$	158		$	236

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company incurred a settlement loss of $109,000 during the year ended September 27, 2008 for lump-sum distributions to plan participants.

The estimated net loss that will be amortized from accumulated other comprehensive income into net periodic pension cost over the next fiscal year is $140,000.

The assumptions used in the valuation of the plan are as follows:


	September 27,			September 29,			September 30,
	2008			2007			2006
Assumptions at year-end:
Discount rate		7.00	%		6.50	%		6.25	%
Rate of increase in compensation levels		N/A			N/A			N/A
Expected long-term rate of return on assets		8.00	%		8.00	%		8.00	%

The projected benefit payments under the plan are as follows:


Fiscal year(s)	In thousands
2009	$	607
2010		605
2011		494
2012		383
2013		282
2014 - 2018		1,472

The Delaware Plan has a long-term target asset mix of 65% equities and 35% fixed income. The ranges for the long term allocation are: equities 60% to 80%, fixed income 20% to 40% and cash reserves 0 to 10%. The investment strategy for equities emphasizes U.S. large cap equities with the portfolio’s performance measured against the S&P 500 index or other applicable indices. The investment strategy for fixed income investments is focused on maintaining an overall portfolio with a minimum credit rating of A-1 as well as a minimum rating of any security at the time of purchase of Baa/BBB by Moody’s or Standard & Poor’s, if rated. The total fund has an expected return of 8.0% based on the overall policy allocation and historical market returns, compared to the expected long term rate of return of 8.0% used to develop the plan’s net periodic pension cost.

Supplemental employee retirement plan. The Company has Retirement Security Agreements (each, a “SERP”) with certain of its employees (each, a “Participant”). Under the SERP, if the Participant remains in continuous service with the Company for a period of at least 30 years, the Company will pay to the Participant a supplemental retirement benefit for the 15-year period following the Participant’s retirement equal to 50% of the Participant’s highest average annual base salary for five consecutive years in the 10-year period preceding the Participant’s retirement. If the Participant retires prior to the later of age 65 or the completion of 30 years of continuous service with the Company, but has completed at least 10 years of continuous service with the Company, the amount of the supplemental retirement benefit will be reduced by 1/360th for each month short of 30 years that the Participant was employed by the Company. In 2005, the Company amended the SERP to add Participants and increase benefits to certain Participants already included in the plan.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The reconciliation of the projected benefit obligation, plan assets, funded status of the plan and amounts recognized in the Company’s consolidated balance sheets for the SERP at September 27, 2008, September 29, 2007 and September 30, 2006 is as follows:


	Year Ended
							(Revised)
	September 27,			September 29,			September 30,
(In thousands)	2008			2007			2006
Change in benefit obligation:
Benefit obligation at beginning of year	$	4,192		$	3,868		$	3,574
Service cost		155			163			106
Interest cost		266			230			207
Actuarial loss (gain)		(352	)		11			61
Distributions		(140	)		(80	)		(80	)

Benefit obligation at end of year	$	4,121		$	4,192		$	3,868


Change in plan assets:
Actual employer contributions	$	140		$	80		$	80
Actual distributions		(140	)		(80	)		(80	)

Plan assets at fair value at end of year	$	—		$	—		$	—


Reconciliation of funded status to net amount recognized:
Funded status	$	(4,121	)	$	(4,192	)	$	(3,868	)
Unrecognized net loss		—			—			510
Unrecognized prior service cost		—			—			1,588

Net amount recognized	$	(4,121	)	$	(4,192	)	$	(1,770	)


Amounts recognized in accumulated other comprehensive loss:
Unrecognized net loss	$	147		$	—
Unrecognized prior service cost		1,135			2,083

Net amount recognized	$	1,282		$	2,083


Other changes in plan assets and benefit obligations recognized in other comprehensive loss:
Net loss (gain)	$	(363	)	$	1
Prior service costs		(438	)		(227	)

Total recognized on other comprehensive loss	$	(801	)	$	(226	)

Net periodic pension cost includes the following components:


	Year Ended
	September 27,		September 29,		September 30,
(In thousands)	2008		2007		2006
Service cost	$	154	$	163	$	106
Interest cost		266		230		207
Prior service cost		227		227		227
Recognized net actuarial loss		12		10		2

Net periodic pension cost	$	659	$	630	$	542

The estimated prior service costs that will be amortized from accumulated other comprehensive income into net periodic pension cost over the next fiscal year is $227,000.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The assumptions used in the valuation of the SERP are as follows:


	Measurement Date
	September 27,			September 29,			December 1,
	2008			2007			2005
Assumptions at year-end:
Discount rate		7.00	%		6.25	%		5.60	%
Rate of increase in compensation levels		3.00	%		3.00	%		3.00	%

The projected benefit payments under the SERP are as follows:


Fiscal year(s)	(In thousands)
2009	$	155
2010		155
2011		244
2012		244
2013		244
2014 - 2018		1,300

As noted above, the SERP was amended in 2005 to add Participants and increase benefits to certain Participants already covered under the plan. However, for certain Participants the Company still maintains the benefits of the SERP that were in effect prior to the 2005 amendment, which entitles them to fixed cash benefits upon retirement at age 65, payable annually for 15 years. This plan is supported by life insurance polices on the Participants purchased and owned by the Company. The cash benefits paid under this plan were $74,000 in 2008, 2007 and 2006, respectively. The plan expense was $12,000 in 2008, $11,000 in 2007 and $10,000 in 2006.

Retirement savings plan. In 1996, the Company adopted the Retirement Savings Plan of Insteel Industries, Inc. (“the Plan”) to provide retirement benefits and stock ownership for its employees. The Plan is an amendment and restatement of the Company’s Employee Stock Ownership Plan (“ESOP”). As allowed under Sections 401(a) and 401(k) of the Internal Revenue Code, the Plan provides for tax-deferred salary deductions for eligible employees.

Employees may contribute up to 15% of their annual compensation to the Plan, limited to a maximum annual amount as set periodically by the Internal Revenue Code. The Plan allows for discretionary contributions to be made by the Company as determined by the Board of Directors. Such contributions to the Plan are allocated among eligible participants based on their compensation relative to the total compensation of all participants . In 2008 and 2007, the Company matched employee contributions up to 50% of the first 7% of eligible compensation that was contributed by employees. In 2006, the Company matched employee contributions up to 50% of the first 5% of eligible compensation that was contributed by employees. Beginning in 2009, employees may contribute up to 75% of their annual compensation to the Plan, limited to a maximum annual amount as set periodically by the Internal Revenue Code. The Company will match employee contributions dollar for dollar on the first 1% and 50% on the next 5% of eligible compensation. Company contributions to the Plan were $407,000 in 2008, $402,000 in 2007 and $351,000 in 2006.

Voluntary Employee Beneficiary Associations (“VEBA”) . The Company has a VEBA under which both employees and the Company may make contributions to pay for medical costs. Company contributions to the VEBA were $1.7 million in 2008, $2.4 million in 2007 and $3.1 million in 2006. The Company is primarily self-insured for employee’s healthcare costs, carrying stop-loss insurance coverage for individual claims in excess of $150,000. The Company’s self-insurance liabilities are based on the total estimated costs of claims filed and claims incurred but not reported, less amounts paid against such claims. Management reviews current and historical claims data in developing its estimates.

(9) Commitments and Contingencies

Leases and purchase commitments . The Company leases a portion of its equipment under operating leases that expire at various dates through 2010. Under most lease agreements, the Company pays insurance, taxes and maintenance. Rental expense for operating leases was $977,000 in 2008, $920,000 in 2007 and $836,000 in 2006. Minimum rental commitments under all non-cancelable leases with an initial term in excess of one year are payable as follows: 2009, $587,000; 2010, $365,000; 2011, $183,000; 2012, $11,000; 2013 and beyond, $0.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of September 27, 2008, the Company had $89.7 million in non-cancelable fixed price purchase commitments for raw material extending as long as approximately 120 days. In addition, the Company has contractual commitments for the purchase of certain equipment. Portions of such contracts not completed at year-end are not reflected in the consolidated financial statements and amounted to $1.1 million as of September 27, 2008.

Legal proceedings . On November 19, 2007, Dywidag Systems International, Inc. (“DSI”) filed a third-party lawsuit in the Ohio Court of Claims alleging that certain epoxy-coated strand sold by the Company to DSI in 2002, and supplied by DSI to the Ohio Department of Transportation (“ODOT”) for a bridge project, was defective. The third-party action seeks recovery of any damages which may be assessed against DSI in the action filed against it by ODOT, which allegedly could be in excess of $8.3 million, plus $2.7 million in damages allegedly incurred by DSI. The Company had previously filed a lawsuit against DSI in the North Carolina Superior Court in Surry County on July 25, 2007 seeking recovery of $1.4 million (plus interest) owed for other products sold by the Company to DSI and a judgment declaring that it had no liability to DSI arising out of the ODOT bridge project. The Company’s North Carolina lawsuit was subsequently removed by DSI to the U.S. District Court for the Middle District of North Carolina. On March 5, 2008, the Magistrate Judge in the U.S. District Court issued his recommendation that the Company’s motion to remand the matter to the Surry County Court should be granted. DSI has appealed the Magistrate’s recommendation to the District Judge, who has not yet ruled on DSI’s appeal. On April 17, 2008, the Ohio Court of Claims reached a preliminary ruling denying the Company’s motion to stay the proceedings against the Company in that court. On June 24, 2008, the Ohio Court of Claims reached a final ruling that DSI’s action against the Company may proceed in that court. The Company subsequently filed a motion to dismiss the Ohio action on the grounds that it is barred by the relevant Statute of Limitations. The Ohio Court has not yet ruled on this motion. In any event, the Company intends to vigorously defend the claims asserted against it by DSI in addition to pursuing full recovery of the amounts owed to it by DSI.

The Company also is involved in various other lawsuits, claims, investigations and proceedings, including commercial, environmental and employment matters, which arise in the ordinary course of business. The Company does not expect that the ultimate cost to resolve these other matters will have a material adverse effect on its financial position, results of operations or cash flows.

Severance and change of control agreements. The Company has entered into severance agreements with its Chief Executive Officer and Chief Financial Officer that provide certain termination benefits to these executives in the event that an executive’s employment with the Company is terminated without cause. The initial term of each agreement is two years and the agreements provide for an automatic renewal of one year unless the Company or the executive provides notice of termination as specified in the agreement. Under the terms of these agreements, in the event of termination without cause, the executives would receive termination benefits equal to one and one-half times the executive’s annual base salary in effect on the termination date and the continuation of health and welfare benefits for eighteen months. In addition, all of the executive’s stock options and restricted stock would vest immediately and outplacement services would be provided.

The Company has also entered into change in control agreements with key members of management, including its executive officers, which specify the terms of separation in the event that termination of employment followed a change in control of the Company. The initial term of each agreement is two years and the agreements provide for an automatic renewal of one year unless the Company or the executive provides notice of termination as specified in the agreement. The agreements do not provide assurances of continued employment, nor do they specify the terms of an executive’s termination should the termination occur in the absence of a change in control. Under the terms of these agreements, in the event of termination within two years of a change of control, the Chief Executive Officer and Chief Financial Officer would receive severance benefits equal to two times base compensation, two times the average bonus for the prior three years and the continuation of health and welfare benefits for two years. The other key members of management, including the Company’s other two executive officers, would receive severance benefits equal to one times base compensation, one times the average bonus for the prior three years and the continuation of health and welfare benefits for one year. In addition, all of the executive’s stock options and restricted stock would vest immediately and outplacement services would be provided.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(10) Earnings Per Share

The reconciliation of basic and diluted earnings per share (“EPS”) is as follows:


	Year Ended
	September 27,		September 29,			September 30,
(In thousands, except for per share amounts)	2008		2007			2006
Net earnings	$	43,752	$	24,162		$	33,040


Weighted average shares outstanding:
Weighted average shares outstanding (basic)		17,547		18,142			18,307
Dilutive effect of stock-based compensation		165		172			166

Weighted average shares outstanding (diluted)		17,712		18,314			18,473


Per share (basic):
Earnings from continuing operations	$	2.49	$	1.34		$	1.88
Earnings (loss) from discontinued operations		—		(0.01	)		(0.08	)

Net earnings	$	2.49	$	1.33		$	1.80


Per share (diluted):
Earnings from continuing operations	$	2.47	$	1.33		$	1.86
Earnings (loss) from discontinued operations		—		(0.01	)		(0.07	)

Net earnings	$	2.47	$	1.32		$	1.79

Options to purchase 180,000 shares in 2008, 67,000 shares in 2007 and 42,000 shares in 2006 were antidilutive and were not included in the diluted EPS computation.

