UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

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

For the Fiscal Year Ended October 2, 2004

Commission File Number 1-9929

INSTEEL INDUSTRIES, INC.

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: NONE

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

Title of Each Class

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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. [X]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [  ] No [X]

     The aggregate market value of the common stock held by non-affiliates of the registrant as of March 27, 2004 was $12,024,120.

     The number of shares outstanding of the registrant’s common stock as of December 6, 2004 was 9,270,046.

DOCUMENTS INCORPORATED BY REFERENCE

     Certain portions of the registrant’s proxy statement to be delivered to shareholders in connection with the 2005 Annual Meeting of Shareholders are incorporated by reference herein as set forth in Part III hereof.

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. When used in this report, the words “believes,” “anticipates,” “expects,” “plans” and similar expressions are intended to identify forward-looking statements. Although the Company believes that its plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, such forward-looking statements are subject to a number of risks and uncertainties, and the Company can provide no assurances that such plans, intentions or expectations will be achieved. All forward-looking statements attributable to the Company or persons acting on its 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 the Company does not undertake and specifically declines 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 the future operations or financial performance of the Company; however, they would include, but are not limited to, the following:

	•		general economic and competitive conditions in the markets in which the Company operates;
	•		the cyclical nature of the steel industry;
	•		fluctuations in the cost and availability of the Company’s primary raw material, hot-rolled steel wire rod from domestic and foreign suppliers;
	•		the Company’s ability to raise selling prices in order to recover increases in wire rod prices;
	•		changes in U.S. or foreign trade policy affecting imports or exports of steel wire rod or the Company’s products;
	•		interest rate volatility;
	•		unanticipated changes in customer demand, order patterns and inventory levels;
	•		the Company’s ability to successfully develop and expand the volume of niche products, such as engineered structural mesh;
	•		legal, environmental or regulatory developments that significantly impact the Company’s operating costs;
	•		unanticipated plant outages, equipment failures or labor difficulties;
	•		continuing escalation in medical costs that affect employee benefit expenses; and
	•		the risks discussed herein under the caption “Risk Factors”.

Risk Factors

Risks Related to the Company’s Business

The Company’s business is seasonal and cyclical where prolonged economic declines could have a material adverse effect on its financial performance.

     Demand for most of the Company’s products is both seasonal and cyclical and sensitive to general economic conditions. The Company’s concrete reinforcing products are used for a broad range of commercial, residential and infrastructure construction applications. Demand in these markets is driven by the level of construction activity, which generally is highest in the third and fourth quarters of the Company’s fiscal year when weather conditions are more conducive. As a result of the seasonal nature of the construction industry, sales and profitability generally are lower in the first and second fiscal quarters.

     The Company’s industrial wire products are used in the manufacture of tires and other industrial applications where the seasonal changes are not as pronounced as they are for concrete reinforcing products. However, demand for these products is cyclical based on general economic conditions in the markets served and the overall level of manufacturing activity. A prolonged slowdown in the economy or weakening conditions in any of the markets that the Company serves could have a material adverse impact on its results of operations, financial condition and cash flows.

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Fluctuations in the cost and availability of the Company’s primary raw material from domestic and foreign suppliers could have a material adverse effect on its financial performance due to reduced spreads between wire rod costs and selling prices, and increased production costs associated with the underutilization of its facilities.

     The primary raw material used to manufacture the Company’s products is hot-rolled carbon steel wire rod, which is purchased from both domestic and foreign suppliers. During 2004, imported wire rod represented approximately 52% of the Company’s total wire rod purchases compared with 33% in 2003. Demand for hot-rolled steel wire rod in the U.S. contracted between 2000 and the first half of 2003. During the last half of 2003, however, demand began to recover and continued to rise through 2004. Wire rod prices have increased sharply since July 2003 due to reductions in domestic capacity related to mill closures, the pricing impact of the lower value of the U.S. dollar, and anti-dumping duties imposed in 2002 by the U.S. Department of Commerce on seven wire rod producing countries. While favorable market conditions have enabled the Company to raise its selling prices to recover higher wire rod cost, there can be no assurance that such favorable conditions will continue or that future cost increases will be recovered. Additionally, should rod costs decline significantly in the future, the Company’s financial results may be negatively impacted due to unfavorable inventory revaluation adjustments and reduced spreads if the selling prices for its products were to decrease by an even greater extent.

     During 2004, the Company lost production time at certain facilities because it was unable to obtain sufficient quantities of wire rod due to unanticipated delays in foreign deliveries and the opportunistic policies of domestic suppliers. In August 2004 a domestic mill that ceased production in October 2003 restarted production. The production ramp up of this mill, which is favorably located relative to several of the Company’s manufacturing facilities, has significantly improved the availability of domestically produced wire rod. Additionally, the availability of imported wire rod improved in the second half of 2004 as offshore producers took advantage of rising prices in the United States to increase their participation in the domestic market. While the lower value of the U.S. dollar and comparatively high prices for steel scrap and other metallics are expected to contribute to the continuation of higher prices for wire rod, raw material availability is expected to be adequate for the Company to maintain normal production schedules without supply-related interruptions. Although there can be no assurances as to continued availability, as of the first quarter of fiscal 2005 the shortfall had subsided to where the Company expects that the supply of wire rod will be adequate to meet its anticipated future requirements.

Unexpected equipment failures or operational interruptions may lead to curtailments in production or shutdowns.

