Selected Balance Sheet Data at September

(in thousands)

10Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Ingles, a leading supermarket chain in the Southeast, operates 198 supermarkets in Georgia (83)(81), North Carolina (60), South Carolina (31)(33), Tennessee (21), Virginia (2) and Alabama (1). The Company locates its supermarkets primarily in suburban areas, small towns and rural communities. Ingles supermarkets offer customers a wide variety of nationally advertised food products, including grocery, meat and dairy products, produce, frozen foods and other perishables and non-food products, including health and beauty care products and general merchandise, as well as quality private label items. In addition, the Company focuses on selling high-growth, high-margin products to its customers through the development of book sections, media centers, floral departments, bakery departments and prepared foods including delicatessen sections. TheDuring fiscal 2000, the Company recently began adding fuel centers and pharmacies at select store locations. As of September 28, 200227, 2003, the Company operates 1526 in-store pharmacies and 1117 fuel centers.

Ingles also operates two other lines of business, fluid dairy processing and shopping center rentals. The fluid dairy processing segment sells approximately 32% of its products to the retail grocery segment and approximately 68% of its products to third parties. Real estate ownership (including the shopping center rental segment) is an important component of the Company’s operations, providing both operational and economic benefit.

Critical Accounting Policies

Critical accounting policies are those accounting policies that management believes are important to the portrayal of Ingles’ financial condition and results of operations, and require management’s most difficult, subjective or complex judgements, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Self-Insurance

The Company is self-insured for workers’ compensation and group medical and dental benefits. Risks and uncertainties are associated with self-insurance; however, the Company has limited its exposure by maintaining excess liability coverages. Self-insurance reserves are established based on claims filed and estimates of claims incurred but not

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reported. The estimates are based on data provided by the respective claims administrators. The majority of the Company’s properties are self-insured for casualty losses and business interruption; however, liability coverage is maintained.

Asset Impairments

The

Beginning in fiscal 2003, the Company has accountedaccounts for the impairment of long-lived assets in accordance with Statement of Financial Accounting Standards No. 121 and, beginning in fiscal 2003, will account for it in accordance with Statement of Financial Accounting Standards No. 144. For assets to be held and used, the Company tests for impairment using undiscounted cash flows and calculates the amount of impairment using discounted cash flows. For assets held for sale, impairment is recognized based on the excess of remaining book value over expected recovery value. The recovery value is the fair value as determined by independent quotes or expected sales prices developed by internal specialists. Estimates of future cash flows and expected sales prices are judgementsjudgments based upon the Company’s experience and knowledge of local operations and cash flows that are projected for several years into the future. These estimates can fluctuate significantly due to changes in real estate market conditions, the economic environment, capital spending decisions and inflation.

Closed Store Accrual

For properties closed prior to be closedDecember 31, 2002 that arewere under long-term lease agreements, the present value of any remaining liability under the lease, discounted using risk-free rates and net of expected sublease recovery, is recognized as a liability and expensed. For all store closures subsequent to the adoption of Statement of Financial Accounting Standards No. 146 effective December 31, 2002, the liability is recognized and expensed based on the difference between the present value of any remaining liability under the lease and the present value of the estimated market rate at which the Company expects to be able to sublease the properties. The Company’s estimates of market rates are based on its experience, knowledge and typical third-party advice or market data. If the real estate and leasing markets change, sublease recovery could vary significantly from the recoveries originally assumed, resulting in a material change in the Company’s recorded liability.