(11) Business Segment Information

Following the Company’s exit from the industrial wire business (see Note 7 to the consolidated financial statements), the Company’s operations are entirely focused on the manufacture and marketing of concrete reinforcing products for the concrete construction industry. Based on the criteria specified in SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” the Company has one reportable segment. The results of operations for the industrial wire business have been reported as discontinued operations for all periods presented.

The Company’s net sales and long-lived assets for continuing operations by geographic region are as follows:


	Year Ended
	September 27,		September 29,		September 30,
(In thousands)	2008		2007		2006
Net sales:
United States	$	337,801	$	287,202	$	322,675
Foreign		16,061		10,604		6,832

Total	$	353,862	$	297,806	$	329,507


Long-lived assets:
United States	$	76,678	$	75,149	$	62,935
Foreign		—		—		—

Total	$	76,678	$	75,149	$	62,935

There were no customers that accounted for 10% or more of the Company’s net sales in 2008, 2007 or 2006.

(12) Related Party Transactions

In connection with the Company’s previous stock repurchase program, on January 30, 2006, the Company repurchased

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

approximately 400,000 shares of its common stock held by the chairman of the Company’s board of directors and his wife. The purchase price for the shares repurchased was $21.322 per share based on a predetermined formula, which represented a 15% discount from the closing price on January 27, 2006. The number of shares repurchased and purchase price per share are prior to the effect of the two-for-one split of the Company’s common stock that was distributed as a stock dividend on June 16, 2006.

Sales to a company affiliated with one of the Company’s directors amounted to $1.0 million in 2008, $967,000 in 2007 and $929,000 in 2006. Purchases from another company affiliated with one of the Company’s directors amounted to $5,800 in 2008, $418,000 in 2007 and $1.5 million in 2006.

(13) Comprehensive Loss

The components of accumulated other comprehensive loss are as follows:


							Accumulated
	Adjustment to			Adjustment to			Other
	Defined Benefit			Adopt SFAS No.			Comprehensive
(In thousands)	Plans			158			Loss
Balance at September 30, 2006	$	—		$	—		$	—
Change		(9	)		(2,110	)		(2,119	)

Balance at September 29, 2007		(9	)		(2,110	)		(2,119	)
Change		234			—			234

Balance at September 27, 2008	$	225		$	(2,110	)	$	(1,885	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(14) Other Financial Data

Balance sheet information:


	September 27,			September 29,
(In thousands)	2008			2007
Accounts receivable, net:
Accounts receivable	$	50,487		$	35,128
Less allowance for doubtful accounts		(906	)		(610	)

Total	$	49,581		$	34,518


Inventories:
Raw materials	$	30,793		$	25,443
Work in process		3,161			2,083
Finished goods		37,266			19,875

Total	$	71,220		$	47,401


Other assets:
Cash surrender value of life insurance policies	$	3,938		$	4,367
Capitalized financing costs, net		844			1,342
Non-current deferred tax assets		—			1,480
Other		282			296

Total	$	5,064		$	7,485


Property, plant and equipment, net:
Land and land improvements	$	5,631		$	5,621
Buildings		31,819			31,981
Machinery and equipment		96,638			86,560
Construction in progress		2,195			3,955

		136,283			128,117
Less accumulated depreciation		(67,178	)		(60,970	)

Total	$	69,105		$	67,147


Accrued expenses:
Income taxes	$	10,861		$	—
Cash dividends		9,279			544
Salaries, wages and related expenses		4,128			4,278
Sales allowance reserve		1,493			236
Customer rebates		840			840
Property taxes		794			749
Worker’s compensation		673			499
Other		1,013			467

Total	$	29,081		$	7,613


Other liabilities:
Deferred compensation	$	4,476		$	4,584
Deferred income taxes		435			—
Deferred revenues		395			278

Total	$	5,306		$	4,862

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(15) Rights Agreement

On April 26, 1999, the Company’s Board of Directors adopted a Rights Agreement and declared a dividend distribution of one right per share of the Company’s common stock to shareholders of record as of May 17, 1999. In addition, the Rights Agreement provides that one right will attach to each share of the Company’s common stock issued after May 17, 1999 until the tenth business day following a public announcement that a person or group has acquired, obtained the right to acquire or made a tender or exchange offer for 20% or more of the outstanding shares of the Company’s common stock (such tenth business day, the “Distribution Date”).

Currently, the rights are not exercisable but trade automatically with the Company’s common stock shares and become exercisable on the Distribution Date. Each right will entitle the holder, other than the acquiring person or group, to purchase one one-hundredth of a share (a “Unit”) of the Company’s Series A Junior Participating Preferred Stock at a purchase price of $80 per Unit, subject to adjustment as described in the Rights Agreement (the “Purchase Price”). All rights beneficially owned or acquired by the acquiring person or group will become null and void as of the Distribution Date. If an acquiring person or group acquires 20% or more of the Company’s outstanding common stock, each rights holder, other than the acquiring person or group, upon exercise of his or her rights and payment of the Purchase Price, will severally have the right to receive shares of the Company’s common stock having a value equal to two times the Purchase Price or, at the discretion of the Board of Directors, upon exercise and without payment of the Purchase Price, will have the right to purchase the number of shares of the Company’s common stock having a value equal to two times the Purchase Price at a 50% discount.

In addition, each rights holder, other than an acquiring person or group, upon exercise of his or her rights will have the right to receive shares of the common stock of the acquiring corporation having a value equal to two times the Purchase Price for such holder’s rights if the Company engages in a merger or other business combination where it is not the surviving entity or where it is the surviving entity and all or part of the Company’s common stock is exchanged for the stock or other securities of the other company, or if 50% or more of the Company’s assets or earning power is sold or transferred.

The rights will expire on April 26, 2009, and may be redeemed by the Company at any time prior to the Distribution Date at a price of $0.01 per right.

(16) Product Warranties

The Company’s products are used in applications which are subject to inherent risks including performance deficiencies, personal injury, property damage, environmental contamination or loss of production. The Company warrants its products to meet certain specifications and actual or claimed deficiencies from these specifications may give rise to claims. The Company does not maintain a reserve for warranties as the historical claims have been immaterial. The Company maintains product liability insurance coverage to minimize its exposure to such risks.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(17) Share Repurchases

On December 5, 2007, the Company’s board of directors approved a share repurchase authorization to buy back up to $25.0 million of the Company’s outstanding common stock over a period of up to twelve months ending December 5, 2008. Repurchases under the share repurchase authorization may be made from time to time in the open market or in privately negotiated transactions subject to market conditions, applicable legal requirements and other factors. The Company is not obligated to acquire any particular amount of common stock under the authorization and it may be suspended at any time at the Company’s discretion. During the year ended September 27, 2008, the Company repurchased 913,268 shares or $8.7 million of its common stock, which included 208,585 shares or $2.5 million under the previous $25.0 million share repurchase authorization that was terminated on December 5, 2007, 697,813 shares or $6.2 million under the $25.0 million share repurchase authorization that expires on December 5, 2008 and 6,870 shares or $76,000 through restricted stock net-share settlements. As of September 27, 2008, there was $18.8 million remaining under the $25.0 million share repurchase authorization that expires on December 5, 2008.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED FINANCIAL STATEMENTS

To the Board of Directors and Shareholders
Insteel Industries, Inc.:

We have audited the accompanying consolidated balance sheets of Insteel Industries, Inc. and subsidiaries (a North Carolina corporation) as of September 27, 2008 and September 29, 2007, and the related consolidated statements of operations, shareholders’ equity and comprehensive income and cash flows for each of the three years in the period ended September 27, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Insteel Industries, Inc. and subsidiaries as of September 27, 2008 and September 29, 2007, and the results of their operations and their cash flows for each of the three years in the period ended September 27, 2008 in conformity with accounting principles generally accepted in the United States.

Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule titled “Schedule II — Valuation and Qualifying Accounts” is presented for purposes of additional analysis and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

As discussed in Note 2 to the financial statements, the Company adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” at the beginning of fiscal 2008. In addition, as discussed in Note 8, the Company has adopted Financial Accounting Standards Board Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” (SFAS 158) as of September 29, 2007.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Insteel Industries, Inc. and subsidiaries’ internal control over financial reporting as of September 27, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated November 3, 2008 expressed an unqualified opinion.

/s/ Grant Thornton LLP

Greensboro, North Carolina
November 3, 2008

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 27, 2008, SEPTEMBER 29, 2007 AND SEPTEMBER 30, 2006

ALLOWANCE FOR DOUBTFUL ACCOUNTS
(In thousands)


	Year Ended
	September 27,			September 29,			September 30,
	2008			2007			2006
Balance, beginning of year	$	610		$	664		$	410
Amounts charged to earnings		595			(34	)		228
Write-offs, net of recoveries		(299	)		(20	)		26

Balance, end of year	$	906		$	610		$	664

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of September 27, 2008. This evaluation was conducted under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, we have concluded that these disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports filed by us and submitted under the Securities Exchange Act of 1934, as amended (“the Exchange Act”) is recorded, processed, summarized and reported as and when required. Further, we concluded that our disclosure controls and procedures have been designed to ensure that information required to be disclosed in reports filed by us under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, in a manner to allow timely decisions regarding the required disclosure.

Management’s Report on Internal Control over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes: (1) maintaining records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets; (2) providing reasonable assurance that transactions are recorded as necessary for preparation of financial statements, and that receipts and expenditures are made in accordance with authorizations of management and directors; and (3) providing reasonable assurance that unauthorized acquisition, use or disposition of assets that could have a material effect on financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of financial statements would be prevented or detected. 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.

Management assessed the effectiveness of our internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. Based on this assessment, management concluded that our internal control over financial reporting was effective as of September 27, 2008. During the quarter ended September 27, 2008, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our independent registered public accounting firm has issued an audit report on the effectiveness of our internal control over financial reporting as of September 27, 2008. The report appears below.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Board of Directors and Shareholders
Insteel Industries, Inc.:

We have audited Insteel Industries, Inc. and subsidiaries’ (a North Carolina corporation) internal control over financial reporting as of September 27, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Insteel Industries, Inc. and subsidiaries’ management is responsible 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’s Report on Internal Control over Financial Reporting . Our responsibility is to express an opinion on Insteel Industries, Inc. and subsidiaries’ internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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.

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.

In our opinion, Insteel Industries, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of September 27, 2008, based on criteria established in Internal Control—Integrated Framework issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Insteel Industries, Inc. and subsidiaries as of September 27, 2008 and September 29, 2007 and the related consolidated statements of operations, shareholders’ equity and comprehensive income and cash flows for each of the three years in the period ended September 27, 2008, and our report dated November 3, 2008, expressed an unqualified opinion on those financial statements and contains an explanatory paragraph relating to the adoption of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” at the beginning of fiscal 2008. In addition, as discussed in Note 8, the Company adopted Financial Accounting Standards Board Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” on September 29, 2007.