     If the Company were to experience operational interruptions for any reason, it would be negatively impacted by increased production costs as well as reduced sales and earnings. In addition to equipment failures, the Company’s manufacturing facilities are also subject to the risk of catastrophic loss due to unanticipated events such as fires, explosions or adverse weather conditions. The manufacturing processes depend on the efficient operation of critical equipment, which may be out of service on occasion because of unanticipated failures. In the future, any such equipment failures could subject the Company to material plant shutdowns or periods of reduced production or unexpected down-time. Furthermore, any operational interruptions may require significant capital expenditures to remedy the situation, which could have a negative effect on the Company’s profitability and cash flows. Although the Company maintains business interruption insurance, any recoveries for such claims could potentially be insufficient to offset the lost revenues or increased costs that may be experienced. In addition to the revenue losses, which may be recoverable under the policy, business disruptions of a repeated or long-term nature could result in a loss of customers which could adversely affect future sales, profitability and cash flow.

The Company’s production costs may increase should commodity prices continue to rise because it does not hedge its exposure to price fluctuations for its raw materials.

     The Company does not use derivative commodity instruments to hedge its exposures to changes in commodity prices, including prices of hot-rolled carbon steel wire rod. Historically, the Company has typically negotiated quantities and pricing on a quarterly basis for both domestic and foreign steel wire rod purchases to manage its exposure to price fluctuations and to ensure adequate availability of material consistent with its requirements. However, a tightening of supply in the rod market together with the rising costs of rod producers has resulted in increased price volatility which could continue in the future. In some instances, 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. Because the Company generally does not hedge against price fluctuations, it may be forced to purchase wire rod at higher than anticipated prices. Although changes in its wire rod costs and selling prices tend to be correlated, depending upon market conditions, there may be periods during which the Company is unable to fully recover increased rod costs through higher selling prices, which would reduce gross profit and cash flow from operations.

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The Company’s variable rate indebtedness subjects it to interest rate risk, which could cause its annual debt service obligations to increase significantly.

     All of the Company’s debt obligations under its senior secured credit facility are at variable rates of interest which exposes it to interest rate risk. In connection with the refinancing of its senior secured credit facility in June 2004, the Company terminated certain interest rate swap agreements which were entered as required under the terms of its previous credit facility to reduce the future impact of interest rate fluctuations on earnings and cash flows. Because the Company has not entered into interest rate hedging instruments relating to its refinanced credit facility, if interest rates rise, interest expense on its variable rate indebtedness would increase, decreasing earnings and cash flow.

The Company could have difficulty meeting its funding requirements for debt service, capital investment and maintenance expenditures if there was a substantial downturn in its financial performance.

     As of October 2, 2004, the Company had approximately $52.9 million of long-term debt, consisting of approximately $52.3 million outstanding under its senior secured credit facility and $560,000 outstanding under its industrial revenue refunding bonds. The Company’s operations are capital intensive and require substantial recurring expenditures for routine maintenance of its equipment and facilities. Although the Company expects to finance its business requirements through internally generated funds or from borrowings under its senior secured credit facility, it cannot provide any assurances this will be the case. In the event of a material adverse change in the Company’s financial condition or business operations, the Company may not be able to access funds under its senior secured credit facility. In the event that the Company cannot meet its funding obligations through internally generated funds or from borrowings on its credit facility and cannot access other sources of capital, it’s financial condition and results of operations would be materially adversely impacted.

The Company’s ability and the ability of some of its subsidiaries to engage in some business transactions may be limited by the terms of its debt.

     The Company’s senior secured credit facility contains a number of financial covenants requiring it to meet certain financial ratios and financial condition tests, as well as other covenants that restrict or limit its ability to:

	•		incur additional debt;
	•		pay dividends on, redeem or repurchase capital stock;
	•		allow its subsidiaries to issue new stock to any person other than itself or any of its other subsidiaries;
	•		make investments;
	•		incur or permit to exist liens;
	•		enter into transactions with affiliates;
	•		guarantee the debt of other entities, including joint ventures;
	•		merge or consolidate or otherwise combine with another company; and
	•		transfer or sell its assets.

     The Company’s ability to borrow under its credit facility will depend upon its ability to comply with these covenants and borrowing base requirements. The Company’s ability to meet these covenants and requirements may be affected by events beyond its control which may result in the inability to meet these obligations. The Company’s failure to comply with these covenants and requirements could result in an event of default under its credit facility that, if not cured or waived, could terminate its ability to borrow further, permit acceleration of the relevant debt and permit foreclosure on any collateral granted as security under its credit facility.

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

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

The Company’s production and earnings could be reduced by strikes or work stoppages by its unionized employees.

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     As of October 2, 2004, the Company employed 669 people, of which approximately 62 were union members (approximately 55 employees at its Wilmington, Delaware facility and 7 employees at its Jacksonville, Florida facility). The Company has collective bargaining agreements in place with each union, which expire in November 2006 for the Wilmington facility and April 2005 for the Jacksonville facility. Although the Company believes that its current relations with the labor unions and its unionized employees are satisfactory, any strikes or work stoppages organized by the unions, particularly the union representing certain employees at its Wilmington facility, could reduce production and negatively affect its profitability. Although the Company has a contingency plan to continue serving customers should it experience a disruption of production at any facility, there can be no assurances that a strike or work stoppage would not adversely impact the Company’s operating costs and reduce its earnings.

The Company’s operating costs and earnings could be negatively impacted by the continued escalation in medical costs.

     Although the Company has implemented a number of measures to offset the impact of the ongoing escalation in medical costs, there can be no assurance that such actions will be effective going forward. Continued increases in medical costs could potentially be substantial enough to significantly increase the Company’s operating costs and reduce its earnings.