Vendor Allowances

The Company receives funds for a variety of merchandising activities from the many vendors whose products the Company buys for resale in its stores. These incentives and allowances include volume or purchase based incentives, advertising allowances, slotting fees, and promotional discounts. The purpose of these incentives and allowances is generally to help defray the costs incurred by the Company for stocking, advertising, promoting and selling the vendor’s products. Whenever possible, vendor discounts and allowances that relate to buying and merchandising activities are recorded as a component of item cost in inventory and recognized in merchandise costs when the item is sold. Due to system constraints and the nature of certain allowances, it is sometimes not practicable to apply allowances to the item cost of inventory. In those instances, the allowances are applied as a reduction of merchandise costs using a rational and systematic methodology, which results in the recognition of these incentives when the inventory related to the initial purchase is sold. Amounts that represent a reimbursement of specific identifiable incremental costs, such as advertising, are recorded as a reduction to the related expense in the period that the related expense is incurred.

Results of Operations

Ingles operates on a 52 or 53-week fiscal year ending on the last Saturday in September. The consolidated statements of income for the fiscal years ended September 27, 2003, September 28, 2002 and September 29, 2001 includeeach includes 52 weeks of operations. The consolidated statement of income for the fiscal year ended September 30, 2000 includes 53 weeks of operations. Comparable store sales are defined as sales by grocery stores in operation for the entire duration of the

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previous and current fiscal years. Replacement stores and major and minor remodels are included in the comparable store sales calculation. A replacement store is a new store that is opened to replace an existing nearby store that is closed. A major remodel entails substantial remodeling of an existing store and may include additional retail square footage. A minor remodel includes repainting, remodeling and updating the lighting and equipment throughout an existing store. For the fiscal years ended September 27, 2003 and September 28, 2002 comparable store sales include 194 and 196 stores, respectively.

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The following table sets forth, for the periods indicated, selected financial information as a percentage of net sales. For information regarding the various segments of the business, reference is made to Note 11 “Lines of Business” to the Consolidated Financial Statements.

portion of the proceeds of the Notes was used to repay $170.0 million of existing debt. Debt retired with the proceeds from the Notes generally had lower interest rates and shorter maturity than the Notes. The Company incurred $1.0 million in costs in connection with the early retirement of the $170.0 million of debt which is included as interest expense in fiscal 2002. In addition, interest capitalized on the construction of assets declined $1.6 million in fiscal 2002 compared to fiscal 2001 due to a reduction in capital expenditures.

Income Taxes.Income tax expense as a percentage of pre-tax income decreased to 36.3%36.2% in the 2002 year compared to 36.7% in fiscal 2001.

Income Before Extraordinary Item.Income before the extraordinary item (discussed below) for the 2002 fiscal year was $15.3 million, or 0.8% of sales, compared to $17.9 million, or 0.9% of sales, for the 2001 fiscal year. Diluted earnings per common share before the extraordinary item were $.66 for the 2002 year compared to $.79 for the 2001 year. Increased interest expense was the primary factor contributing to the decrease.

Extraordinary Item-Early Extinguishment of Debt.The Company incurred $0.6 million in costs, net of income tax benefits of $0.4 million, in connection with the early retirement of $170.0 million of debt with a portion of the proceeds from the Notes offering in December 2001.

Net Income.Net income for the year ended September 28, 2002 was $14.7 million compared to $17.9 million for the year ended September 29, 2001. Net income, as a percentage of sales, was 0.8% for the fiscal 2002 period compared to 0.9% for the fiscal 2001 period. Basic earnings per share were $.65 and $.79 for 2002 and 2001, respectively. Diluted earnings per share were $.64 and $.79 per share for 2002 and 2001, respectively.

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Fiscal Year Ended September 29, 2001 Compared to the Fiscal Year Ended September 30, 2000

Net Sales.Net sales increased 1.9% to $1.953 billion for the fiscal year ended September 29, 2001 from $1.916 billion for the fiscal year ended September 30, 2000. Fiscal year 2001 contained 52 weeks compared to 53 weeks in fiscal 2000. Net sales increased 3.9%, adjusted for the difference in weeks. Comparable store sales grew 3.6%.