/s/ Grant Thornton LLP

Greensboro, North Carolina
November 3, 2008

Item 9B. Other Information.

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The information called for by this item appears under the captions “Election of Directors” and “Corporate Governance Principles and Board Matters” in the Company’s Proxy Statement for the 2009 Annual Meeting of Shareholders and is incorporated herein by reference. Information on executive officers appears under the caption “Executive Officers of the Company” in Item 1 of this report.

We have adopted a Code of Business Conduct that applies to all directors, officers and employees which is available on our web site at http://investor.insteel.com/documents.cfm . To the extent permissible under applicable law, the rules of the SEC or NASDAQ listing standards, we intend to satisfy the disclosure requirement under Item 5.05 of the Form 8-K by posting on our web site any amendment or waiver to a provision of our Code of Business Conduct that requires disclosure under applicable law, the rules of the SEC or NASDAQ listing standards. The Company’s web site does not constitute part of this Annual Report on Form 10-K.

Item 11. Executive Compensation .

The information called for by this item appears under the captions “Executive Compensation” and “Corporate Governance Principles and Board Matters” in the Company’s Proxy Statement for the 2009 Annual Meeting of Shareholders and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information called for by this item appears under the captions “Voting Securities” and “Security Ownership” in the Company’s Proxy Statement for the 2009 Annual Meeting of Shareholders and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information called for by this item appears under the captions “Compensation Committee Interlocks,” “Certain Relationships and Related Person Transactions” and “Corporate Governance Principles and Board Matters” in the Company’s Proxy Statement for the 2009 Annual Meeting of Shareholders and is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services.

The information called for by this item appears under the caption “Fees Paid to Independent Registered Public Accounting Firm” in the Company’s Proxy Statement for the 2009 Annual Meeting of Shareholders and is incorporated herein by reference.

PART IV

Item 15. Exhibits, Financial Statement Schedules .

(a)(1) Financial Statements

The financial statements as set forth under Item 8 are filed as part of this report.

(a)(2) Financial Statement Schedules

Supplemental Schedule II — Valuation and Qualifying Accounts appears on page 46 of this report.

All other schedules have been omitted because they are either not required or not applicable.

(a)(3) Exhibits

The list of exhibits filed as part of this annual report is set forth on the Exhibit Index immediately preceding such exhibits and is incorporated herein by reference.

(b) Exhibits

See Exhibit Index on pages 52 and 53.

(c) Financial Statement Schedules

See Item 15(a)(2) above.

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.

INSTEEL INDUSTRIES, INC.
Registrant



Date: November 17, 2008	By:	/s/ Michael C. Gazmarian
		Michael C. Gazmarian
		Vice President, Chief Financial Officer and Treasurer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on November 17, 2008 below by the following persons on behalf of the registrant and in the capacities indicated:


Name and Signature				Position(s)

/s/ HOWARD O. WOLTZ, JR. HOWARD O. WOLTZ, JR.				Chairman of the Board

/s/ H. O. WOLTZ III H. O. WOLTZ III				President, Chief Executive Officer and a Director

/s/ MICHAEL C. GAZMARIAN MICHAEL C. GAZMARIAN				Vice President, Chief Financial Officer and Treasurer

/s/ SCOT R. JAFROODI SCOT R. JAFROODI				Chief Accounting Officer and Corporate Controller

/s/ LOUIS E. HANNEN LOUIS E. HANNEN				Director

/s/ CHARLES B. NEWSOME CHARLES B. NEWSOME				Director

/s/ GARY L. PECHOTA GARY L. PECHOTA				Director

/s/ W. ALLEN ROGERS II W. ALLEN ROGERS II				Director

/s/ WILLIAM J. SHIELDS WILLIAM J. SHIELDS				Director

/s/ C. RICHARD VAUGHN C. RICHARD VAUGHN				Director

EXHIBIT INDEX
to

Annual Report on Form 10-K of Insteel Industries, Inc. for Year Ended September 27, 2008


Exhibit
Number		Description

3.1		Restated Articles of Incorporation for the Company (incorporated by reference to Exhibit 3.1 of the Company’s Form S-1 filed on May 2, 1985).

3.2		Articles of Amendment to the restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K dated May 3, 1988).

3.3		Articles of Amendment to the restated articles of incorporation of the Company (incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended April 3, 1999).

3.4		Bylaws of the Company (as last amended September 18, 2007) (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on September 21, 2007).

4.1		Rights Agreement dated April 27, 1999 between the Company and First Union National Bank (incorporated by reference to Exhibit 99.1 of the Company’s Registration Statement on Form 8-A filed on May 7, 1999).

10.4		Amended and Restated Credit Agreement dated January 12, 2006 among Insteel Wire Products Company, as Borrower; the Company, as a Credit Party; Intercontinental Metals Corporation, as a Credit Party; and General Electric Capital Corporation, as Agent and Lender (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on January 13, 2006).

10.5		Employee Stock Ownership Plan of the Company, including Employee Stock Ownership Plan Trust Agreement (incorporated by reference to Exhibit 10.5 of the Company’s Annual Report on Form 10-K for the year ended September 30, 1989).

10.9*		1994 Director Stock Option Plan of the Company (as Amended and Restated Effective as of April 28, 1998) (incorporated by reference to Exhibit 10.12 of the Company’s Annual Report on Form 10-K for the year ended October 3, 1998 filed on December 3, 1998).

10.11*		Insteel Industries, Inc. Return on Capital Incentive Compensation Plan (as amended September 18, 2007) (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on September 21, 2007).

10.12*		Form of Amended and Restated Change in Control Severance Agreements between the Company and each of H.O. Woltz III and Michael C. Gazmarian, respectively, each dated November 14, 2006; each agreement is substantially identical to the form in all material respects (incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K filed on November 16, 2006).

10.14*		Change in Control Severance Agreement between the Company and James F. Petelle dated November 14, 2006 (incorporated by reference to Exhibit 99.3 of the Company’s Current Report on Form 8-K filed on November 16, 2006).

10.15*		Insteel Industries, Inc. Director Compensation Plan (incorporated by reference to Exhibit 10.30 of the Company’s Annual Report on Form 10-K for the year ended September 30, 1997).

10.16*		Amended and Restated Retirement Security Agreement with H.O. Woltz III dated September 19, 2007 (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on September 21, 2007).

10.17*		Form of Retirement Security Agreement between the Company and each of Michael C. Gazmarian, James F. Petelle and Richard T. Wagner, respectively, dated September 19, 2007; each agreement is substantially identical to the form in all material respects (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on September 21, 2007).

10.20*		Letter of Employment between the Company and James F. Petelle, dated August 23, 2006 (incorporated by reference to Exhibit 99.7 of the Company’s Current Report on Form 8-K filed on November 16, 2006).

10.21*		Change in Control Severance Agreement between the Company and Richard T. Wagner dated November 14, 2006 (incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K filed on February 15, 2007).

10.22		2005 Equity Incentive Plan of Insteel Industries, Inc. as most recently amended on August 12, 2008.

10.23		Summary of amendments to the Insteel Industries, Inc. Director Compensation Plan.

21.1		List of Subsidiaries of Insteel Industries, Inc. at September 27, 2008.

23.1		Consent of Independent Registered Public Accounting Firm.

31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

EXHIBIT INDEX
to

Annual Report on Form 10-K of Insteel Industries, Inc. for Year Ended September 27, 2008


Exhibit
Number		Description
32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*		Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.

Our SEC file number reference for documents filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended, is 1-9929.

Exhibit 10.22

2005 EQUITY INCENTIVE PLAN

INSTEEL INDUSTRIES, INC.

As amended by the Board of Directors on September 18, 2007,
and as further amended by the Board of Directors on August 12, 2008

2005 EQUITY INCENTIVE PLAN OF
INSTEEL INDUSTRIES, INC.

1. Purpose .

The purpose of the 2005 Equity Incentive Plan of Insteel Industries, Inc. (the “Plan”) is to encourage and enable selected key employees and non-employee directors of Insteel Industries, Inc. (the “Corporation”) to acquire or to increase their holdings of common stock of the Corporation (the “Common Stock”) in order to promote a closer identification of their interests with those of the Corporation and its shareholders, thereby further stimulating their efforts to enhance the return on capital generated by the Corporation and the creation of value for its shareholders. This purpose will be carried out through the granting of stock options, restricted stock, restricted stock units and performance awards on the terms set forth herein.

2. Certain Definitions .

For purposes of the Plan, the following terms shall have the meanings indicated:

(a) “Award” means an Option, Restricted Stock, Restricted Stock Unit or Performance Award granted under this Plan.

(b) “Award Agreement” means a written or electronic agreement executed on behalf of the Corporation by the Chief Executive Officer (or another officer designated by the Administrator) and delivered to the Participant and containing terms and provisions of Awards, consistent with the Plan, as the Administrator may approve. Such agreement may, but is not required to be, executed by the Participant.

(c) “Cause” means (W) termination of Participant’s employment for “cause” in accordance with the Corporation’s or a Related Corporation’s written policies or pursuant to the definition of “cause” as indicated in any agreement Participant may have with the Corporation or any Related Corporation; (X) dishonesty or conviction of a crime which brings the Participant into disrepute or is likely to have a material detrimental impact on the business operations of the Corporation or any Related Corporation; (Y) failure to perform his or her duties to the satisfaction of the Corporation after written notice; or (Z) engaging in conduct that could be materially damaging to the Corporation without a reasonable good faith belief that such conduct was in the best interest of the Corporation or Related Corporation. The determination of “Cause” shall be made by the Administrator and its determination shall be final and conclusive.

(d) A “Change of Control” shall be deemed to have occurred on the earliest of the following dates:

(i) The date any entity or person shall have become the beneficial owner of, or shall have obtained voting control over, twenty percent (20%) or more of the outstanding Common Stock of the Corporation.

(ii) The date (A) the Corporation consummates a merger or consolidation with or into another corporation, or any other transaction pursuant to which any shares of

Common Stock of the Corporation are converted into cash, securities or other property of another corporation or entity, other than a merger, consolidation or other transaction in which holders of Common Stock immediately prior to the merger, consolidation or other transaction have substantially the same proportionate ownership of common stock or ownership interests of the surviving corporation or entity immediately after the merger, consolidation or other transaction, or (B) there is a sale or other disposition of all or substantially all the assets of the Corporation other than to a corporation or other entity in which holders of Common Stock of the Corporation immediately prior to the sale or other disposition have substantially the same proportionate ownership of stock or ownership interests of the surviving corporation or other entity immediately after the sale or other disposition or (C) there is a complete liquidation or dissolution of the Corporation; or

(iii) The date there shall have been a change in a majority of the Board of Directors of the Corporation within a 12-month period unless the nomination for election by the Corporation’s shareholders of each new director was approved by the vote of two-thirds of the directors then still in office that were in office at the beginning of the 12-month period.

(For purposes herein, the term “person” shall mean any individual, corporation, partnership, group, association or other person, as such term is defined in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, other than the Corporation, a subsidiary of the Corporation or any employee benefit plan(s) sponsored or maintained by the Corporation or any subsidiary thereof, and the term “beneficial owner” shall have the meaning given the term in Rule 13d-3 under the Exchange Act.)

(e) “Code” means the Internal Revenue Code of 1986, as amended or recodified from time to time, and any successor thereto.

(f) “Committee” means the Executive Compensation Committee of the Board of Directors or any other standing or special committee that may be established and appointed by the Board of Directors for the purpose of administering this Plan and performing such other duties as are contemplated to be performed by the Committee as herein provided. The Committee shall be composed of not less than three directors, all of whom are “non-employee directors” (within the meaning of Rule 16b-3 of the Act), “outside directors” (within the meaning of Section 162(m) of the Code) and “independent” directors (within the meaning of the applicable stock exchange listing standards on which shares of the Common Stock are traded).