Risks Related to Its Common Stock

The Company may not pay dividends for the foreseeable future.

     In November 2000, the Company suspended its quarterly cash dividend in connection with the terms of a covenant waiver with its lenders under its previous senior secured credit facility. Under the terms of its new credit facility the Company is currently restricted from paying dividends in excess of $750,000 in the aggregate in any fiscal year. Accordingly, investors must rely on sales of their common stock after price appreciation (which may never occur) as the only way to realize income on their investment. The payment of any future dividends, to the extent permitted under the terms of the credit facility, will be at the discretion of its board of directors after taking into account various factors, including its financial condition, operating results, cash needs, and expansion plans.

Anti-takeover provisions in the Company’s organizational documents and North Carolina law make any change in control more difficult. This could have an adverse affect on the price of the Company’s common stock.

     The Company’s articles of incorporation and bylaws contain provisions that may delay or prevent a change in control, may discourage bids at a premium over the market price of its common stock and may have an adverse affect on the market price of its common stock as well as the voting and other rights of the holders of its common stock. These provisions include:

	•		the division of its Board of Directors into three classes servicing staggered three-year terms;
	•		prohibiting its shareholders from calling a special meeting of shareholders;
	•		the ability to issue additional shares of its common stock or preferred stock without shareholder approval;
	•		the existence of a rights agreement, or “poison pill,” that results in the dilution of the value of its common stock held by a potential acquirer and forces any acquirer to negotiate the potential acquisition of the Company with its Board of Directors;
	•		prohibiting its shareholders from amending its articles of incorporation or bylaws except with 66 2/3% shareholder approval; and
	•		advance notice requirements for raising matters of business or making nominations at shareholder meetings.

Item 1. Business

General

     Insteel Industries, Inc. (“Insteel” or “the Company”) is one of the nation’s largest manufacturers of wire products. Insteel is the parent holding company for a wholly-owned operating subsidiary, Insteel Wire Products Company (“IWP”), which manufactures and markets concrete reinforcing products, including welded wire fabric (“WWF”) and prestressed concrete strand (“PC strand”), and industrial wire products, including tire bead wire and other industrial wire products for a broad range of construction and industrial applications. Insteel’s business strategy is focused on achieving leadership positions in its markets and operating as the lowest cost producer. The Company pursues growth opportunities in existing or related product lines sold to the same customers that leverage off of its infrastructure and core competencies in the manufacture and marketing of wire

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products.

Internet Access to Company Information

     Additional information about the Company and its filings with the U.S. Securities and Exchange Commission (“SEC”) are available, at no cost, on the Company’s web site at www.insteel.com. The information available on the Company’s web site is not part of this report and shall not be deemed incorporated into any of the Company’s SEC filings.

Products

     Concrete Reinforcing Products. The Company’s concrete reinforcing products consist of welded wire fabric and prestressed concrete strand (“PC strand”).

     Welded wire fabric (“WWF”) is produced as either a commodity or a specially engineered reinforcing product for use in infrastructure, residential, and commercial construction. Insteel produces a full range of WWF products, including pipe mesh, building mesh and engineered structural mesh (“ESM”). Pipe mesh 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. Building mesh 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 a variety of slab-on-grade applications. ESM is an engineered made-to-order product that is used as the primary reinforcement for concrete elements or structures serving as a replacement for hot-rolled rebar. For 2004, WWF sales represented 53% of the Company’s consolidated net sales.

     PC strand is a high carbon seven-wire strand that is used to impart compression forces into precast concrete elements and structures, which may be either prestressed or posttensioned, providing reinforcement for bridges, parking decks, buildings and other concrete structures. For 2004, PC strand sales represented 37% of the Company’s consolidated net sales.

     Industrial Wire Products. In addition to its concrete reinforcing products, the Company also produces tire bead wire and other industrial wire.

     Tire bead wire is a bronze-plated steel wire that is used by tire manufacturers to reinforce the inside diameter of a tire and hold the tire to the wheel. The bronze coating serves to provide the product with rubber adhesion properties, which is critical to its application. For 2004, tire bead wire sales represented 8% of the Company’s consolidated net sales.

     Other industrial wire is specialty small diameter wire sold as an intermediate product to manufacturers for a broad range of industrial and commercial applications. Industrial wire is produced to customer specifications based upon the specific requirements of their manufacturing processes and the end use for the finished product. Product attributes vary with the specific application and can include intermediate heat-treating as well as stringent dimensional tolerance specifications and mechanical properties. For 2004, industrial wire sales represented 2% of the Company’s consolidated net sales.

Marketing and Distribution

     Insteel markets its products through sales representatives that are employees of the Company and a sales agent. The Company’s sales force is organized by product line and trained in the technical applications of its products. The Company’s products are sold directly to users as well as through numerous wholesalers and distributors located nationwide as well as into Canada, Mexico, and Central and South America.

     Insteel delivers its products primarily by truck, using common or contract carriers. The delivery method selected is dependent upon backhaul opportunities, comparative costs and scheduling requirements.

Customers

     The Company sells its products to a broad range of customers including manufacturers, distributors and wholesalers. There were no customers that represented 10% or more of the Company’s net sales in 2004, 2003 or 2002.

Product Warranties

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     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 due to immateriality. The Company maintains product liability insurance coverage to minimize its exposure to such risks.

Seasonality and Cyclicality

     The Company’s concrete reinforcing products are used for a broad range of nonresidential, infrastructure and residential construction applications. Demand in these markets is both seasonal and cyclical, driven by the level of construction activity, which significantly impacts the sales and profitability of the Company. 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.