During fiscal 2001, Ingles opened two new stores and six replacement stores, closed seven older stores and completed three major remodel/expansions and six minor remodels. Retail square footage increased by 1.9% to 9.1 million square feet. Investments made in maturing new stores, remodeled stores and stores that have been replaced were contributors to sales growth. Successful marketing campaigns such as the “Safari Challenge” game and sponsorship of various community events and sports teams also contributed to sales growth.

Gross Profit.Gross profit for the fiscal year ended September 29, 2001, increased 4.2% to $511.6 million, or 26.2% of sales, compared to $490.9 million, or 25.6% of sales, for the fiscal year ended September 30, 2000. Expansion of the higher margin perishable departments, effective purchasing and reduced product loss due to security measures all contributed to the gross margin growth.

Operating and Administrative Expenses.Operating and administrative expenses increased 5.1% to $454.6 million for the year ended September 29, 2001, from $432.6 million for the year ended September 30, 2000. As a percentage of sales, operating and administrative expenses were 23.3% and 22.6% for the years ended September 29, 2001 and September 30, 2000, respectively. A variety of factors contributed to the increase. Higher payroll costs resulted primarily from increased wage rates in a competitive labor market. Equipment rent expense increases resulted from the leasing of store equipment for new and replacement stores. Utility expense increases resulted primarily from increases in fuel costs at the store level. Insurance expense increased primarily due to a larger volume of claims under the Company’s self-insured group medical program. A breakdown of the major increases (decreases) in operating and administrative expenses, expressed as a percentage of sales, is as follows:

Rental Income, Net.Rental income, net increased $0.2 million to $10.3 million for the 2001 year from $10.1 million for the 2000 year. The improvement consists of gross rental income increases of $0.7 million and operating cost increases of $0.5 million.

Other Income, Net.Other income, net decreased $3.1 million to $3.9 million for the year ended September 29, 2001 from $7.0 million for the year ended September 30, 2000. Other income includes gains on the sale of assets of $1.4 million and $2.7 million for fiscal years 2001 and 2000, respectively. The balance of the decrease resulted primarily from a reduction in proceeds from vendor accounts payable audits.

Income Before Interest and Income Taxes.Income before interest and income taxes decreased $4.3 million to $71.1 million, during the 2001 fiscal year compared to $75.4 million during the 2000 fiscal year. Income before interest and income taxes, as a percentage of sales, was 3.6% and 3.9% for the 2001 and 2000 fiscal years, respectively.

Interest Expense.Interest expense increased $1.7 million for the year ended September 29, 2001 to $42.9 million from $41.2 million for the year ended September 30, 2000. The increase resulted from interest on additional debt incurred to fund expansion and renovation, offset somewhat by lower interest rates.

Income Taxes.Income tax expense as a percentage of pre-tax income decreased to 36.7% in the 2001 year compared to 38.3% in fiscal 2000, due primarily to increased tax credits related to training and employment.

Net Income.Net income for the 2001 fiscal year was $17.9 million, or 0.9% of sales, compared to $21.1 million, or 1.1% of sales, for the 2000 fiscal year. Basic and diluted earnings per common share were $.79 for the 2001 year compared to $.93 for the 2000 year.

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Liquidity and Capital Resources

Capital Expenditures

The Company believes that a key to its ability to continue to develop a loyal customer base is providing conveniently located, clean and modern stores which provide customers with good service and a broad selection of competitively priced products. As such, the Company has invested and will continue to invest significant amounts of capital toward the modernization of its store base. The Company’s modernization program includes the opening of new stores, the completion of major remodels and expansion of selected existing stores, the relocation of selected existing stores to larger, more convenient locations and the completion of minor remodeling of its remaining existing stores.

Capital expenditures totaled $49.7$75.9 million for the fiscal year ended September 28, 2002,27, 2003, including the opening of four new stores, the replacement of one store, major remodel and expansion of twothree stores and minor remodels at tenthree stores. Capital expenditures also included the costs of upgrading and replacing store equipment, technology investments, the purchase of future store sites, capital expenditures related to the Company’s distribution operation and its milk processing plant, and expenditures for stores to open in fiscal 2003.2004.