(g) “Common Stock” means the Common Stock, no par value, of the Corporation.

(h) “Covered Employee” means any individual who, on the last day of the taxable year, is the principal chief executive officer of the Corporation or is acting in such capacity, or is among the three highest paid compensated officers (other than the principal chief executive officer or the principal financial officer) or such other individuals as may be treated as “covered employees” pursuant to Section 162(m) of the Code.

(i) “Date of Grant” shall mean the date that the Administrator acts to grant an Award, or on any later date specified by the Administrator as the effective date of the Award.

(j) “Disability” shall mean the inability of the Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death, or which has lasted or can be expected to last for a continuous period of not less than twelve months, within the meaning of Section 22(e)(3) of the Code. The Administrator shall determine whether a Participant is disabled within the meaning of the Plan.

(k) “Exchange Act” means the Securities Exchange Act of 1934, as in effect from time to time.

(l) “Fair Market Value” with respect to a share of the Common Stock shall be established in good faith by the Administrator and, except as may otherwise be determined by the Administrator, the fair market value shall be determined in accordance with the following provisions: (A) if the shares of Common Stock are listed for trading on the New York Stock Exchange, the American Stock Exchange or the NASDAQ Stock Market, LLC (“NASDAQ Stock Market”), the fair market value shall be the closing sales price per share of the shares on the New York Stock Exchange, the American Stock Exchange or the NASDAQ Stock Market (as applicable) on the date the Award is granted or otherwise being valued, or, if there is no transaction on such date, then on the trading date nearest preceding the date the Award is granted or otherwise being valued for which closing price information is available, and, provided further, if the shares are not listed for trading on the New York Stock Exchange, the American Stock Exchange or the NASDAQ Stock Market, the fair market value shall be the average between the highest bid and lowest asked prices for such stock on the date the Award is granted or otherwise being valued as reported on the Nasdaq OTC Bulletin Board Service or by the National Quotation Bureau, Incorporated or a comparable service; or (B) if the shares of Common Stock are not listed or reported in any of the foregoing, then the fair market value shall be determined by the Administrator in accordance with the applicable provisions of Section 20.2031-2 of the Federal Estate Tax Regulations, or in any other manner consistent with the Code and accompanying regulations.

(m) “Incentive Stock Option” means an option to purchase Common Stock which qualifies as an incentive stock option under Section 422 of the Code and which is designated by the Administrator to be an Incentive Stock Option.

(n) “Nonqualified Stock Option” means an option to purchase Common Stock which is designated as such or which does not qualify as an Incentive Stock Option.

(o) “Option” means either an Incentive Stock Option or a Nonqualified Stock Option granted under Section 8 of the Plan.

(p) “Option Price” means the purchase price per share of Common Stock payable on exercise of an Option.

(q) “Parent” or “parent corporation” means any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation if, at the time as of which a determination is being made, each corporation other than the Corporation owns stock possessing fifty percent or more of the total combined voting power of all classes of stock in another corporation in the chain.

(r) “Participant” means an eligible person under Section 7 of the Plan who is selected by the Administrator to receive an Award under this Plan.

(s) “Performance Award” means a contractual right awarded pursuant to Section 10 of this Plan to receive a share of Common Stock (or its value in cash) or a cash-denominated award which are forfeitable by the Participant until the achievement of pre-established performance objectives over a performance period.

(t) “Plan” means this 2005 Equity Incentive Plan of Insteel Industries, Inc., as contained herein and any amendments hereto or restatements hereof.

(u) “Related Corporation” means any parent or subsidiary of the Corporation.

(v) “Restricted Stock” means an award of shares of Common Stock made pursuant to Section 9 of this Plan that is nontransferable and forfeitable by the Participant until the completion of a specified period of future service, the achievement of pre-established performance objectives or until otherwise determined by the Administrator.

(w) “Restricted Stock Unit” means a contractual right awarded pursuant to Section 9 of this Plan to receive a share of Common Stock (or its value in cash) that is forfeitable by the Participant until the completion of a specified period of future service, the achievement of pre-established performance objectives or until otherwise determined by the Administrator.

(x) “Rule 16b-3” means Rule 16b-3 under Section 16 of the Act (or any successor rule to the same effect) as in effect from time to time.

(y) “Securities Act” means the Securities Act of 1933, as in effect from time to time.

(z) “Subsidiary” or “subsidiary corporation” means any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation if, at the time as of which a determination is being made, each corporation other than the last corporation in the unbroken chain owns stock possessing fifty percent or more of the total combined voting power of all classes of stock in another corporation in the chain.

3. Administration of the Plan .

(a) The Plan shall be administered by the Committee. To the extent permitted by law, the Committee may delegate to one or more executive officers of the Company the power to make Awards to Participants, other than to any non-employee director or any officer under Section 16 of the Act or a Covered Employee if the Award is intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Code, provided that when so delegating, the Committee shall fix the aggregate maximum amount of such Awards and the maximum Award for any one Participant that may be awarded by such delegate(s). For the purposes herein, the term “Administrator” shall refer to the Committee and its delegates.

(b) Any action of the Administrator may be taken by a written instrument signed by all of the members of the Administrator and any action so taken by written consent shall be as

fully effective as if it had been taken by a majority of the members at a meeting duly held and called. Subject to the provisions of the Plan, the Administrator shall have full and final authority, in its discretion, to take any action with respect to the Plan including, without limitation, the following: (i) to determine the individuals to receive Awards, the nature of each Option as an Incentive Stock Option or a Nonqualified Stock Option, the times when Awards shall be granted, the number of shares to be subject to each Award, the Option Price (determined in accordance with Section 8), the Option Period (determined in accordance with Section 8), the time or times when each Award shall vest and be exercisable or payable, and all related terms conditions, restrictions and limitations; (ii) to prescribe the form or forms of any Award Agreements; (iii) to establish, amend and rescind rules and regulations for the administration of the Plan; and (iv) to construe and interpret the Plan, the rules and regulations, and the Award Agreements, and to make all other determinations deemed necessary or advisable for administering the Plan. The Administrator also shall have authority, in its discretion, to accelerate the date that any Award which was not otherwise exercisable, vested or payable shall become exercisable, vested or payable in whole or in part without any obligation to accelerate such date with respect to any other Award granted to any recipient. The express grant in this Plan of any specific power to the Administrator shall not be construed as limiting any power or authority of the Administrator. Any decision made, or action taken, by the Administrator shall be final and conclusive. The members of the Administrator shall not be liable for any act done in good faith with respect to this Plan or any Award Agreement. All expenses of administering this Plan shall be borne by the Corporation.

(c) The Corporation shall indemnify and hold harmless each person who is or shall have been a member of the Administrator, acting as such, or any delegate of such, against and from any cost, liability, loss or expense, that may be imposed upon or reasonably incurred by such person in connection with or resulting from any action, claim, suit, or other proceeding to which such person may be a party or in which such person may be involved by reason of any action taken or not taken under the Plan or against and from any and all amounts paid by such person in settlement thereof, with the Corporation’s approval, or paid by such person in satisfaction of any judgment in such action, suit or proceeding against such person, provided he or she shall give the Corporation the opportunity, at its own expense, to handle and defend the same before such person undertakes to handle or defend it on his or her own behalf. Notwithstanding the foregoing, the Corporation shall not indemnify or hold harmless any such person if (i) applicable law or the Corporation’s Articles of Incorporation or Bylaws prohibit such indemnification or (ii) such persons did not act in good faith or in a manner that such person believed to be consistent with the Plan or (iii) such person’s conduct constituted gross negligence or willful misconduct. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company’s Articles of Incorporation or Bylaws, as a matter of law or otherwise, or under any other power that the Corporation may have to indemnify such person or hold him or her harmless. The provisions of the foregoing indemnity shall survive indefinitely the term of this Plan.

4. Effective Date; Term of the Plan .

The effective date of the Plan shall be February 15, 2005. Awards may be granted under the Plan on or after the effective date, but not after the tenth anniversary of the effective date.

However, this Plan, and any Awards granted hereunder, shall not be effective unless the Plan is approved by the Corporation’s shareholders within one year after the adoption of the Plan.

5. Shares of Common Stock Subject to the Plan .

The number of shares of Common Stock that may be issued pursuant to Awards shall not exceed in the aggregate 885,000 shares of authorized but unissued Common Stock. The Corporation hereby reserves sufficient authorized shares to provide for the exercise or settlement of such Awards. The following rules shall apply for purposes of the determination of the number of shares available for grant under the Plan:

(a) Any shares of Common Stock which are subject to Awards under this Plan that are terminated unexercised, forfeited or surrendered or that expire for any reason (including, but not limited to, shares of Common Stock tendered to exercise outstanding Options or shares tendered or withheld for taxes under any Award under this Plan) shall again be available for issuance under the Plan, provided that such shares may only be used in respect of Awards of the same or a substantially similar type (i.e., shares related to forfeited Options may be used to grant new Options, forfeited Restricted Stock may be used to grant new Restricted Stock, Restricted Stock Units or Performance Shares).

(b) Awards that can only be settled in cash shall not result in a charge against the aggregate number of shares available for issuance. For purposes of determining the maximum number of shares available for issuance under the Plan, Awards that may be settled in shares of Common Stock shall initially cause the available reserve to be reduced by the maximum number of shares of Common Stock that may be issued in connection with the Award. Notwithstanding the foregoing, any shares not actually issued at exercise or settlement shall again be available for issuance under the Plan.

(c) If there is any change in the shares of Common Stock because of a merger, consolidation or reorganization involving the Corporation or a Related Corporation, or if the Corporation declares a stock dividend or stock split distributable in shares of Common Stock, or if there is a change in the capital structure of the Corporation or a Related Corporation affecting the Common Stock, the number of shares of Common Stock reserved for issuance under the Plan and the per individual limitations shall be correspondingly adjusted, and the Administrator shall make such adjustments to Awards (including the Option Price of outstanding Options) or to any provisions of this Plan as the Administrator deems equitable to prevent dilution or enlargement of Award benefits. Notwithstanding the foregoing, the issuance by the Corporation of stock of any class, or securities convertible into stock of any class, for cash or property, or for labor or services, either upon direct sale or upon the exercise of rights or warrants to subscribe therefore, or upon conversion of stock or other obligations of the Corporation convertible into such stock or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Common Stock reserved for issuance under the Plan, the per individual limits or the terms of outstanding Awards.

6. Individual Limits .

Subject to adjustment as provided in Section 5(c) of this Plan, in any calendar year, no individual Participant shall be granted under this Plan (i) Stock Options for more than 100,000 shares of Common Stock, (ii) Restricted Stock, Restricted Stock Units or Performance Awards denominated in shares of Common Stock for more than 50,000 shares of Common Stock in the aggregate, or (iii) Performance Awards denominated in cash valued at maximum at more than $750,000.

7. Eligibility .

An Award may be granted only to an individual who satisfies the following eligibility requirements on the date the Award is granted:

(a) The individual is a key employee or non-employee director of the Corporation or a key employee of a Related Corporation (including an entity that becomes a Related Corporation after the adoption of this Plan). For this purpose, an individual shall be considered to be an “employee” only if there exists between the individual and the Corporation or a Related Corporation the legal and bona fide relationship of employer and employee. In determining whether such a relationship exists, the regulations of the United States Treasury Department relating to the determination of the employment relationship for the purpose of collection of income tax on wages at the source shall be applied. Also for this purpose, a “key employee” shall mean an employee of the Corporation or a Related Corporation whom the Administrator determines qualifies as a key employee based on the nature and extent of such employee’s duties, responsibilities, personal capabilities, performance, potential or any combination of such factors.