     The Company’s tire bead wire and industrial wire products are used in the manufacture of tires and for a broad range of other industrial applications. Demand for these products tends to be cyclical based on changes in general economic conditions, sales of new vehicles as well as replacement tires, and the overall level of manufacturing activity. As a result, seasonality in demand does not tend to be as pronounced as it is for concrete reinforcing products.

Raw Materials

     The primary raw material used to manufacture Insteel’s products is hot-rolled carbon steel wire rod, which the Company purchases from both domestic and foreign suppliers. Wire rod can generally be characterized as a commodity-type product. The Company purchases 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 its various end products. In spite of the tight market conditions that prevailed for much of fiscal 2004, the Company believes that wire rod is available in sufficient quantities to meet its future requirements.

     Pricing for wire rod tends to fluctuate with domestic market conditions as well as the global economic environment. Domestic demand for wire rod exceeds domestic production, and as such, imports of wire rod are essential to provide adequate supply to U.S. consumers of wire rod. In recent years, the Company has relied on imported wire rod to satisfy between 20% and 52% of its total requirements. During 2004, imported wire rod represented approximately 52% of the Company’s total wire rod purchases compared with 33% in 2003. The Company believes that the substantial volume and desirable mix of products represented by its wire rod requirements makes it an attractive customer to suppliers thereby providing it with the opportunity to purchase rod at more favorable pricing relative to its competitors. As the Company’s purchases are dollar denominated, there are no exchange rate risks.

     In recent years, trade actions initiated by domestic rod producers have impacted the balance of supply and demand in the market as well as pricing. In January 1999, domestic rod producers initiated a Section 201 filing with the U.S. International Trade Commission (“ITC”) alleging that rising import levels had resulted in serious injury to the domestic industry. In response to the ITC’s report, in February 2000, President Clinton announced import relief for the domestic industry in the form of a “tariff-rate-quota” (“TRQ”), under which imported rod would be subject to duties once the imported quantities exceeded certain levels. The TRQ framework that was implemented provided for a gradual increase in the annual tonnage that may enter the domestic market each year as well as a gradual reduction in the applicable tariff for imports in excess of the quota. In November 2001, President Bush amended the terms of the TRQ by changing the administration of the quota system to a regional approach from the previous worldwide structure. In addition, administrative changes were made intended to balance the entry of imported material into the market. For the final year of the quota program, which was March 2002 to February 2003, the duty rate for imports in excess of the quota decreased to 5.0% from 7.5%.

     In addition to the TRQ limitations, in August 2001, four domestic producers of wire rod filed anti-dumping and countervailing duty complaints against twelve wire rod exporting countries. These countries accounted for over 80% of the imported wire rod that entered the domestic market during the year preceding the filing. In October 2002, the ITC determined that domestic producers were materially injured by imports of carbon steel wire rod from seven countries. The Department of Commerce (“DOC”) found that wire rod had been sold in the United States at less than fair value and imposed anti-dumping duty margins ranging from 4% to 369%. Subsequently, administrative reviews have reduced anti-dumping margins for certain exporting countries to the extent that the Company believes they may become more active in the domestic wire rod market.

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     In 2002, demand for wire rod in the United States was curtailed by the continued weakness in economic conditions. In spite of the reduced demand, wire rod prices rose primarily due to the decreasing supply of foreign rod resulting from trade restrictions as well as reductions in domestic capacity related to mill closures. Although alternative sources of foreign rod were available to meet the Company’s requirements, prices increased as a result of the uncertainty caused by the pending anti-dumping and countervailing duty cases. In 2003, demand for wire rod remained at depressed levels due to the continuation of weak economic conditions. Additional reductions in domestic capacity, including the closure of a major rod mill that was previously one of the Company’s primary suppliers, significantly curtailed the domestic supply alternatives available to wire rod consumers. Prices escalated due to the combined impact of the decrease in domestic supply and the reduced availability of rod from foreign countries that were subject to the anti-dumping and countervailing duty orders. Additionally, the weakening in the value of the dollar drove import prices higher. In 2004, demand for wire rod increased due to improved economic conditions. Domestic market prices increased dramatically between January and August 2004 driven by increased demand, the lower value of the dollar, and rising prices for metallics, energy, and other inputs required in the steel making process. During this period, the Company adopted a pricing policy with respect to its wire products driven off of the replacement costs of wire rod rather than the inventory carrying value. The rapidly increasing cost environment together with the Company’s modified pricing policy favorably impacted its profit margins beginning in January 2004.

     The Company expects to be able to obtain adequate quantities of wire rod going forward to avoid operational disruptions due to increasing supplies of imported material and the recent startup of additional domestic production capacity. Wire rod prices are expected to remain at historically high levels for the near future due to high cost of metallics and rising costs of energy and other manufacturing inputs.

     Selling prices for the Company’s products tend to move closely with changes in rod prices — typically within a three-month period — although the timing varies based on market conditions and competitive factors. The relative supply and demand conditions in the Company’s markets for its finished products determines whether its margins expand or contract during periods of rising or falling wire rod prices.

Competition

     The markets in which Insteel’s business is conducted are highly competitive, including competition from other manufacturers of wire products whose revenues and financial resources are much larger than the Company’s. Some of its competitors are integrated steelmakers that produce both wire rod and wire products and offer multiple product lines over broad geographical areas. Other competitors are smaller independent companies that offer limited competition in certain markets. Market participants compete on the basis of price, quality and service. 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. The Company believes that it is one of the leading low cost producers of wire products based upon its technologically-advanced manufacturing facilities and production capabilities. In addition, the Company believes that it offers a broader range of products through more diverse distribution channels than any of its competitors. The Company believes that it is well positioned to compete favorably with other producers of wire products.