Capital expenditures totaled $49.7 million for the fiscal year ended September 28, 2002, including the opening of one replacement store and the completion of two major remodel/expansions and ten minor remodels. This represented a slowing in the dollar amount of capital expenditures typically incurred by the Company in a fiscal year. Much of this slowed pace was attributable to the Company’s efforts to secure long term-financing through a high-yield debt offering completed in December 2001. The majority of capital expenditures on a given project are incurred in the later months of completion of the project. Therefore, the majority of the dollars spent on projects started after the financing was in place were not incurred until after the end of fiscal year 2002.

Ingles’ capital expenditure plans for fiscal 20032004 include investments of approximately $70 million. Originally the Company planned to invest approximately $60 million in capital expenditures in fiscal 2004; however proceeds of $19.6 million from the sale of a shopping center in the fourth quarter of 2003 were designated as a like kind exchange for tax reporting purposes. Under current tax law, the Company has 180 days to purchase like kind property in order to defer the $4.5 million of income tax on the gain from the sale of the shopping center. Therefore capital expenditures for fiscal 2004 will include a higher proportion of land purchases than usual in order to qualify for the like kind exchange provisions.

The Company plans to open fourone new stores, replace one existing store and complete three remodel/expansions and threetwo minor remodels.remodels in fiscal 2004. Expenditures will also include investments in stores expected to open in fiscal 20042005 as well as technology improvements, upgrading and replacing existing store equipment and warehouse and transportation equipment and improvements to the Company’s milk processing plant.

The Company expects that its net annual capital expenditures will remain in the range of approximately $60 to $70 million going forward in order to maintain a modern store base. The number of projects pursued during each fiscal year could decline to some degree as the Company increases the average size of stores being built. The number of projects may also fluctuate due to the varying costs of the types of projects pursued including new stores, major remodel/expansions or minor remodels. The Company makes decisions on the allocation of capital expenditure dollars based on many factors including the competitive environment, other Company capital initiatives and its financial condition.

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The Company does not generally enter into commitments for capital expenditures other than on a store-by-store basis at the time it begins construction on a new store or begins a major or minor remodeling project. The Company generally engages in major remodeling and new store development on not more than three or four locations at a time. Construction commitments at September 27, 2003 totaled $10.6 million.

Liquidity

The Company generated $52.0$55.8 million of cash from operations in fiscal 2002.2003.

Cash used by investing activities totaled $43.6$53.5 million comprised primarily of $49.7$75.8 million of capital expenditures during the period, partially offset by $6.1$22.3 million of proceeds from the sale of assets.

The Company has generally funded its capital expenditures with cash provided from operations and borrowings under lines of credit. The lines of credit are later refinanced with secured long-term debt.

During fiscal year 2002,2003, the Company’s financing activities provided $26.0$31.7 million in cash. Proceeds from long-term debt totaled $272.3$120.0 million, including the issuanceaddition of $100.0 million to the existing Notes, while payments on long-term and short-term debt were $225.2$75.7 million, including the $170.0$30.5 million of early debt retirementretired with a portion of the proceeds from the Notes. Debt issuance costs of $9.7$1.1 million associated with the issuance of the Notes and dividend payments of $14.3 million reduced cash from financing activities.

At September 28, 2002,27, 2003, the Company had lines of credit with sevenfive banks totaling $150$145 million, all of which were unused. Of the $150$145 million of committed lines of credit, $130$120 million matures in October 2006, $15 million matures in October and November 2004 and $20$10 million matured in October 2002.2003. The lines provide the Company with various interest rate options generally at rates less than prime. The Company is not required to maintain compensating balances in connection with these lines of credit. The Company was in compliance with all financial covenants related to these lines of credit at September 28, 2002.27, 2003.