(b) With respect to the grant of an Incentive Stock Option, the individual must be an employee who does not own, immediately before the time that the Incentive Stock Option is granted, stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation or a Related Corporation; provided, that an individual owning more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation or a Related Corporation may be granted an Incentive Stock Option if the price at which such Option may be exercised is greater than or equal to 110 percent of the fair market value of the shares on the date the Option is granted and the period of the Option does not exceed five years. For this purpose, an individual will be deemed to own stock which is attributed to him under Section 424(d) of the Code.

8. Options Grants to Employees .

Subject to the limitations of the Plan, the Administrator may in its sole and absolute discretion grant Options to such eligible individuals, in such numbers, upon such terms and conditions and at such times as the Administrator shall determine. Both Incentive Stock Options and Nonqualified Stock Options may be granted under the Plan. To the extent that an Option is designated as an Incentive Stock Option but does not qualify as such under Section 422 of the Code, the Option (or portion thereof) shall be treated as a Nonqualified Option. Each grant shall specify the number of shares of Common Stock to which the Option pertains, subject to the

limitations set forth in Sections 5 and 6 of this Plan. In addition, the following provisions shall apply with respect to Options:

(a) The Option Price shall be no less than the Fair Market Value per share of the Common Stock on the date the Option is granted, as established by the Administrator and set forth in the terms of the Award Agreement.

(b) The period during which an Option may be exercised (the “Option Period”) shall be determined by the Administrator when the Option is granted and shall extend from the date on which the Option is granted to a date not more than ten years from the date on which the Option is granted. Subject to the restriction contained in the preceding sentence and as otherwise provided in this Plan, an Option shall be exercisable on such date or dates, during such period, for such number of shares, and subject to such conditions as shall be determined by the Administrator and set forth in the Award Agreement evidencing such Option, subject to the discretion of the Administrator to accelerate the time or times when Options may be exercised. Any Option or portion thereof not exercised before the expiration of the Option Period shall terminate. Any grant may provide that the Option will become exercisable in the event of termination of employment or a Change in Control of the Corporation or any other similar transaction or event.

(c) An Option may be exercised by giving written notice to the Administrator or its designee at such time and place as the Administrator shall direct. Such notice shall specify the number of shares to be purchased pursuant to an Option and the aggregate purchase price to be paid therefor, and shall be accompanied by the payment of such purchase price. Such payment shall be in the form of (i) cash; (ii) shares of Common Stock owned by the Participant for at least six months at the time of exercise and acceptable to the Administrator; or (iii) any combination thereof; provided, that the Administrator may, in its sole and absolute discretion and subject to such terms and conditions as it deems appropriate, also permit all or a portion of the purchase price to be paid by delivery of written notice of exercise to the Corporation and delivery to a broker of written notice of exercise and irrevocable instructions to promptly deliver to the Corporation the amount of sale or loan proceeds to pay the Option Price. Shares tendered in payment on the exercise of an Option shall be valued at their Fair Market Value on the date of exercise.

(d) No Option shall be exercised unless the Participant, at the time of exercise, shall have been an employee or non-employee director continuously since the date the Option was granted unless provided for otherwise in other agreements between the Participant and the Corporation, subject to the following:

(i) An Option shall not be affected by any change in the terms, conditions or status of the Participant’s employment, provided that the Participant continues to be an employee of the Corporation or a Related Corporation.

(ii) The employment relationship of a Participant may, in the discretion of the Administrator, be treated as continuing intact for any period that the Participant is on military or sick leave or other bona fide leave of absence, provided that the period of such leave does not exceed 90 days, and in any event shall be treated as continuing during

such period as the Participant’s right to reemployment is guaranteed either by statute or by contract. The employment relationship of a Participant may, in the discretion of the Administrator, also be treated as continuing intact while the Participant is not in active service because of Disability; provided, that shares acquired by the Participant pursuant to exercise of an Incentive Stock Option shall be subject to Sections 421 and 422 of the Code only if and to the extent that such exercise occurs within twelve months less one day following the date the Participant’s employment is considered to be terminated because of such Disability under Section 422. The Administrator shall determine the date of a Participant’s termination of employment for any reason (the “termination date”).

(iii) Unless an individual Award Agreement provides otherwise, if the employment of a Participant is terminated because of death or Disability, the Option may be exercised following such termination only to the extent determined by the Administrator in its discretion and set forth in the Award Agreement; provided that such discretion may include a decision to accelerate the date for exercising all or any part of the Option which was not otherwise exercisable on the termination date. In that event, the Option must be exercised, if at all, prior to the earlier of: (A) the first anniversary of the Participant’s death or Disability, or (B) the close of the Option Period. In the event of the Participant’s death, such Option shall be exercisable by such person or persons as shall have acquired the right to exercise the Option by will or by the laws of intestate succession. In the event of the Participant’s Disability , such Option may be exercised by the Participant’s guardian or legal representative.

(iv) Unless an individual Award Agreement provides otherwise, if the employment of a Participant is terminated for any reason other than death, Disability or Cause, his or her Option may be exercised only to the extent determined by the Administrator in its discretion and set forth in the Award Agreement; provided, that such discretion may include a decision to accelerate the date of exercising all or any part of the Option which was not otherwise exercisable on the Participant’s termination date. In that event, the Option must be exercised, if at all, prior to the earlier of: (A) 90 days following the Participant’s termination date for any reason other than death, Disability or Cause, or (B) the close of the Option Period.

(v) Unless an individual agreement provides otherwise, if the employment of a Participant is terminated for Cause, his or her Option shall terminate and no longer be exercisable as of the Participant’s termination date (whether or not the Option previously became exercisable).

(e) In no event shall there first become exercisable by the Participant in any one calendar year Incentive Stock Options granted by the Corporation or any Related Corporation with respect to shares of Common Stock having an aggregate fair market value (determined at the time the Incentive Stock Option is granted) greater than $100,000. If the limitation is exceeded, Options that cause the limitation to be exceeded shall be exercisable nonetheless as Nonqualified Stock Options.

(f) A Participant or his or her legal representative, legatees or distributees shall not be deemed to be the holder of any shares subject to an Option and shall not have any rights as a

shareholder unless and until certificates for such shares are issued (electronic or otherwise) to him/her or them under the Plan. A certificate or certificates (electronic or otherwise) for shares of Common Stock acquired upon exercise of an Option shall be issued in the name of the Participant (or his or her beneficiary) and distributed to the Participant (or his or her beneficiary) as soon as practicable following receipt of proper notice of exercise and payment of the Option Price and any other applicable tax withholdings.

(g) A Participant shall notify the Corporation of any sale or other disposition of shares of Common Stock acquired pursuant to an Option that was an Incentive Stock Option if such sale or disposition occurs (i) within two years of the grant of the Option or (ii) within one year of the issuance of shares of Common Stock to the Participant. Such notice shall be in writing and directed to the Secretary of the Corporation. The Corporation shall not be liable to any Participant if an Option intended to be an Incentive Stock Option does not qualify as such.

9. Restricted Stock and Restricted Stock Unit Grants to Employees .

Subject to the limitations of the Plan, the Administrator may in its sole and absolute discretion grant Restricted Stock and Restricted Stock Units to such eligible individuals, in such numbers, upon such terms and conditions and at such times as the Administrator shall determine and set forth in an Award Agreement.

(a) Each grant shall specify the number of shares of Common Stock to which it pertains, subject to the limitations set forth in Sections 5 and 6 of this Plan.

(b) Each grant shall specify the required period or periods (if any) of continuous service by the Participant with the Company and/or any performance or other conditions to be satisfied before the restrictions on the Restricted Stock or Restricted Stock Units (or installments thereof) shall lapse. Any grant may provide for vesting in the event of a termination of employment or a Change in Control of the Corporation or any other similar transaction or event. To the extent the Participant’s rights in Restricted Stock or Restricted Stock Units are forfeitable and nontransferable for a period of time, the Administrator on the date of grant shall determine the maximum period over which the rights may become nonforfeitable and transferable, except that such period shall not exceed 10 years.

(c) Restricted Stock shall be evidenced in such manner as the Administrator may deem appropriate, including book-entry registration or issuance of one or more stock certificates. The Administrator shall require that any stock certificates evidencing any Restricted Stock be held in the custody of the Corporation and/or bear a legend until the restrictions lapse, and that, as a condition of any Restricted Stock award, the Participant shall have delivered a stock power, endorsed in blank, relating to the shares of Common Stock covered by such Award. As a condition to grant, if required by applicable law or otherwise determined by the Administrator, Participants may be required to pay a minimum purchase price. Restricted Stock is nontransferable and subject to forfeiture until the restrictions lapse.

(d) Restricted Stock Units represent a contractual right to receive the economic equivalent of an award of Restricted Stock. At the discretion of the Administrator as set forth in the Award Agreement, Restricted Stock Units may be settled in shares of Common Stock, the

cash value of shares of Common Stock, or a combination. No shares of Common Stock will be issued at the time an award of Restricted Stock Units is made.

(e) Unless otherwise determined by the Administrator and except as provided in (f) below, Participants holding Restricted Stock may exercise full voting rights and other rights as a shareholder with respect to those shares prior to the lapse of restrictions, except that the Participant may not sell, transfer, pledge, exchange, hypothecate, or otherwise dispose of shares granted pursuant to Restricted Stock until such shares vest. The transfer limitations set forth in the preceding sentence shall not apply after the Restricted Stock becomes transferable and no longer forfeitable. However, Participants holding Restricted Stock Units (as opposed to Restricted Stock) shall not have any rights as a shareholder prior to the actual issuance of shares of Common Stock.

(f) Unless otherwise determined by the Administrator, Participants holding Restricted Stock or Restricted Stock Units shall be entitled to receive all dividends (or dividend equivalents) and other distributions paid with respect to the shares underlying the Awards. Such dividends (or dividend equivalents) may be paid in any of the following manners, as the Administrator may determine from time to time:

(i) in cash;

(ii) in shares of common stock bearing no restrictions; or

(iii) as credits to an account established for each Participant and invested in additional Restricted Stock or Restricted Stock Units on the distribution date of the applicable dividends; provided that the restrictions on any additional shares or units shall become vested and non-forfeitable, if at all, on the same terms and conditions as are applicable in respect of the Restricted Stock or Restricted Stock Units with respect to which such dividends (or dividend equivalents) were payable.

(g) To the extent the Restricted Stock or Restricted Stock Units are designated as “performance-based” compensation under Section 162(m) of the Code, they shall be subject to the restrictions set forth in Section 11.

(h) Unless an individual Award Agreement provides otherwise, if the employment of a Participant is terminated for Cause, his or her Restricted Stock and Restricted Stock Units shall terminate and can no longer become vested or payable as of the Participant’s termination date.

10. Performance Awards to Employees .

Subject to the limitations of the Plan, the Administrator may in its sole and absolute discretion grant Performance Awards to such eligible individuals, in such numbers, upon such terms and conditions and at such times as the Administrator shall determine. Performance Awards may be denominated in cash (e.g. units valued at $100) or shares of Common Stock. Performance Awards may be settled in cash or shares of Common Stock, at the discretion of the Administrator, as set forth in the Award Agreement.

(a) Each grant shall specify the number of shares of Common Stock or units to which it pertains, subject to the limitations set forth in Sections 5 and 6 of this Plan. No shares of Common Stock will be issued at the time an award of Performance Shares is made.

(b) Each grant shall specify the performance conditions and required period or periods (if any) of continuous service by the Participant with the Corporation to earn the Performance Awards. The Administrator may provide that if performance relative to the performance goals exceeds targeted levels, then the number of Performance Awards earned shall be a multiple, not in excess of 200%, of those that would be earned for target performance. Any grant may provide for the settlement of Performance Awards in the event of a termination of employment or a Change in Control of the Corporation or any other similar transaction or event. The Administrator, on the date of grant, shall determine the maximum period over which Performance Awards may be earned, except that such period shall not exceed 10 years.