Employees

     As of October 2, 2004, the Company employed 669 people, of which approximately 62 were union members (approximately 55 employees at its Wilmington, Delaware facility and 7 employees at its Jacksonville, Florida facility). The Company has collective bargaining agreements in place with each union, which expire in November 2006 for the Wilmington facility and April 2005 for the Jacksonville facility. Although the Company believes that its current relations with the labor unions and its unionized employees are satisfactory, any strikes or work stoppages organized by the unions, particularly the union representing certain employees at its Wilmington facility, could reduce production and negatively affect its profitability. Although the Company has a contingency plan to continue serving customers should it experience a disruption of production at any facility, there can be no assurances that a strike or work stoppage would not adversely impact the Company’s operating costs and reduce its earnings.

Environmental Matters

     The Company believes that it is in compliance in all material respects with applicable environmental laws and regulations. The Company has experienced no material difficulties in complying with legislative or regulatory standards and believes that these standards have not materially impacted its financial position or results of operations. Compliance with future additional environmental requirements could necessitate capital outlays. However, the Company does not believe that these

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expenditures should ultimately result in a material adverse effect on its financial position or results of operations.

Executive Officers of the Company

     The executive officers of the Company are as follows:

     Howard O. Woltz, Jr., has been a Director and Chairman of the Board since 1958 and has served in various capacities for more than 51 years. He had been President of the Company from 1958 to 1968 and from 1974 to 1989. He previously served as Vice President, General Counsel and a director of Quality Mills, Inc., a publicly held manufacturer of knit apparel and fabrics, for more than 35 years prior to its acquisition in 1988 by Russell Corporation.

     H. O. Woltz III, a son of Howard O. Woltz, Jr., was elected Chief Executive Officer in 1991 and has served in various capacities for more than 26 years. He was named President and Chief Operating Officer in 1989. He had been Vice President of the Company since 1988 and, previously, President of Rappahannock Wire Company, formerly a subsidiary of the Company, from 1981 to 1989. Mr. Woltz has been a director of the Company since 1986 and also serves as President of IWP. Mr. Woltz serves on the Executive Committee of the Company’s Board of Directors.

     Michael C. Gazmarian joined Insteel as Chief Financial Officer and was elected Treasurer in 1994. He had been with Guardian Industries Corp., a privately held glass manufacturer, since 1986, serving in various financial capacities.

     Gary D. Kniskern was elected Vice President — Administration in 1994 and has served in various capacities for more than 23 years. He had been Secretary and Treasurer since 1984 and, previously, internal auditor since 1979.

     The executive officers listed above were elected by the Board of Directors at a meeting held February 23, 2004 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 scheduled for February 15, 2005.

Item 2. Properties.

     Insteel’s corporate headquarters and Insteel Wire Products’ sales and administrative offices are located in Mount Airy, North Carolina. The Company operates seven manufacturing facilities located in Dayton, Texas; Fredericksburg, Virginia; Gallatin, Tennessee; Hickman, Kentucky; Mount Airy, North Carolina; Sanderson, Florida; and Wilmington, Delaware. In connection with its exits from certain businesses, the Company is pursuing a sale of idle facilities located in Jacksonville, Florida, Brunswick, Georgia and Andrews, South Carolina.

     The Company owns all of its real estate, all of which is pledged as security under long-term financing agreements. The Company believes that its properties are in good operating condition and that its machinery and equipment have been well maintained. The Company’s manufacturing facilities are suitable for their intended purposes and have capacities adequate for current and projected needs for existing products.

Item 3. Legal Proceedings.

     From time to time, the Company is subject to various legal proceedings. However, there are no material legal proceedings currently pending to which the Company or any of its subsidiaries is a party or which any of their property is a subject.

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 2004.

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PART II

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

     The Company’s common stock traded on the OTC Bulletin Board (“OTCBB”) from February 8, 2002 to February 18, 2004. On February 19, 2004, the Company’s common stock ceased trading on the OTCBB and began trading on the Pink Sheets due to the Company’s noncompliance with certain OTCBB filing requirements. The Company cured its noncompliance issues with the OTCBB with the filing of its late reports with the SEC, and on July 1, 2004, its common stock resumed trading on the OTCBB. On September 28, 2004, the Company’s common stock began trading on the NASDAQ National Market under the symbol “IIIN”. The Company’s common stock was listed on the New York Stock Exchange from 1992 through February 7, 2002.

     At December 6, 2004, there were 1,511 shareholders of record. For information regarding the Company’s stock price and dividend history, see “Item 8(b) — Supplementary Data” in this report.

     In November 2000, the Company suspended its quarterly cash dividend in connection with the terms of a covenant waiver with its senior lenders under its previous credit facility. Pursuant to the restrictions of its new credit facility, the Company is subject to limitations on the payment of dividends (see Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Credit Facilities”).

     In April 1999, the Company’s Board of Directors adopted a Rights Agreement between the Company and First Union National Bank, as Rights Agent. In connection with adopting the Rights Agreement, the Company declared a dividend of one right per share of the Company’s 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 the Company’s common stock issued after that date. Each right entitles the registered holder to purchase from the Company on certain dates described in the Rights Agreement one one-hundredth of a share of the Company’s Series A Junior Participating Preferred Stock. For more information regarding the Company’s Rights Agreement, see Note 17 under “Item 8(a) — Financial Statements” in this report.