The Company’s principal sources of liquidity are expected to be cash flow from operations, borrowings under its lines of credit and long-term financing. As of September 28, 2002,27, 2003, the Company had unencumbered real property and equipment with a net book value of approximately $286$330 million. The Company believes, based on its current results of operations and financial condition, that its financial resources, including existing bank lines of credit, short- and long-term financing expected to be available to it and internally generated funds, will be sufficient to meet planned capital expenditures and working capital requirements for the foreseeable future, including any debt service requirements of additional borrowings. However, there can be no assurance that any such sources of financing will be available to the Company on acceptable terms, or at all.

In addition,

However, it is possible that, in the future, the Company’s results of operations and financial condition will be different from that described in this report based on a number of intangible factors. These factors may include, among others, increased competition, changing regional and national economic conditions, adverse climatic conditions affecting food production and delivery and changing demographics as well as the additional factors discussed below under “Forward Looking Statements”. It is also possible, for such reasons, that the results of operations from the new, expanded, remodeled and/or replacement stores will not meet or exceed the results of operations from existing stores that are described in this report.

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Contractual Obligations and Commercial Commitments

The Company has assumed various financial obligations and commitments in the normal course of its operations and financing activities. Financial obligations are considered to represent known future cash payments that the Company is required to make under existing contractual arrangements, such as debt and lease arrangements. The following table represents the scheduled maturities of the Company’s long-term contractual obligations as of September 27, 2003.

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Amounts available to the Company under commercial commitments as of September 27, 2003, were as follows:

Off Balance Sheet Arrangements

The Company is not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Company’s financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.

Quarterly Cash Dividends

Since December 27, 1993, the Company has paid regular quarterly cash dividends of $.165 (sixteen and one-half cents) per share on its Class A Common Stock and $.15 (fifteen cents) per share on its Class B Common Stock for an annual rate of $.66 and $.60 per share, respectively.

The Company expects to continue paying regular cash dividends on a quarterly basis. However, the Board of Directors periodically reconsiders the declaration of dividends. The Company pays these dividends at the discretion of the Board of Directors and the continuation of these payments, the amount of such dividends, and the form in which the dividends are paid (cash or stock) depends upon the results of operations, the financial condition of the Company and other factors which the Board of Directors deems relevant. In addition, certain loan agreements containing provisions outlining minimum tangible net worth requirements restrict the ability of the Company to pay additional dividends to approximately $29.8$33.7 million based on tangible net worth at September 28, 2002.27, 2003. Further, the Company is prevented from paying dividends at any time that it is in default under the indenture governing the Notes. In addition, the terms of the indenture may restrict the ability of the Company to pay additional dividends based on certain financial parameters.

Impact of Inflation

Inflation in food prices during fiscal 20022003 and 20012002 was slightly higher than the overall increase in the Consumer Price Index. During fiscal 2000,2001, inflation in food prices was lower than the overall increase in the Consumer Price Index. One of the Company’s significant costs is labor, which increases with inflation.

New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statements No. 141, “Business Combinations” (“FAS 141”) and No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”). Under the new rules, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The amortization provisions of FAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company applied the new accounting rules on September 30, 2001. The adoption of FAS 141 and FAS 142 did not have any impact on the Company’s financial statements.

In August 2001, the FASB issued Statement No. 143 “Accounting for Asset Retirement Obligations” that provides accounting guidance for the costs of retiring long-lived assets and is effective for fiscal years beginning after June 15, 2002. The Company does not believe the adoption of this statement will have any impact on its financial statements.

In October 2001, the FASB issued Statement No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”). FAS 144 provides accounting guidance for financial accounting and reporting for the impairment or disposal of long-lived assets. The statement supercedes FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” (“FAS 121”). It also supercedes the accounting and reporting provisions of APB Opinion No. 30 “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” related to the disposal of a segment of a business. FAS 144 is effective for fiscal years beginning after December 15, 2001. The Company is currently assessing the impact adopting this statement will have on its financial statements.