(c) Unless otherwise determined by the Administrator, Participants holding Performance Awards shall not have any rights as a shareholder prior to the actual issuance of shares of Common Stock, if applicable.

(d) To the extent the Performance Awards are designated as “performance-based” compensation under Section 162(m) of the Code, they shall be subject to the restrictions set forth in Section 11.

(e) Unless an Individual Award Agreement provides otherwise, if the employment of a Participant is terminated for Cause, his or her Performance Awards shall terminate and no longer be payable or settled as of the Participant’s Termination Date.

11. Qualified Performance-Based Awards .

The Administrator may designate whether any Award granted to a Covered Employee is intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Code.

(a) Any Award designated as intended to be performance-based compensation shall be, to the extent required by Section 162(m) of the Code, either (1) conditioned upon the achievement of one or more of the following performance measures or (2) granted based upon the achievement of one or more of the following performance measures: total shareholder return, stock price, operating earnings, net earnings, return on equity or capital, income, level of expenses, growth in revenue, or other performance measures deemed by the Administrator to be appropriate.. Performance goals may be established on a Corporation-wide basis or with respect to one or more business units or divisions or subsidiaries. The targeted level or levels of performance (which may include minimum, maximum and target levels of performance) with respect to such performance measures may be established at such levels and in such terms as the Administrator may determine, in its discretion, including in absolute terms, as a goal relative to performance in prior periods, or as a goal compared to the performance of one or more comparable companies or an index covering multiple companies. When establishing performance goals for a performance period, the Administrator may exclude any or all “extraordinary items” as determined under U.S. generally accepted accounting principles

including, without limitation, the charges or costs associated with restructurings of the Company, discontinued operations, other unusual or non recurring items, and the cumulative effects of accounting changes. The Administrator may also adjust the performance goals for any performance period as it deems equitable in recognition of unusual or non-recurring events affecting the Corporation, changes in applicable tax laws or accounting principles, or such other factors as the Administrator may determine; including, without limitation, any adjustments that would result in the Corporation paying non-deductible compensation to a Participant.

(b) Any Award that is intended to qualify as “performance-based compensation” shall also be subject to the following:

(i) No later than 90 days following the commencement of each performance period (or such other time as may be required or permitted by Section 162(m) of the Code), the Administrator shall, in writing, (1) grant a target number of shares or units, (2) select the performance goal or goals applicable to the performance period and (3) specify the relationship between performance goals and the number of shares or units that may be earned by a Participant for such performance period.

(ii) Following the completion of each performance period, the Administrator shall certify in writing whether the applicable performance targets have been achieved and the number of units or shares, if any, earned by a Participant for such performance period.

(iii) In determining the number of units or shares earned by a Participant for a given performance period, subject to any applicable Award Agreement, the Administrator shall have the right to reduce (but not increase) the amount earned at a given level of performance to take into account additional factors that the Administrator may deem relevant to the assessment of individual or corporate performance for the performance period.

12. Awards to Non-Employee Directors .

(a) Annual Grant. Following the close of business of the Corporation on the date of the annual meeting of shareholders of the Corporation held each year during the term of the Plan, commencing with the 2005 annual meeting, each non-employee director who is eligible to receive an Award under the Plan shall be granted such number of Options, shares of Restricted Stock, Restricted Stock Units, or other forms of long-term compensation available under the Plan, as the full Board of Directors, in its sole discretion, shall determine;

(b) Additional Grants Upon Other Election or Appointment to the Board. In addition to the grant of Options or other Awards pursuant to Section 12(a) herein, the Committee shall have discretion to grant Awards to any non-employee Director who is appointed or elected to the Board of Directors at any time other than at the annual meeting of shareholders of the Corporation.

13. Nontransferability of Awards .

Awards shall not be transferable other than by will or the laws of intestate succession. An Option shall be exercisable during the Participant’s lifetime only by him/her or by his/her guardian or legal representative on his/her behalf.

14. Restrictions on Awards .

(a) The Administrator may impose such restrictions on any shares issued pursuant to the exercise of Options or the settlement of any Award granted hereunder as it may deem advisable, including without limitation restrictions under the Securities Act, under the requirements of the applicable stock exchange and under any Blue Sky or securities laws applicable to such shares. Notwithstanding any other Plan provision to the contrary, the Corporation shall not be obligated to issue, deliver or transfer shares of Common Stock under the Plan, or take any other action, unless such issuance, delivery, transfer or other action is in compliance with all applicable laws, rules and regulations (including but not limited to the requirements of the Securities Act or withholding tax requirements). The Administrator may cause a restrictive legend to be placed on any certificate issued pursuant to the exercise of an Option, the vesting of Restricted Stock or the settlement of an Award granted hereunder in such form as may be prescribed from time to time by applicable laws and regulations or as may be advised by legal counsel.

(b) The Administrator may postpone any grant, exercise, vesting or payment of any Award for such time as the Administrator in its sole discretion may deem necessary (i) to effect, amend or maintain any necessary registration of the Plan or shares of Common Stock issuable pursuant to Awards under the securities law; (ii) to permit any action to be taken in order to (A) list such shares of Common Stock or other shares of stock of the Corporation on a stock exchange if shares of Common Stock or other shares of stock of the Corporation are not then listed on such exchange or (B) comply with restrictions or regulations incident to the maintenance of a public market for its shares of Common Stock or other shares of stock of the Corporation, including any rules and regulations of any stock exchange on which the shares of Common Stock or other shares of stock of the Corporation are listed; (iii) to determine that such shares of Common Stock are exempt from such registration or that no action of the kind referred to in (ii)(B) above needs to be taken; (iv) to comply with any other applicable law, including without limitation, securities law; (v) during any such time the Corporation or any Related Corporation is prohibited from doing any such acts under applicable law, including without limitation, during the course of any investigation or under any contract, loan agreement or covenant or other agreement to which the Corporation or Related Corporation is a party; (vi) to otherwise comply with any prohibition on such acts or payments during any applicable blackout period; and the Corporation shall not be obligated by virtue of any Award Agreement or any other provision of the Plan to recognize the grant, exercise, vesting or payment of an Award or to grant, sell or issue shares of Common Stock or make any other payments under such circumstances. Any such postponement shall not extend the term of the Award and neither the Corporation nor the Administrator shall have any obligation or liability to any Participant or to any other person with respect to shares of Common Stock or payments to which the Award shall lapse because of such postponement.

15. No Right to Employment .

Nothing in the Plan shall confer upon the Participant any right to continue in the employment or service of the Corporation or a Related Corporation, or to interfere in any way with the right of the Corporation or a Related Corporation to terminate the Participant’s employment or service at any time for any reason whatsoever.

16. Amendment and Termination .

The Plan may be amended or terminated at any time by the Board of Directors of the Corporation; provided, that approval of an amendment to the Plan by the shareholders of the Corporation shall be required to the extent, if any, that shareholder approval of such amendment is required by applicable law, rule or regulation, including, by way of illustration and not limitation, any amendment that would increase the number of shares of Common Stock that may be issued under the Plan or modify the requirements for eligibility for participation or change the performance objectives with respect to Awards to Covered Employees if such Awards are intended to qualify as “performance-based compensation” under Section 162(m) of the Code. In addition, in no event shall the Company reprice any outstanding Option (or cancel and regrant a new Option with a lower Option Price) without shareholder approval.

17. Withholding .

The Corporation shall withhold all required local, state and federal taxes from any amount payable in cash with respect to an Award. The Corporation shall require any recipient of an Award payable in shares of the Common Stock to pay to the Corporation in cash the amount of any tax or other amount required by any governmental authority to be withheld and paid over by the Corporation to such authority for the account of such recipient. Notwithstanding the foregoing, the Corporation may establish procedures to permit or require a recipient to satisfy such obligation in whole or in part, and any other local, state or federal income tax obligations relating to such an Award (but only up to the statutory minimum), by electing (the “election”) to have the Corporation withhold shares of Common Stock from the shares to which the recipient is entitled. The number of shares to be withheld shall have a Fair Market Value as of the date that the amount of tax to be withheld is determined as nearly equal as possible to (but not exceeding) the amount of such obligations being satisfied. Each election must be made in writing to the Administrator in accordance with election procedures established by the Administrator.

18. Applicable Law .

Except as otherwise provided herein, the Plan shall be construed and enforced according to the laws of the State of North Carolina.

19. Change of Control .

(a) Unless the Committee determines otherwise at the time of grant and sets forth in the Award Agreement, in the event the Awards are assumed by an acquirer in accordance with (c) below and a Participant’s employment or service is involuntarily terminated without Cause during the 24-month period following a Change of Control:

(i) all Options, Restricted Stock and Restricted Stock Units outstanding as of the date of such Change of Control shall become fully vested and payable and, if applicable, exercisable, whether or not then vested or exercisable as of such termination of the Participant’s employment or service; and

(ii) all Performance Awards shall vest at target and be paid pro-rata based on completed days in the performance period, as of the date of Participant’s termination of employment or service.

(b) Notwithstanding the foregoing, if the Committee reasonably determines, in good faith, prior to the Change of Control that such outstanding Awards will not be assumed as described in (c) below (such assumed Awards being referred to as “Assumed Awards”) by the acquirer, the Awards shall immediately become full vested (at target for Performance Awards) and, if applicable, exercisable and payable. Additionally, in that case, in the event of or in anticipation of the Change of Control, the Committee in its discretion (i) may declare that some or all outstanding Options previously granted under the Plan shall terminate as of the date before or on the Change of Control without any payment to the holder of the Option, provided the Committee gives prior written notice to the Participant of such termination and gives such Participant the right to exercise his or her outstanding Options before such date or (ii) may terminate before or on the Change of Control some or all outstanding Options previously granted under the Plan in consideration of payment to the holder of the Option, with respect to each shares of Common Stock for which the Option is then exercisable, of the excess, if any, of the Fair Market Value on such date of the Common Stock subject to the exercisable portion of the Option over the Option Price. The payment described in (ii) above may be made in any manner the Committee determines, including cash, stock or other property. In the event of or in anticipation of a Change of Control, the Committee in its discretion also may take such action to provide that all Restricted Stock and Restricted Stock Units outstanding shall become fully vested and payable and all Performance Awards shall vest and be payable pro rata as described above. The Committee may take the actions described in this Section 19(b), other than the accelerated vesting which applies to all outstanding Awards, with respect to some or all outstanding Awards or on an Award-by-Award basis, which actions need not be uniform with respect to all outstanding Awards.

(c) Assumed Awards must: (i) be based on securities which are traded on an established United States securities market, or which will be so traded within 60 days of the Change of Control; (ii) provide the Participant with rights and entitlements substantially equivalent to or better than the rights, terms and conditions applicable under the original Award, including, but not limited to, an identical or better exercise or vesting schedule and identical or better timing and methods of payment; and (iii) have substantially equivalent economic value to the original Award (determined at the time of the Change of Control).

20. General Provisions .

(a) This Plan, insofar as it provides for Awards, shall be unfunded, and the Corporation shall not be required to segregate any assets that may at any time be represented by Awards under this Plan. Any liability of the Corporation or any person with respect to any Award under this Plan shall be based solely upon any contractual obligations that may be

created thereto. No such obligation of the Corporation shall be deemed to be secured by any pledge of, or other encumbrance on, any property or assets of the Corporation or any Related Corporation.