Equity Compensation Plan Information
Year Ended October 2, 2004
(In thousands, except exercise price amounts)

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Item 6. Selected Financial Data.

Financial Highlights
(In thousands, except per share amounts)

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” at the beginning of this Form 10-K.

Critical Accounting Policies

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

     The following critical accounting policies are used in the preparation of the financial statements:

     Revenue recognition and credit risk. The Company recognizes revenue from product sales in accordance with Staff Accounting Bulletin No. 104 when products are shipped and risk of loss and title has passed to the customer. Substantially all of the Company’s accounts receivable are due from customers that are located in the U.S. and the Company generally requires no collateral depending upon the creditworthiness of the account. The Company provides an allowance for doubtful accounts based upon its 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. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company’s customers were to change significantly, adjustments to the allowances may be required. While the Company believes its recorded trade receivables will be collected, in the event of default in payment of a trade receivable, the Company would follow normal collection procedures.

     Excess and obsolete inventory reserves. The Company writes down the carrying value of its inventory for estimated obsolescence to reflect the lower of the cost of the inventory or its estimated net realizable value based upon assumptions about

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future demand and market conditions. If actual market conditions for the Company’s wire products are substantially different than those projected by management, adjustments to these reserves may be required.

     Valuation allowances for deferred income tax assets. The Company has recorded valuation allowances related to a portion of its deferred income tax assets for which it cannot support the presumption that expected realization meets a “more likely than not” criteria. If the timing or amount of future taxable income is different than management’s current estimates, adjustments to the valuation allowances may be necessary.

     Accruals for self-insured liabilities and litigation. The Company has accrued its estimate 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, the Company’s legal counsel and other advisors and are based on management’s 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 December 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This Statement changes the disclosure requirements for pension plans and other post-retirement benefit plans. It does not change the measurement or recognition of those plans required by SFAS No. 87, “Employers’ Accounting for Pensions,” SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” or SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” This Statement requires additional disclosures to those required in the original SFAS No. 132 about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other post-retirement benefit plans. SFAS No. 132 requires that information be provided separately for pension plans and for other post-retirement benefit plans and is effective for annual financial statements with fiscal years ending after December 15, 2003, and for interim periods beginning after December 15, 2003. The Company adopted SFAS No. 132 as of the beginning of the second quarter of fiscal 2004 (December 28, 2003) and its adoption did not have any impact on the Company’s operating results or financial position.

     In January 2003, the FASB issued FASB Interpretation (“FIN”) 46, “Consolidation of Variable Interest Entities — an interpretation of Accounting Research Bulletin (“ARB”) No. 51.” This Interpretation is intended to clarify the application of the majority voting interest requirement of ARB No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The controlling financial interest may be achieved through arrangements that do not involve voting interests.

     Subsequent to issuing FIN 46, the FASB issued FIN 46 (revised) (“FIN 46R”), which replaces FIN 46. Among other things, FIN 46R clarified and changed the definition and application of a number of provisions of FIN 46 including de facto agents, variable interests and variable interest entity (“VIE”). FIN 46R also expanded instances when FIN 46 should not be applied. FIN 46R was issued December 23, 2003 and, for the Company, was effective no later than the end of the second quarter of fiscal 2004. FIN 46R may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. The Company has not identified any significant variable interests that would have a material impact on its financial statements since its adoption of FIN 46 at the end of the second quarter of fiscal 2004.

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Results of Operations

Statements of Operations – Selected Data
(Dollars in thousands)

“N/M” = not meaningful

2004 Compared with 2003

Net Sales

     Net sales increased 57% to $332.6 million in 2004 from $212.1 million in 2003 primarily due to higher selling prices for the Company’s products largely driven by escalating raw material costs that it was able to pass through to its customers. Average selling prices for the year increased 48% and shipments rose 6% from the prior year levels. Sales of the Company’s concrete reinforcing products (welded wire fabric and PC strand) increased 62% from a year ago, increasing to 90% of consolidated sales from 87%. Sales of industrial wire products (tire bead wire and other industrial wire) rose 24% from the prior year, but fell to 10% of consolidated sales from 13%. The changes in product mix were primarily due to reduced shipments for industrial wire products and lower price increases relative to the average price increases for the Company’s concrete reinforcing products. Based on the Company’s fiscal calendar, sales for the current year benefited from reflecting one additional week than the prior year.

Gross Profit

     Gross profit rose to $81.3 million, or 24.5% of net sales in 2004 from $21.3 million, or 10.0% of net sales in 2003. The increase in gross profit was largely driven by higher spreads between average selling prices and raw material costs resulting from the Company’s efforts to recover rapidly escalating raw material costs during the period together with the increased level of shipments. In addition, gross profit for the current year benefited from the sale of lower cost inventory in view of the increases in raw material costs and average selling prices that occurred over the course of the year.

Selling, General and Administrative Expense

     Selling, general and administrative expense (“SG&A expense”) increased 34% to $15.2 million, or 4.6% of net sales in 2004 from $11.3 million, or 5.3% of net sales in 2003. The increase in SG&A expense was primarily due to higher incentive plan expense resulting from the improved financial performance of the Company, legal fees related to the dumping and countervailing duty cases that were filed by a coalition of domestic PC strand producers, including the Company, against certain countries exporting into the U.S. market, and higher employee medical insurance costs.

Other Expense (Income)

     Other income was $1.6 million in 2004 compared with other expense of $7,000 in 2003. The income for the current year

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was primarily comprised of an $830,000 gain resulting from the settlement of the litigation related to a supply agreement with a vendor and $572,000 of profit from the sale of raw material to a vendor.

