(

) Stock-Based Compensation

Under our equity incentive plan, employees and directors

may

be granted stock options, restricted stock, restricted stock units and performance awards. Effective

February 17, 2015,

our shareholders approved the

2015

Equity Incentive Plan of Insteel Industries, Inc. (the

“2015

Plan”), which authorizes up to

900,000

shares of our common stock for future grants under the plan. The

2015

Plan, which expires on

February 17, 2025,

replaces the

2005

Equity Incentive Plan of Insteel Industries, Inc., which expired on

February 15, 2015.

As of

September 30, 2017,

there were

433,000

shares of our common stock available for future grants under the

2015

Plan, which is our only active equity incentive plan.

Stock option awards

Under our equity incentive plan, 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 the plan generally vest over

three

years and expire

ten

years from the date of the grant. Compensation expense associated with stock options is as follows:

	Year Ended
	September 30,		October 1,		October 3,
(In thousands)	2017		2016		2015
Stock options:
Compensation expense	$	1,007	$	988	$	1,007

The remaining unrecognized compensation cost related to unvested options at

September 30, 2017

was

$330,000,

which is expected to be recognized over a weighted average period of

1.49

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

2017,

2016

and

2015

were

$11.08,

$9.92

and

$7.10

per share, respectively, based on the following weighted-average assumptions:

	Year Ended
	Septem ber 30 ,			Octo ber 1 ,			Octo ber 3 ,
	201 7			201 6			201 5
Expected term (in years)		5.14			5.45			5.72
Risk-free interest rate		1.98	%		1.30	%		2.18	%
Expected volatility		38.32	%		39.00	%		37.99	%
Expected dividend yield		0.37	%		0.48	%		0.61	%

The assumptions utilized in the Monte Carlo valuation model are evaluated and revised, as necessary, to reflect market conditions and actual historical experience. 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 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 expected volatility was derived using a term structure based on historical volatility and the volatility implied by exchange-traded options on our stock. The dividend yield was calculated based on our annual dividend as of the option grant date.

The following table summarizes stock option activity:

				Exercise Price						Contractual		Aggregate
				Per Share						Term -		Intrinsic
	Options							Weighted		Weighted		Value
(Share amounts in thousands)	Outstanding			Range				Average		Average (in years)		(in thousands)
Outstanding at September 27, 2014		871			$6.89	-	$20.50	$	14.23
Granted		134			18.05	-	21.96		19.89
Exercised		(27	)		6.89	-	11.15		9.17			$	328
Forfeited		(55	)		9.16	-	21.96		15.37
Outstanding at October 3, 2015		923			7.55	-	21.96		15.14
Granted		99			23.95	-	34.49		28.47
Exercised		(651	)		7.55	-	21.96		13.93				8,718
Outstanding at October 1, 2016		371			9.16	-	34.49		20.81
Granted		88			26.75	-	37.06		30.93
Exercised		(67	)		9.16	-	23.95		19.05				1,212
Outstanding at September 30, 2017		392			9.16	-	37.06		23.40		7.64		1,845

Vested and anticipated to vest in future at September 30, 2017		388							23.36		7.63		1,837

Exercisable at September 30, 2017		194							19.05		6.41		1,491

Stock option exercises include “net exercises” for which the optionee received shares of common stock equal to the intrinsic value of the options (fair market value of common stock on the date of exercise less exercise price) reduced by any applicable withholding taxes.

Restricted stock uni

Restricted stock units (“RSUs”) granted under our equity incentive plan are valued based upon the fair market value on the date of the grant and provide for a dividend equivalent payment which is included in compensation expense. The vesting period for RSUs is generally

one

year from the date of grant for RSUs granted to directors and

three

years from the date of the grant for RSUs granted to employees. RSUs do

not

have voting rights. RSU grants and compensation expense are as follows:

	Year Ended
	September 30,		October 1,		October 3,
(In thousands)	2017		2016		2015
Restricted stock unit grants:
Units		37		57		62
Market value	$	1,180	$	1,516	$	1,253
Compensation expense		1,238		1,451		1,291

The remaining unrecognized compensation cost related to unvested RSUs on

September 30, 2017

was

$548,000

which is expected to be recognized over a weighted average period of

1.69

years.

The following table summarizes RSU

activity:

				Weighted
	Restricted			Average
	Stock Units			Grant Date
(Unit amounts in thousands)	Outstanding			Fair Value
Balance, September 27, 2014		197		$	15.68
Granted		62			20.33
Forfeited		(13	)		17.52
Released		(89	)		12.86
Balance, October 3, 2015		157			18.96
Granted		57			26.57
Forfeited		(2	)		23.95
Released		(67	)		17.95
Balance, October 1, 2016		145			22.35
Granted		37			31.95
Released		(54	)		20.43
Balance, September 30, 2017		128			25.92