(b) Nothing in this Plan shall be construed to limit the authority of the Corporation to exercise its corporate rights and powers, including, by way of illustration and not by way of limitation, the right to grant Awards for proper corporate purposes other than under the Plan to any employee or to any other person, firm, corporation, association or other entity, or to grant Award, or assume such Awards of any person, in connection with any acquisition, purchase, lease, merger, consolidation, reorganization, or otherwise, of all or part of the business or assets of any person, firm, corporation, association or other entity.

(c) Notwithstanding any other provision hereof, the Committee may grant Awards in substitution for performance shares, incentive awards, stock awards, stock options, stock appreciation rights or similar awards held by an individual who becomes a key employee or non-employee director of the Corporation or a key employee of a Related Corporation in connection with a transaction described in Section 424(a) of the Code (or which would be so described if the substitution or assumption under that Section had occurred) with the Corporation or a Related Corporation. Notwithstanding any other provisions of this Plan (other than the limitations of Section 5), the terms of such substitute Awards shall be as the Committee, in its discretion, determines is appropriate.

IN WITNESS WHEREOF, this 2005 Equity Incentive Plan has been executed in behalf of the Corporation as of the ___ day of ___.


		INSTEEL INDUSTRIES, INC.

		By:

		Title:


Attest:

Secretary

[Corporate Seal]


		INSTEEL INDUSTRIES, INC.
Notice of Grant of Stock Options
		ID: 56-0674867
and Option Agreement
		1373 BOGGS DRIVE
		MOUNT AIRY,
		NORTH CAROLINA 27030

Name		Option Number:
Address		Plan:
		ID:

Effective , you (the “Optionee”) have been granted an Option to buy shares of INSTEEL INDUSTRIES, INC. (the “Corporation”) stock at $ per share. The Option is intended to be (check appropriate box):

o A nonqualified stock option.

o An incentive stock option. However, this Option will be treated as an incentive stock option only to the extent the aggregate Fair Market Value (determined as of the date of grant of this Option) of the shares for which this Option (or any other incentive stock option you receive) becomes exercisable for the first time in any calendar year does not exceed the sum of One Hundred Thousand Dollars ($100,000). Should the aggregate Fair Market Value of the number of shares for which this Option (or any other incentive stock option you receive) first becomes exercisable in any calendar year exceed One Hundred Thousand Dollars ($100,000), then the portion of the Option that covers the excess number of shares will be treated as a nonqualified stock option.

Shares in each period will become fully vested on the date shown.


Shares	Vest Type	Full Vest

Except as otherwise provided in the attached Stock Option Agreement, an Option (or the portion thereof) that has not become or will be unable to become vested by the date shown above shall expire and be forfeited.

By your signature and the Corporation’s signature below, you and the Corporation agree that these options are granted under and governed by the terms and conditions of the Corporation’s 2005 Equity Incentive Plan as amended and the Option Agreement, all of which are attached and made a part of this document.

2005 EQUITY INCENTIVE PLAN
OF
INSTEEL INDUSTRIES, INC.

Stock Option Agreement

R E C I T A L S :

In furtherance of the purposes of the 2005 Equity Incentive Plan of Insteel Industries, Inc., as amended (the “Plan”), and in consideration of the services of the Optionee and such other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Corporation and the Optionee hereby agree as follows:

1. Incorporation of Plan . The rights and duties of the Corporation and the Optionee under this Stock Option Agreement (the “Agreement”) shall in all respects be subject to and governed by the provisions of the Plan, the terms of which are expressly incorporated herein by reference and made a part hereof. In the event of any conflict between the provisions in the Agreement and those of the Plan, the provisions of the Plan shall govern. Unless otherwise defined herein, capitalized terms in this Agreement shall have the same definitions as set forth in the Plan.

2. Grant of Option; Term of Option . The Corporation hereby grants to the Optionee pursuant to the Plan, as a matter of separate inducement and agreement in connection with his employment or service to the Corporation, and not in lieu of any salary or other compensation for his services, the right and Option (the “Option”) to purchase all or any part of an aggregate of shares (the “shares”) of the common stock (the “Common Stock”) of the Corporation and at a purchase price (the “option price”) per share as set forth on the attached Notice of Grant of Stock Options and Option Agreement. Due to current regulations, some options may be issued as Nonqualified Options. To the extent that any Option is designated as an Incentive Stock Option and such Option does not qualify as an Incentive Stock Option, it shall be treated as a Nonqualified Option. Except as otherwise provided in the Plan, the Option will expire if not exercised in full before the date set forth on the attached Notice of Grant of Stock Options and Option Agreement.

3. Exercise of Option . The Option shall become exercisable on the date or dates and subject to such other conditions as are set forth in the Plan and on Notice of Grant of Stock Options and Option Agreement, attached hereto. To the extent that an Option which is exercisable is not exercised, such Option shall accumulate and be exercisable by the Optionee in whole or in part at any time prior to expiration of the Option, subject to the terms of the Plan and this Agreement. Payment of the option price may be made in the form of (i) cash; (ii) shares of Common Stock owned by the Optionee for at least six months at the time of exercise and acceptable to the Administrator; (iii) in the Administrator’s discretion and to the extent permitted by applicable law, delivery of written notice of exercise to the Administrator and delivery to a broker who is selected by the Optionee of written notice of exercise and irrevocable instructions to promptly deliver to the Corporation the amount of sale or loan proceeds to pay the option price; or (iv) any combination of such methods. Upon the Corporation’s receipt of proper notice

of exercise of the Option in whole or in part and payment of the option price, the Corporation shall as soon thereafter as practicable deliver to the Optionee a certificate or certificates for the shares purchased. Shares tendered in payment on the exercise of an Option shall be valued at their Fair Market Value on the date of exercise. In order to comply with any applicable securities laws, the Corporation may require the Optionee, prior to issuance of the Common Stock pursuant to the exercise of the Option, (i) to furnish evidence satisfactory to the Corporation (including a written and signed representation letter) to the effect that the Common Stock to be acquired will be acquired for investment only and not for resale or distribution and (ii) to agree that the Common Stock shall only be sold by the Optionee following registration under the Securities Act of 1933, as amended, or pursuant to an exemption therefrom.

4. Termination of Employment; Change in Control . Except as otherwise expressly provided in this Section 4, all rights of the Optionee under the Plan with respect to the unexercised portion of his Option (whether or not then vested and exercisable) shall terminate upon termination of the employment of the Optionee with the Corporation or a Related Corporation.

(a) If the employment of the Optionee is terminated because of death or Disability, the Option shall immediately vest and must be exercised, if at all, prior to the earlier of: (A) the first anniversary of the Optionee’s termination date, or (B) the expiration of the Option. In the event of the Optionee’s death, such Option shall be exercisable by such person or persons as shall have acquired the right to exercise the Option by will or by the laws of intestate succession. In the event of the Optionee’s Disability, such Option may be exercised by the Optionee’s guardian or legal representative.

(b) If the employment of the Optionee terminates because of Retirement , the Option shall immediately vest and must be exercised, if at all, prior to the earlier of: (A) 90 days following the Participant’s termination date, or (B) the expiration of the Option. For this purpose, Retirement means the Participant’s voluntary termination of employment on or after attaining age 55 and completing ten (10) years of employment with the Corporation or a Related Corporation.

(c) If the employment of the Optionee is terminated for any reason other than death, Disability , Retirement or Cause, the unvested portion of the Option shall be forfeited and the vested portion must be exercised, if at all, prior to the earlier of: (A) 90 days following the Participant’s termination date, or (B) the expiration of the Option.

(d) Upon a Change in Control, the provisions of Section 19 of the Plan will apply.

5. Fractional Shares . Fractional shares shall not be issuable hereunder, and when any provision hereof may entitle the Optionee to a fractional share, such fractional share shall be disregarded.

6. No Right of Continued Employment . Nothing contained in this Agreement or the Plan shall confer upon the Optionee any right to continue in the employment or service of the

Corporation or a Related Corporation or interfere with the right of the Corporation or a Related Corporation to terminate the Optionee’s employment or service at any time.

7. Nontransferability of Option . The Option shall not be transferable other than by will or the laws of intestate succession. The Option shall be exercisable during the Optionee’s lifetime only by the Optionee or, in case of the Optionee’s Disability, by the Optionee’s guardian or legal representative on the Optionee’s behalf.

8. Superseding Agreement; Binding Effect . This Agreement supersedes any statements, representations or agreements of the Corporation with respect to the grant of the Options or any related or similar rights, and the Optionee hereby waives any rights or claims related to any such statements, representations or agreements. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective executors, administrators, next-of-kin, successors and assigns.

9. Governing Law . Except as otherwise provided in the Plan or herein, this Agreement shall be construed and enforced according to the laws of the State of North Carolina, without regard to the conflict of laws provisions of any state.

10. Amendment and Termination; Waiver . Subject to the terms of the Plan, this Agreement may be modified or amended only by the written agreement of the parties hereto. The waiver by the Corporation of a breach of any provision of the Agreement by the Optionee shall not operate or be construed as a waiver of any subsequent breach by the Optionee.

11. No Rights as Shareholder . The Optionee or his legal representatives, legatees or distributees shall not be deemed to be the holder of any shares subject to the Option and shall not have any rights of a shareholder unless and until certificates for such shares have been issued and delivered to him or them.

12. Withholding . The Optionee acknowledges that the Corporation shall require the Optionee to pay the Corporation the amount of any federal, state, local or other tax or other amount required by any governmental authority to be withheld and paid over by the Corporation to such authority for the account of the Optionee, and the Optionee agrees, as a condition to the grant of the Option, to satisfy such obligations.

13. Section 409A of the Code . If any provision of the Plan or this Agreement would result in the Optionee becoming subject to any penalty under Section 409(A) of the Code, any rights of the Optionee or authority of the Corporation with respect to the Option shall be automatically modified and limited to the extent necessary to avoid the imposition of such penalty.

14. Administration . The authority to construe and interpret this Agreement and the Plan and to administer all aspects of the Plan shall be vested in the Administrator, and the Administrator shall have all powers with respect to this Agreement as are provided in the Plan. Any interpretation of the Agreement by the Administrator and any decision made by it with respect to the Agreement is final and binding.

15. Notices . Except as may be otherwise provided by the Plan, any written notices provided for in this Agreement or the Plan shall be in writing and shall be deemed sufficiently given if either hand delivered or if sent by fax or overnight courier, or by postage paid first class mail. Notices sent by mail shall be deemed received three business days after mailed but in no event later than the date of actual receipt. Notices shall be directed, if to the Optionee, at the Optionee’s address indicated by the Corporation’s records, or if to the Corporation, at the Corporation’s principal office.

16. Severability . The provisions of this Agreement are severable and if any one or more provisions may be determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable.

17. Restrictions on Shares . The Corporation may impose such restrictions on any shares issued pursuant to the exercise of the Option as it may deem advisable, including without limitation restrictions under the federal securities laws, the requirements of any stock exchange or similar organization and any blue sky or state securities laws applicable to such shares. Notwithstanding any other provision in the Plan or the Agreement to the contrary, the Corporation shall not be obligated to issue, deliver or transfer shares of Common Stock, to make any other distribution of benefits, or to take any other action, unless such delivery, distribution or action is in compliance with all applicable laws, rules and regulations (including but not limited to the requirements of the Securities Act). The Corporation may cause a restrictive legend to be placed on any certificate issued pursuant to the exercise of the Option in such form as may be prescribed from time to time by applicable laws and regulations or as may be advised by legal counsel.


		INSTEEL INDUSTRIES, INC.

Notice of Grant of Restricted Stock
		ID: 56-0674867
and Restricted Stock Agreement
		1373 BOGGS DRIVE
		MOUNT AIRY,
		NORTH CAROLINA 27030

Name		Restricted Stock Number:
Address		Plan:
		ID:

Effective , you have been granted an award of restricted shares of INSTEEL INDUSTRIES, INC. (the “Corporation”) stock.