Earnings Before Interest, Income Taxes and Accounting Change

     The Company’s earnings before interest, income taxes and accounting change increased to $67.7 million in 2004 compared with $9.9 million in 2003 primarily due to the higher sales and gross profit in the current year.

Interest Expense

     Interest expense decreased $1.1 million, or 11%, to $9.0 million in 2004 from $10.1 million in 2003. The decrease was primarily due to reductions in the average borrowing levels on the Company’s senior secured credit facility ($1.5 million) and average interest rates ($890,000), partially offset by higher amortization expense associated with the terminated interest rate swaps and capitalized financing costs ($1.3 million).

Income Taxes

     The Company’s effective income tax rate decreased to 37.5% in 2004. In 2003, the effective income tax rate was impacted by a reduction in the valuation allowance on deferred income tax assets from $7.5 million to $1.3 million combined with the near break-even pre-tax earnings (a pre-tax loss of $112,000). In 2004, the valuation allowance was further reduced to $900,000 based upon the Company’s utilization of state net operating loss carryforwards against which an allowance had previously been established. However the reduction in the valuation allowance did not significantly impact the effective tax rate in view of the magnitude of the Company’s pre-tax earnings in 2004.

Net Earnings

     The Company’s net earnings for 2004 increased to $36.7 million, or $4.08 per diluted share, compared to $6.7 million, or $0.78 per diluted share, in 2003 primarily due to the higher sales and gross profit together with the other income and reduction in interest expense in the current year.

2003 Compared with 2002

Net Sales

     Net sales decreased 15% to $212.1 million in 2003 from $251.0 million in 2002 primarily due to the elimination of revenues from the product lines that the Company has exited, including certain segments of the industrial wire business and the nail business, together with lower sales of concrete reinforcing products. On a comparable basis, excluding the revenues from the discontinued product lines, sales decreased 3%. Shipments for the year decreased 20% while average selling prices rose 5% from the prior year levels. Excluding the discontinued product lines, shipments fell 7% while average selling prices rose 4%.

     Sales of the Company’s concrete reinforcing products (welded wire fabric and PC strand) declined 5% from a year ago, but rose to 87% of consolidated sales from 77%. Demand for the Company’s concrete reinforcing products was unfavorably impacted by the reduced level of nonresidential construction activity. Pricing pressure for standard styles of welded wire fabric remained intense during the period. Sales of industrial wire products (tire bead wire and other industrial wire excluding revenues from the industrial wire and nail businesses that the Company has exited) rose 10% from the prior year, increasing to 13% of consolidated sales from 10%. Sales of the product lines that the Company has exited represented 13% of consolidated sales in 2002. The changes in product mix were primarily due to increased sales of industrial wire products and reduced sales of concrete reinforcing products in the current year together with the impact of the Company’s exit from certain segments of the industrial wire business and the nail business in the prior year.

Gross Profit

     Gross profit decreased 12% to $21.3 million, or 10.0% of net sales in 2003 from $24.1 million, or 9.6% of net sales in 2002. The decrease in gross profit was largely driven by the reduction in sales and compression in spreads between average selling prices and raw material costs in certain product lines together with the unfavorable impact of reduced schedules and downtime on the operating costs of the Company’s manufacturing facilities.

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Selling, General and Administrative Expense

     Selling, general and administrative expense (“SG&A expense”) decreased 2% to $11.3 million, or 5.3% of net sales in 2003 from $11.6 million, or 4.6% of net sales in 2002. The decrease in SG&A expense was primarily due to the elimination of selling and administration costs associated with the product lines that the Company exited as well as the savings generated from previously implemented cost reduction measures. These decreases were partially offset by legal fees related to the dumping and countervailing duty cases that were filed by a coalition of domestic PC strand producers, including the Company, against certain countries exporting into the U.S. markets and higher selling expenses in support of the development of the Company’s engineered structural mesh business.

Restructuring Charges

     In 2002, the Company recorded restructuring charges totaling $13.0 million for losses on the sale of certain assets associated with the Company’s nail business and write-downs in the carrying value of the remaining assets to be disposed of ($5.0 million), estimated costs related to the closure of the Company’s nail operations ($854,000), losses on the sale of certain assets associated with the Company’s galvanized strand business and write-downs in the carrying value of the remaining assets to be disposed of ($3.1 million), an impairment loss on the long-lived assets and closure reserves associated with the industrial wire business ($4.3 million) and separation costs associated with other selling and administration staffing reductions ($114,000). These charges were partially offset by the benefit from a $361,000 reduction in the reserves that were previously recorded related to the Company’s exit from the galvanized strand business. Approximately $11.4 million of the restructuring charges were non-cash charges related to asset write-downs or losses on asset sales and the remaining $1.6 million were cash charges associated with the sale of the industrial wire and nail businesses and employee separation costs.

Other Expense (Income)

     Other expense was $7,000 in 2003 compared with other income of $797,000 in 2002. In 2002, the Company recorded a $1.0 million gain in other income in connection with an insurance settlement, which was partially offset by $215,000 of other expense. The insurance settlement was related to a property damage and business interruption claim resulting from an accident that occurred at the Fredericksburg, Virginia facility in August 1999.

Earnings Before Interest, Income Taxes and Accounting Change

     The Company’s earnings before interest, income taxes and accounting change was $9.9 million in 2003 compared with $343,000 in 2002. Excluding restructuring charges and the gain on an insurance settlement, the Company’s earnings before interest, income taxes and accounting change in the prior year was $12.3 million.