In April 2002, the FASB issued Statement No. 145, “Modifications to Reporting of Extinguishments of Debt and Accounting for Certain Capital Lease Modifications and Technical Corrections” (“FAS 145”). FAS 145 will requirerequires gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under FASB Statement No. 4. Extraordinary treatment will beis required for certain extinguishments as provided in APB Opinion No. 30. FAS 145 also amends FASB Statement No. 13 to require certain modifications to capital leases be treated as a sale-leaseback transactions and modifies the accounting for sub-leases when the original lessee remains a secondary obligor (or guarantor). In addition, the FASB rescinded Statement No. 44 which addressed the accounting for intangible assets of motor carriers and made numerous technical corrections. In fiscal 2003,December 2002 quarter, the Company will reclassifyadopted FAS 145. Costs of $0.7 million incurred with the losses on extinguishmentearly retirement of $170.0 million in debt incurred duringhave been reclassified in fiscal 2002 from an extraordinary item to interest expense. The reclassification has no effect on total basic or diluted earnings per share but eliminates classifying a $0.02 per share charge in fiscal 2002 as an extraordinary item.

EITF (Emerging Issues Task Force) Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor,” became effective as to the Company on December 29, 2002. This issue addresses the appropriate accounting for consideration received from a vendor. Due to system constraints and the nature of certain allowances, it is sometimes not practicable to apply allowances to the item cost of inventory. As a result of this new guidance and these constraints, the Company has adopted a new policy for recognizing vendor allowances, including slotting fees. The Company recognizes these allowances as a reduction in income from continuing operations.to inventory and ultimately to cost of goods sold when the related products are sold, for transactions executed subsequent to

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December 29, 2002. Under the Company’s previous accounting policy for vendor allowances including slotting fees, these credits were recognized as a reduction to cost of goods sold as soon as the amount was contractually established and collection was probable. In connection with the implementation of this new accounting policy, the Company applied the provisions of EITF No. 02-16 prospectively which resulted in deferring recognition of $2.7 million of allowances, before a tax benefit of approximately $1.0 million, in fiscal 2003. This charge was recorded in the Company’s Consolidated Statement of Income using the prospective method and reflects an adjustment of the Company’s inventory balance.

In January 2003, the FASB released Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 requires that all primary beneficiaries of Variable Interest Entities (VIE) consolidate that entity. FIN 46 is effective immediately for VIEs created or acquired after January 31, 2003. It applies in the first fiscal year or interim period ending after December 15, 2003, to variable interest entities in which an enterprise holds a VIE it acquired before February 1, 2003. The Company has determined that it has not created or modified any relationships or contracts since February 1, 2003 that could result in potential VIEs. The Company is in the process of identifying any relationships that existed prior to February 1, 2003 that could potentially be classified as a VIE. The impact on the Company’s financial statements is not known at this time.

Prior to fiscal 2003, the Company accounted for its stock-based compensation plans under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. No stock-based employee compensation expense for stock options was reflected in net income for years prior to 2003, as all stock options granted under those plans had an exercise price equal to the fair market value of the underlying common stock on the date of grant. During the fourth quarter of fiscal 2003, effective as of the beginning of the year, the Company adopted the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” (“FAS 123”). Under the fair value recognition provisions of FAS 123, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Under the transition method selected by the Company as allowed by FASB Statement No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“FAS 148”), the change in accounting principle can be reported using the prospective method. As no options were granted, modified or settled after the beginning of the fiscal year, there was no stock-based employee compensation included in net income for fiscal 2003.