Shares in each period will become fully vested on the date shown.



Shares	Vest Type	Full Vest

Except as otherwise provided in the attached Restricted Stock Agreement, shares of Restricted Stock that have not become or will be unable to become vested by the date shown above shall expire and be forfeited.

By your signature and the Corporation’s signature below, you and the Corporation agree that these restricted shares are granted under and governed by the terms and conditions of the Corporation’s 2005 Equity Incentive Plan as amended and the Restricted Stock Agreement, all of which are attached and made a part of this document.

2005 EQUITY INCENTIVE PLAN
OF
INSTEEL INDUSTRIES, INC.

Restricted Stock Agreement

R E C I T A L S :

In furtherance of the purposes of the 2005 Equity Incentive Plan of Insteel Industries, Inc., as amended (the “Plan”), and in consideration of the services of the Participant and such other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Corporation and the Participant hereby agree as follows:

1. Incorporation of Plan . The rights and duties of the Corporation and the Participant under this Agreement shall in all respects be subject to and governed by the provisions of the Plan, the terms of which are expressly incorporated herein by reference and made a part hereof. In the event of any conflict between the provisions in the Agreement and those of the Plan, the provisions of the Plan shall govern. Unless otherwise defined herein, capitalized terms in this Agreement shall have the same definitions as set forth in the Plan.

2. Grant of Restricted Stock . The Corporation hereby grants to the Participant pursuant to the Plan, as a matter of separate inducement and agreement in connection with his employment or service to the Corporation, and not in lieu of any salary or other compensation for his services, the shares of the common stock (the “Common Stock”) of the Corporation, subject to the restrictions and other conditions set forth on the attached Notice of Grant of Restricted Stock and Restricted Stock Agreement (the “Restricted Stock”).

3. Certificates .

(a) Subject to subsection (b) below, certificates evidencing the Restricted Stock shall be issued by the Corporation and registered in the name of the Participant on the stock transfer books of the Corporation. However, certificates issued with respect to Restricted Stock shall be held by the Corporation in escrow under the terms hereof. Such certificates shall bear the legend set forth in subsection (c) below or such other appropriate legend as the Administrator shall determine, which legend shall be removed only if and when the Restricted Stock vests as provided herein, at which time the certificates shall be delivered to the Participant. As a condition to the issuance of the Restricted Stock, the Participant shall deliver to the Corporation stock powers duly endorsed in blank. Upon the issuance of the Restricted Stock, the Participant shall be entitled to vote the shares of Restricted Stock, and shall be entitled to receive all ordinary dividends paid with respect to the shares of Restricted Stock. The Participant’s right to receive any extraordinary dividends or other distributions with respect to the Restricted Stock prior to their becoming nonforfeitable shall be at the sole discretion of the Administrator, but in the event of any such extraordinary event, the Administrator shall take such action as is appropriate to preserve the value of, and prevent the unintended enhancement of the value of, the Restricted Stock.

(b) In order to comply with any applicable securities laws, the Corporation may require the Participant (i) to furnish evidence satisfactory to the Corporation (including a written and signed representation letter) to the effect that the Restricted Stock was acquired for investment only and not for resale or distribution and (ii) to agree that the Restricted Stock shall only be sold by the Participant following registration under the Securities Act of 1933, as amended, or pursuant to an exemption therefrom.

(c) Unless otherwise determined by the Administrator, any certificate issued in respect of the Restricted Stock prior to the lapse of any outstanding restrictions relating thereto shall bear the following legend:

“This certificate and the shares of stock represented hereby are subject to the terms and conditions, including the forfeiture provisions and restrictions against transfer (the “Restrictions”), contained in the Insteel Industries, Inc. 2005 Equity Incentive Plan and an agreement entered into between the registered owner and the Corporation. Any attempt to dispose of these shares in contravention of the applicable restrictions, including by way of sale, assignment, transfer, pledge, hypothecation or otherwise, shall be null and void and without effect.”

4. Vesting . Subject to Section 5 hereof, the restrictions on transfer of the Restricted Stock shall lapse and the Restricted Stock shall become vested and nonforfeitable as set forth in the Notice of Grant of Restricted Stock. Upon the lapse of restrictions under this Section or Section 5, new certificates evidencing the shares with respect to which the restrictions have lapsed, without the restrictive legend set forth in Section 3(c) above, shall be issued to the Participant or his legal representative, against cancellation of the legended certificates. Each new certificate may bear a legend reflecting any restrictions upon the transferability of such shares imposed by law.

5. Termination of Employment; Change in Control . Except as otherwise expressly provided in this Section 5 or as determined by the Administrator, all rights of the Participant under the Plan with respect to the unvested portion of the Restricted Stock shall terminate upon termination of the employment of the Participant with the Corporation or a Related Corporation. Restricted Shares that have not vested as of the Participant’s termination shall be forfeited by the Participant to the Corporation without payment of any consideration by the Corporation, and neither the Participant, nor any successor, heir, assign or personal representative of the Participant, shall have any further right to or interest in the Restricted Stock or the certificate or certificates evidencing them. Notwithstanding the foregoing:

(a) If the employment of the Participant is terminated because of death or Disability, the Restricted Stock shall immediately vest .

(b) If the employment of the Participant terminates because of Retirement , the Restricted Stock shall immediately vest. For this purpose, Retirement means the Participant’s voluntary termination of employment on or after attaining age 55 and completing ten (10) years of employment with the Corporation or a Related Corporation.

6. No Right of Continued Employment . Nothing contained in this Agreement or the Plan shall confer upon the Participant any right to continue in the employment or service of the Corporation or a Related Corporation or interfere with the right of the Corporation or a Related Corporation to terminate the Participant’s employment or service at any time.

7. Nontransferability of Restricted Stock . The Restricted Stock shall not be transferable until it has become vested.

8. Fractional Shares . Fractional shares shall not be issuable hereunder, and when any provision hereof may entitle the Participant to a fractional share, such fractional share shall be disregarded.

9. Superseding Agreement; Binding Effect . This Agreement supersedes any statements, representations or agreements of the Corporation with respect to the grant of the Restricted Stock or any related or similar rights, and the Participant hereby waives any rights or claims related to any such statements, representations or agreements. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective executors, administrators, next-of-kin, successors and assigns.

10. Governing Law . Except as otherwise provided in the Plan or herein, this Agreement shall be construed and enforced according to the laws of the State of North Carolina, without regard to the conflict of laws provisions of any state.

11. Amendment and Termination; Waiver . Subject to the terms of the Plan, this Agreement may be modified or amended only by the written agreement of the parties hereto. The waiver by the Corporation of a breach of any provision of the Agreement by the Participant shall not operate or be construed as a waiver of any subsequent breach by the Participant.

12. Withholding . The Participant acknowledges that the Corporation shall require the Participant to pay the Corporation the amount of any federal, state, local or other tax or other amount required by any governmental authority to be withheld and paid over by the Corporation to such authority for the account of the Participant, and the Participant agrees, as a condition to the grant of the Restricted Stock, to satisfy such obligations.

13. Section 409A of the Code . If any provision of the Plan or this Agreement would result in the Participant becoming subject to any penalty under Section 409(A) of the Code, any rights of the Participant or authority of the Corporation with respect to the Restricted Stock shall be automatically modified and limited to the extent necessary to avoid the imposition of such penalty.

15. Notices . Except as may be otherwise provided by the Plan, any written notices provided for in this Agreement or the Plan shall be in writing and shall be deemed sufficiently given if either hand delivered or if sent by fax or overnight courier, or by postage paid first class mail. Notices sent by mail shall be deemed received three business days after mailed but in no event later than the date of actual receipt. Notices shall be directed, if to the Participant, at the Participant’s address indicated by the Corporation’s records, or if to the Corporation, at the Corporation’s principal office.

17. Other Restrictions . The Corporation may impose such restrictions on the vesting of the Restricted Stock as it may deem advisable, including without limitation restrictions under the federal securities laws, the requirements of any stock exchange or similar organization and any blue sky or state securities laws applicable to such shares. Notwithstanding any other provision in the Plan or the Agreement to the contrary, the Corporation shall not be obligated to vest or deliver the Restricted Stock, to make any other distribution of benefits, or to take any other action, unless such vesting, delivery, distribution or action is in compliance with all applicable laws, rules and regulations (including but not limited to the requirements of the Securities Act).

Exhibit 10.23

Summary of Amendments to Insteel Industries, Inc. Director Compensation Plan

July 20, 2004. At its meeting on this date, the Board of Directors implemented the following compensatory arrangements for non-employee directors:

	•		Base annual retainer: $20,000, paid quarterly.

	•		Annual retainer for committee chairs and members: $2,000, paid quarterly.

	•		Committee chair meeting fee: $750.

	•		Committee member meeting fee: $500.

February 15, 2005. At its meeting on this date, the Board of Directors implemented the following compensatory arrangements for non-employee directors:

	•		Base annual retainer: $30,000, paid quarterly.

	•		Committee chair annual retainer: $3,000, paid quarterly.

	•		Annual grant of restricted shares having a fair value of $30,000 on the date of grant. The grants are made pursuant to the 2005 Equity Incentive Plan, as amended, and are to be made on the Annual Meeting Date.

	•		All meeting fees are eliminated.

February 13, 2007. At its meeting on this date, the Board of Directors implemented the following compensatory arrangements for non-employee directors:

	•		Base annual retainer: $40,000, paid quarterly.

	•		Committee chair annual retainer: $5,000, paid quarterly.

	•		Annual grant of restricted shares having a fair value of $40,000 on the date of grant.

Exhibit 21.1

List of Subsidiaries of Insteel Industries, Inc.

The following is a list of subsidiaries of the Company as of September 27, 2008, each of which is wholly-owned by the Company:


				State or Other Jurisdiction of
Name				Incorporation

Insteel Wire Products Company				North Carolina

Intercontinental Metals Corporation				North Carolina

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We have issued our reports dated November 3, 2008 with respect to the consolidated financial statements, schedules, and internal control over financial reporting included in the Annual Report of Insteel Industries, Inc. on Form 10-K for the years ended September 27, 2008, September 29, 2007 and September 30, 2006. We hereby consent to the incorporation by reference of said reports in the Registration Statements of Insteel Industries, Inc. on Forms S-8 (File No. 033-61887, File No. 33-61889, File No. 333-48011, File No 333-30934, and File No. 333-123325.

/s/ Grant Thornton LLP

Greensboro, North Carolina
November 3, 2008

Exhibit 31.1

CERTIFICATION

I, H.O. Woltz III, certify that:

	1.		I have reviewed this Annual Report on Form 10-K for the year ended September 27, 2008 of Insteel Industries, Inc.;

	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;

	4.		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:

(a) 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;

(b) 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;

(c) 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

(d) 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

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 the registrant’s board of directors (or persons performing the equivalent functions):

(a) 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

(b) 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: November 17, 2008


/s/ H. O. Woltz III H. O. Woltz III President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION

I, Michael C. Gazmarian, certify that:

	1.		I have reviewed this Annual Report on Form 10-K for the year ended September 27, 2008 of Insteel Industries, Inc.;

	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;

	4.		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:

(b) 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: November 17, 2008


/s/ Michael C. Gazmarian Michael C. Gazmarian Vice-President, Chief Financial Officer and Treasurer

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Insteel Industries, Inc. (the “Company”) for the period ended September 27, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, H. O. Woltz III, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/ H.O. Woltz III H.O. Woltz III
President and Chief Executive Officer
November 17, 2008

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Insteel Industries, Inc. (the “Company”) for the period ended September 27, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael C. Gazmarian, Vice President, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/ Michael C. Gazmarian Michael C. Gazmarian
Vice President, Chief Financial Officer and Treasurer
November 17, 2008