Interest Expense

     Interest expense decreased $1.7 million, or 15%, to $10.1 million in 2003 from $11.8 million in 2002. The decrease was primarily due to reductions in the average borrowing levels on the Company’s senior secured credit facility ($2.3 million) and amortization expense associated with capitalized financing costs ($216,000), partially offset by higher average interest rates ($786,000).

Income Taxes

     The Company’s effective income tax rate was significantly impacted by a reduction of the valuation allowance on deferred income tax assets from $7.5 million to $1.3 million. The reduction in the valuation allowance was due to management’s determination that the realization of certain net operating loss carryforwards was more likely than not and accounts for $6.2 million of the $6.8 million benefit for income taxes that was recorded in 2003. Due to the near breakeven pre-tax earnings of the Company (a pre-tax loss of $112,000), the changes in the valuation allowance were amplified in the calculation of the effective income tax rates.

Cumulative Effect of Accounting Change

     In 2002, the Company recorded a non-cash charge of $14.4 million, or $1.70 per share, for the cumulative effect of an accounting change. During the second quarter of fiscal 2002, the Company completed the impairment testing of the goodwill associated with Florida Wire and Cable, Inc. (“FWC”), required in connection with its adoption of SFAS No. 142 effective

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September 30, 2001, the first day of fiscal year 2002. Based on the results of the testing, the Company determined that goodwill had been impaired and that a charge should be recorded as of the date of adoption at the beginning of fiscal 2002.

Net Earnings (Loss)

     The Company’s net earnings for 2003 were $6.7 million, or $0.78 per diluted share, compared to a loss of $25.7 million, or $3.04 per diluted share, in 2002. Excluding the cumulative effect of an accounting change, the loss in 2002 was $11.4 million, or $1.34 per diluted share.

Liquidity and Capital Resources

Selected Financial Data
(Dollars in thousands)

Cash Flow Analysis

     Operating activities provided $27.8 million of cash in 2004, $5.2 million in 2003 and $9.4 million in 2002. The increase in 2004 was primarily due to the improved financial performance of the Company partially offset by the additional working capital investment required to support the higher level of sales. The net change in the working capital components of receivables, inventories and accounts payable and accrued expenses used $23.0 million in 2004 compared to $5.4 million in 2003. Depreciation and amortization increased by $1.1 million, or 15%, compared to the prior year primarily due to the increased amortization associated with the terminated interest rate swaps. Deferred income taxes provided $7.5 million in the current year while using $6.8 million in the prior year primarily due to the substantial pre-tax profit in the current year which resulted in the use of net operating loss carryforwards.

     Investing activities used $3.0 million of cash in 2004 and $716,000 in 2003 while providing $18.2 million in 2002. The cash provided in 2002 was principally related to the $16.4 million of proceeds generated from the sale of the South Carolina industrial wire business, the Company’s investment in Structural Reinforcement Products, Inc. and certain assets of the Company’s galvanized strand and nail businesses. Capital expenditures amounted to $3.0 million, $1.0 million and $528,000 in 2004, 2003 and 2002, respectively. The increases in capital expenditures were primarily related to the capital outlays associated with the expansion of the Company’s engineered structural mesh business. Under the terms of the Company’s credit facility, it is limited to capital expenditures of not more than $7.0 million for fiscal 2005 and each fiscal year thereafter through the year ended September 29, 2007, and for the period beginning on September 30, 2007 and ending on June 2, 2008, plus for any of these periods, up to a $2.0 million carryover of the amount by which actual capital expenditures are less than the applicable limitation for the prior period. Since the Company’s 2004 capital expenditures were $2.0 million below the amount permitted by its credit facility, the capital expenditure limitation applicable for 2005 is $9.0 million. The Company is proceeding with expansions of its engineered structural mesh, PC strand and pipe mesh businesses which will together represent an investment of approximately $8.0 million over the 2005 – 2006 period and currently expects that its capital outlays will amount to $9.0 million in 2005 and $5.0 million in 2006.

     Financing activities used $22.7 million, $4.4 million and $28.3 million of cash in 2004, 2003 and 2002, respectively. The increase in financing requirements in the current year was primarily due to the $17.4 million reduction in debt, $3.5 million of costs incurred in connection with the refinancing of the Company’s credit facility and $2.1 million of payments that were required to terminate interest rate swap agreements. In 2003, principal payments reflect the application of a $3.0 million federal

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tax refund, which was used to pay down term debt on the previous senior secured credit facility.

     The Company’s total debt to capital ratio decreased to 43% at October 2, 2004 compared with 69% at September 27, 2003 and 76% at September 28, 2002. The decrease was due to the combined impact of a $17.4 million net reduction in debt and a $39.4 million increase in shareholders’ equity in the current year. The Company believes that, in the absence of significant unanticipated cash demands, net cash generated by operating activities and amounts available under its revolving credit facility will be sufficient to satisfy its working capital and capital expenditure requirements.

Credit Facilities

     On June 3, 2004, the Company entered into a new $82.0 million senior secured debt facility which has a four-year term maturing on June 2, 2008 consisting of a $60.0 million revolver, a $17.0 million Term Loan A and a $5.0 million Term Loan B. Proceeds from the financing were used to pay off and terminate the Company’s previous credit facility (approximately $62.4 million outstanding as of the closing date) and will support the Company’s working capital, capital expenditure and general corporate requirements going forward. The new credit facility is secured by all of the Company’s assets.

     Advances under the revolving credit facility