Forward Looking Statements

This Annual Report contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. The words “expect”, “anticipate”, “intend”, “plan”, “believe”, “seek” and similar expressions are intended to identify forward-looking statements. While these forward-looking statements and the related assumptions are made in good faith and reflect ourthe Company’s current judgment regarding the direction of ourthe Company’s business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. Such statements are based upon a number of assumptions and estimates which are inherently subject to significant risks and uncertainties many of which are beyond ourthe Company’s control. Some of these assumptions inevitably will not materialize, and unanticipated events will occur which will affect ourthe Company’s results. Some important factors (but not necessarily all factors) that affect ourthe Company’s revenues, growth strategies, future profitability and operating results, or that otherwise could cause actual results to differ materially from those expressed in or implied by any forward-looking statement, including business and economic conditions generally in the Company’s operating area; the Company’s ability to successfully implement its expansion and operating strategies and to manage rapid expansion; pricing pressures and other competitive factors; the Company’s ability to reduce costs and achieve improvements in operating results; the availability and terms of financing; increases in labor and utility costs; success or failure in the ownership and development of real estate; and changes in the laws and government regulations applicable to the Company.Company; and changes in accounting policies, standards, guidelines or principles as may be adopted by regulatory agencies as well as the Financial Accounting Standards Board.

Consequently, actual events affecting the Company and the impact of such events on the Company’s operations may vary significantly from those described in this report or contemplated or implied by statements in this report.

Item 7(a).QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

The Company is exposed to changes in financial market conditions in the normal course of its business as a result of its use of bank debt to finance its retail grocery and real estate lines of business.

The Company is exposed to changes in interest rates primarily as a result of its borrowing activities, which include borrowings under lines of credit, real estate and equipment financing and the Notes. The lines of credit, along with cash

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flow from operations, are used to maintain liquidity and fund business operations. The Company typically replaces borrowings under its lines of credit, as necessary, with both long-term secured and unsecured fixed rate financing. The nature and amount of the Company’s debt may vary as a result of future business requirements, market conditions and other factors. The definitive extent of the Company’s interest rate risk is not quantifiable or predictable because of the variability of future interest rates and business financing requirements, but the Company does not believe such risk is material. The Company does not customarily use derivative instruments to adjust the Company’s interest rate risk profile.

The table below presents principal amounts and related weighted average rates by year of maturity for the Company’s debt obligations at September 27, 2003 and September 28, 2002 and September 29, 2001 (in thousands):

The Company does not typically utilize financial instruments for trading or other speculative purposes, nor does it typically utilize leveraged financial instruments. On the basis of the fair value of the Company’s market sensitive

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instruments at September 28, 2002,27, 2003, the Company does not consider the potential near-term losses in future earnings, fair values and cash flows from reasonable possible near-term changes in interest rates and exchange rates to be material.

Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following consolidated financial statements of the Company are included on pages 2324 through 4142 of this report on Form 10-K:

Report of Ernst & Young LLP, Independent Auditors;

Consolidated Balance Sheets as of September 28, 200227, 2003 and September 29, 2001;28, 2002;

Consolidated Statements of Income for the years ended September 27, 2003, September 28, 2002, and September 29, 2001, and September 30, 2000;2001;

Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 27, 2003, September 28, 2002, and September 29, 2001, and September 30, 2000;2001;

Consolidated Statements of Cash Flows for the years ended September 27, 2003, September 28, 2002, and September 29, 2001, and September 30, 2000;2001;

Notes to Consolidated Financial Statements;

Selected quarterly financial data required by this Item is included in Note 12 of the Consolidated Financial Statements.

Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

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Item 9A.CONTROLS AND PROCEDURES

As of September 27, 2003, the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of Ingles’ management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Ingles’ disclosure controls and procedures, as such term is defined under Rule 13a – 15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, Ingles’ management, including the Chief Executive Officer and Chief Financial Officer, concluded that Ingles’ disclosure controls and procedures were effective as of September 27, 2003 at insuring that required information will be disclosed on a timely basis in Ingles’ reports filed under the Exchange Act. No change in Ingles’ internal control over financial reporting has occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, Ingles’ internal control over financial reporting.

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item is incorporated herein by reference from the data under the heading “ELECTION OF DIRECTORS” in the Proxy Statement to be used in connection with the solicitation of proxies for the Company’s annual meeting of stockholders to be held February 11, 2003, to be filed with the Securities and Exchange Commission (“the “Commission”).

Item 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item is incorporated herein by reference from the data under the heading “ELECTION OF DIRECTORS” in the Proxy Statement to be used in connection with the solicitation of proxies for the Company’s 2004 annual meeting of stockholders, to be filed with the Securities and Exchange Commission (“the “Commission”).

The Company has adopted a Code of Ethics that applies to its senior financial officers, including without limitation, its Chief Executive Officer, Chief Financial Officer and Controller. The full text of the Code of Ethics is published on the Company’s web site at www.ingles-markets.com under the caption “Corporate Governance.” In the event that the Company makes any amendments to, or grants any waivers of, a provision of the Code of Ethics applicable to its principal executive officer, principal financial officer or principal accounting officer, the Company intends to disclose such amendment or waiver on its website. Information on the Company’s website, however, does not form a part of this Form 10-K.

Item 11.EXECUTIVE COMPENSATION

The information required by this Item is incorporated herein by reference from the data under the heading “EXECUTIVE COMPENSATION” in the Proxy Statement to be used in connection with the solicitation of proxies for the Company’s 2004 annual meeting of stockholders, to be held February 11, 2003, to be filed with the Commission.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated herein by reference from the data under the heading “SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS” in the Proxy Statement to be used in connection with the solicitation of proxies for the Company’s annual meeting of stockholders to be held February 11, 2003, to be filed with the Commission.

Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated herein by reference from the data under the heading “SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS” in the Proxy Statement to be used in connection with the solicitation of proxies for the Company’s 2004 annual meeting of stockholders, to be filed with the Commission.

Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated herein by reference from the data under the headings “ELECTION OF DIRECTORS —- Additional Information with Respect to Compensation Committee Interlocks and Insider Participation in Compensation Decisions” and “CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS” in the Proxy Statement to be used in connection with the solicitation of proxies for the Company’s 2004 annual meeting of stockholders, to be held February 11, 2003, to be filed with the Commission.

Item 14.CONTROLSPRINCIPAL ACCOUNTING FEES AND PROCEDURESSERVICES

As of September 28, 2002, an evaluation was performed

The information required by this Item is incorporated herein by reference form the data under the supervision andheading “RELATIONSHIP WITH INDEPENDENT AUDITORS” in the Proxy Statement to be used in connection with the participationsolicitation of Ingles’ management, includingproxies for the Chief Executive Officer and Chief Financial Officer,Company’s 2004 annual meeting of stock holders, to be filed with the effectiveness of the design and operation of Ingles’ disclosure controls and procedures, as such term is defined under Rule 13a – 14(c) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, Ingles’ management, including the Chief Executive Officer and Chief Financial Officer, concluded that Ingles’ disclosure controls and procedures were effective as of September 28, 2002 at insuring that required information will be disclosed on a timely basis in Ingles’ reports filed under the Exchange Act. No significant changes in Ingles’ internal controls or in other factors have occurred that could significantly affect controls subsequent to September 28, 2002.Commission.

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PART IV

Item 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

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EXHIBIT NUMBER AND DESCRIPTION

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2223

Report of Ernst & Young LLP, Independent AuditorAuditors

Stockholders and Board of Directors

Ingles Markets, Incorporated

We have audited the accompanying consolidated balance sheets of Ingles Markets, Incorporated and subsidiaries as of September 28, 200227, 2003 and September 29, 2001,28, 2002, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended September 28, 2002.27, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ingles Markets, Incorporated and subsidiaries at September 28, 200227, 2003 and September 29, 2001,28, 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 28, 2002,27, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

2324

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS