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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-K

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

For the Fiscal Year Ended September 28, 2002

Commission File Number 1-9929

INSTEEL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)

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
Common Stock (No Par Value)

     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]

     The aggregate market value of the common stock held by non-affiliates of the registrant as of December 16, 2002 was $4,889,550.

     The number of shares outstanding of the registrant’s common stock as of December 16, 2002 was 8,460,187.

DOCUMENTS INCORPORATED BY REFERENCE

     Certain portions of the Company’s Proxy Statement to be delivered to shareholders in connection with the 2003 Annual Meeting of Shareholders are incorporated by reference as set forth in Part III hereof.

PART I

Item 1.   Business.

General

     Insteel Industries, Inc. (“Insteel” or “the Company”) is one of the nation’s largest manufacturers of wire products. The Company manufactures and markets concrete reinforcing products, tire bead wire and industrial wire 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 products.

     Insteel is the parent holding company for two wholly-owned operating subsidiaries, Insteel Wire Products Company (“IWP”) and Florida Wire and Cable, Inc. (“FWC”). Subsequent to the year ended September 28, 2002, in October 2002, the Company merged FWC into IWP.

     Additional information about the Company and its filings with the U.S. Securities and Exchange Commission (“SEC”) are available on and through 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 its 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 both a commodity and 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 reinforcing for concrete pipe used in drainage and sewage systems, water treatment facilities and other related applications. Building mesh 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 a welded wire fabric product that acts as the primary reinforcement for concrete elements or structures. The Company frequently markets ESM as a superior alternative to hot-rolled rebar for certain concrete reinforcing applications, including highways, bridges and precast concrete elements. For 2002, WWF sales represented 49% of the Company’s consolidated net sales.

     PC strand is a high carbon seven-wire strand that is used for concrete reinforcing applications such as bridges, parking decks and other concrete structures. The product is used to impart compression forces into precast concrete elements and structures, which may be either prestressed or posttensioned. For 2002, PC strand sales represented 28% of the Company’s consolidated net sales.

     Industrial Wire. 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 2002, tire bead wire sales represented 9% of the Company’s consolidated net sales.

     Other industrial wire is produced as an intermediate product that is sold by the Company to manufacturers of industrial and commercial products. Industrial wire is produced to customer specifications based upon the specific requirements of their manufacturing processes and the end use of 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.

     Following the May 2002 sale of its industrial wire business located in Andrews, South Carolina, the Company has narrowed the focus of its industrial wire product offering to small diameter high carbon wire produced at its Fredericksburg, Virginia facility which is complementary to its tire bead wire product line. For 2002, industrial wire sales represented 11% of the Company’s consolidated net sales. Excluding the sales of the South Carolina plant, sales of the ongoing industrial wire business of the Virginia facility represented 1% of the Company’s consolidated net sales.

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     During 2002, in addition to the sale of the South Carolina industrial wire business, the Company also exited the nail business in January 2002. For 2002, sales of these discontinued products represented 13% of the Company’s consolidated net sales.

Marketing and Distribution

     Insteel markets its products through sales representatives that are employees of the Company. 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 original equipment manufacturers (“OEMs”), distributors and wholesalers. There were no customers that represented 10% or more of the Company’s net sales in 2002, 2001 or 2000.

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.

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 be generally characterized as a commodity-type product. Pricing tends to fluctuate with domestic market conditions as well as the global economic environment. In recent years, trade actions initiated by the domestic producers of carbon steel wire rod have had an impact on the balance of supply and demand in the market and on pricing.

     The Company purchases several different grades and sizes of wire rod. The specifications for each product vary in terms of the diameter, chemistry, mechanical properties, and metallurgical characteristics that are required for the Company’s various end products. The Company believes that the large volume of wire rod that it purchases makes it an attractive customer to suppliers thereby providing an opportunity for the Company to reduce its costs compared to smaller competitors.

     In 2001, demand for wire rod in the United States fell by approximately 20% from the prior year. This reduction in demand was primarily related to the weakening in the domestic economy. In spite of reductions in wire rod production capacity due to mill closures during the year, domestic production together with the availability of imported material resulted in sufficient supply to consumers of wire rod and a relatively stable pricing environment. In 2002, demand for wire rod in the United States remained at lower levels, due to 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 the reductions in domestic capacity. Although alternative sources of foreign rod were available to meet the Company’s requirements, prices increased as a result of the uncertainty caused by pending anti-dumping and countervailing duty cases.

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     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 provides 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 that are intended to balance the entry of imported material into the market. For the final year of the quota program, which is March 2002 to February 2003, the duty rate for imports in excess of the quota decreases 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%. The seven countries with anti-dumping duty margins accounted for 67% of the wire rod that entered the domestic market in 2001. The Company believes that these trade cases could result in a significant reduction in the availability of imported wire rod from the affected countries. Although the Company believes that alternative sources of supply are available that are sufficient to meet its requirements, wire rod prices are expected to rise, particularly if domestic demand recovers.

     In recent years, the Company has relied on imported wire rod to satisfy between 20% and 45% of its total requirements. During 2002, purchases of imported wire rod accounted for approximately 45% of the Company’s total wire rod purchases. Approximately 18% of the Company’s total wire rod purchases in 2002 originated in countries against which anti-dumping or countervailing duty petitions were filed in August 2001. Subsequently, anti-dumping or countervailing duty orders were entered against several producers that have historically supplied the Company. Certain producers elected to absorb these costs and maintain their presence in the domestic market while others elected to withdraw. In spite of the uncertainty and disruptions of supply that were created by the anti-dumping and countervailing duty petitions, weak domestic demand prevented shortages from developing in the market during 2002. The Company believes that new overseas sources of wire rod that are not subject to antidumping and countervailing duty orders will emerge to fill the supply void that was created when some traditional sources withdrew from the domestic market. The Company expects future supplies to be adequate to prevent shortages from developing in the market.

     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. Depending upon the relative strength of demand, the Company can be negatively impacted when rod prices are rising if it is unable to pass through offsetting increases in selling prices to its customers while the contrary holds true when raw material costs are falling.

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 wire mills 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 September 28, 2002, the Company employed 669 people. The Company has a collective bargaining agreement with a labor union at its Wilmington, Delaware facility, which expires in November 2003. Approximately 61 employees at the Wilmington plant were union members. The Company also has a collective bargaining agreement in effect for 5 remaining employees at its idle Jacksonville, Florida facility, which expires in April 2003. The Company believes that its relations with the labor unions and its employees are satisfactory.

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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 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 49 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 24 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 22 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 its annual meeting held February 19, 2002 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 25, 2003.

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 the galvanized strand and nail businesses, the Company is pursuing a sale of idle facilities located in Jacksonville, Florida and Andrews, South Carolina.

     The Company owns all of its properties, except the land at its Wilmington facility, which is leased. All of the Company’s properties are 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.

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Item 3.   Legal Proceedings.

     There are no material pending legal proceedings 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 2002.

PART II

Item 5.   Market for the Registrant’s Common Stock and Related Shareholder Matters.

     In January 2002, the Company was notified by the New York Stock Exchange (“NYSE”) that it would initiate procedures to suspend trading and delist the common stock of the Company in view of the fact that it had fallen below the following NYSE continued listing standards: (1) average global market capitalization over a consecutive 30 trading-day period less than $15.0 million, and (2) average closing price of the Company’s common stock less than $1.00 over a consecutive 30 trading-day period. In February 2002, the Company’s common stock began trading on the OTC bulletin board under the symbol “IIIN”. The Company continues to be subject to all applicable periodic reporting requirements of the U.S. Securities and Exchange Commission.

     At December 16, 2002, there were 618 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 credit facility. Pursuant to an amendment to the credit facility, the Company is prohibited from making dividend payments (see Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Credit Facilities”) and it does not intend to pay cash dividends in the foreseeable future.

Item 6.   Selected Financial Data.

Financial Highlights
(In thousands, except per share amounts)

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Equity Compensation Plan Information
Year Ended September 28, 2002
(In thousands, except exercise price amounts)

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

Cautionary Note Regarding Forward-Looking Statements

     This report contains forward-looking statements that reflect the Company’s current assumptions and estimates of future performance and economic conditions. Such statements are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements contain words such as “expects,” “plans,” “believes,” “will,” “estimates,” “intends,” and other words of similar meaning that do not relate strictly to historical or current facts. Forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those projected, stated or implied by the statements. Such risks and uncertainties include, but are not limited to, general economic and competitive conditions in the markets in which the Company operates; unanticipated changes in customer demand, order patterns and inventory levels; 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; legal, environmental or regulatory developments that significantly impact the Company’s operating costs; continuation of good labor relations; the Company’s ability to avoid events of default with respect to its indebtedness, particularly under its senior secured credit facility, as amended; and the Company’s ability to refinance its current indebtedness in a timely manner and on favorable terms.

Critical Accounting Policies

     The Company’s financial statements have been prepared in accordance with accounting policies 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 policies in addition to certain estimates and judgments by the Company’s management. The Company’s estimates and judgments are based on current available information, 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:

     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.

     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 and its estimated net realizable value based upon assumptions about future demand and market conditions. If actual conditions in the market for the Company’s wire products are substantially different than those projected by management, adjustments to these reserves may be required.

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     Valuation allowances for deferred income tax assets. The Company has recorded a valuation allowance 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 currently recorded valuation allowances against deferred income tax assets 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.

Results of Operations

Statements of Operations – Selected Data
(Dollars in thousands)

     “N/M” = not meaningful

2002 Compared with 2001

Net Sales

     Net sales decreased 16% to $251.0 million in 2002 from $299.8 million in 2001 primarily due to the elimination of revenues from the product lines that the Company has exited, including galvanized strand, nails and certain segments of the industrial wire business. On a comparable basis, excluding the revenues from these discontinued product lines, sales decreased 2%. Sales of the Company’s concrete reinforcing products (welded wire fabric and PC strand) declined 5% from a year ago, but rose to 77% of consolidated net sales from 67%. Sales of wire products (tire bead wire and industrial wire, excluding revenues from the industrial wire and nail businesses which the Company has exited) increased 34% from a year-ago, rising to 10% of consolidated sales from 8%. The changes in product mix were primarily due to increased sales of welded wire fabric and tire bead wire in the current year together with the impact of the Company’s exit from the galvanized strand, nail and certain segments of the industrial wire business. Sales from discontinued product lines represented 13% of the Company’s consolidated sales in 2002.

Gross Profit

     Gross profit rose 13% to $24.1 million, or 9.6% of net sales in 2002 from $21.3 million, or 7.1% of net sales in 2001. The 2.5 point increase in gross margin was due to higher productivity levels and favorable costs achieved by the Company’s manufacturing facilities, which reduced average unit conversion costs. These improvements served to more than offset the compression in spreads between average selling prices and raw material costs from prior year levels.

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Selling, General and Administrative Expense

     Selling, general and administrative expense (“SG&A expense”) fell 33% to $11.6 million, or 4.6% of net sales in 2002 from $17.1 million, or 5.7% of net sales in 2001. The decrease in SG&A expense was primarily related to the elimination of selling and administration costs associated with the product lines that the Company has exited as well as the savings generated from previously implemented cost reduction measures. In addition, $0.9 million of the decrease resulted from the elimination of goodwill amortization expense in the current year in connection with the Company’s adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142.

Restructuring Charges

     The Company recorded restructuring charges totaling $13.0 million in 2002 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 ($0.9 million), 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 ($0.1 million). These charges were partially offset by the benefit from a $0.4 million reduction in the reserves that were previously recorded related to the Company’s exit from the galvanized strand business. Approximately $12.0 million of the restructuring charges were non-cash charges related to asset write-downs or losses on asset sales and the remaining $1.0 million were cash charges associated with the sale of the industrial wire and nail businesses and employee separation costs.

     In 2001, the Company recorded restructuring charges totaling $28.3 million consisting of $26.2 million of impairment losses associated with the write-downs in the carrying values of the Company’s tire bead wire and galvanized strand manufacturing facilities, and $2.1 million for the estimated plant closure costs associated with the sale of its galvanized strand business. The $16.1 million impairment loss recorded on the tire bead wire facility was primarily related to unfavorable changes in the market that have occurred since the Company entered the business. The $10.1 million impairment loss recorded on the galvanized strand facility was due to the change in circumstances resulting from the sale of certain assets of the galvanized strand business and the planned closure and liquidation of the remaining assets of the facility.

Other Income

     Other income rose to $0.8 million in 2002 from $0.4 million in 2001. During the current year, the Company recorded a $1.0 million gain in other income in connection with an insurance settlement, which was partially offset by $0.2 million 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.

     In 2001, the Company recorded a $0.6 million gain in other income in connection with the sale of assets associated with its galvanized strand and nail businesses, which was partially offset by $0.2 million of other expense.

Earnings (Loss) Before Interest, Income Taxes and Accounting Change

     The Company’s earnings before interest, income taxes and accounting change was $0.3 million in 2002 compared with a loss before interest, income taxes and accounting change of $23.7 million in 2001.

Interest Expense

     Interest expense decreased $3.0 million, or 20%, to $11.8 million in 2002 from $14.8 million in 2001. The decrease was primarily due to reductions in the average borrowing levels on the Company’s senior secured credit facility ($1.6 million) and amortization expense associated with capitalized financing costs ($1.4 million).

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Income Taxes

     The Company’s effective income tax rate decreased to 0.1% in 2002 from 37.7% in 2001. The decrease was primarily due to the establishment of a $7.5 million valuation allowance against the Company’s deferred tax assets related to the tax benefit generated by the loss incurred for the current year.

Cumulative Effect of Accounting Change

     The Company’s results for 2002 reflect a non-cash charge of $14.4 million, or $1.70 per share, resulting from an accounting change. During the second quarter of fiscal 2002, the Company completed the testing of the goodwill associated with Florida Wire and Cable, Inc. (“FWC”), required in connection with its adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142 effective 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 the current fiscal year. In accordance with generally accepted accounting principles, the Company’s fiscal 2001 results reflect charges for the amortization of goodwill of $0.9 million. Goodwill is no longer amortized in the current year with the adoption of SFAS No. 142 (see Note 5 to Consolidated Financial Statements – Goodwill and Intangible Assets in Item 8 below).

Net Earnings (Loss)

     The Company’s net loss for 2002 increased to $25.7 million, or $3.04 per share, from $23.8 million, or $2.81 per share, in 2001. On a comparable pro forma basis, excluding restructuring charges and other non-recurring items, net earnings for 2002 were $0.4 million, or 4 cents per share, compared with a net loss of $6.0 million, or 70 cents per share in 2001.

2001 Compared with 2000

Net Sales

     Net sales decreased 5% to $299.8 million in 2001 from $315.3 million in 2000. Sales of the Company’s concrete reinforcing products (welded wire fabric and PC strand) rose 4% compared with the prior year, increasing to 67% of consolidated sales from 62%. Sales of wire products (industrial wire, nails and tire bead wire) fell 20%, decreasing to 27% of consolidated net sales from 32%. The changes in product mix were primarily due to lower sales of nails and industrial wire in 2001 together with increased sales of PC strand generated by FWC in comparison to the eight months of sales contributed in 2000 subsequent to the January 2000 acquisition date. Following the Company’s sale of its galvanized strand business in May 2001 and its exit from the nail business in January 2002, the Company no longer generates revenues from these product lines.

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Gross Profit

     Gross profit decreased 33% to $21.3 million, or 7.1% of net sales in 2001 from $32.0 million, or 10.2% of net sales in 2000. The decrease in gross profit was primarily due to the compression of spreads between average selling prices and raw material costs resulting from competitive pricing pressures and lower average selling prices.

Selling, General and Administrative Expense

     Selling, general and administrative expense (“SG&A expense”) decreased 11% to $17.1 million, or 5.7% of net sales in 2001 from $19.4 million, or 6.1% of net sales in 2000. The decrease was primarily related to the cost reduction measures that have been implemented by the Company.

Restructuring Charges

     The Company recorded $28.3 million of restructuring charges in 2001 consisting of non-cash impairment losses totaling $26.2 million associated with write-downs in the carrying values of the Company’s tire bead wire and galvanized strand manufacturing facilities, and estimated plant closure costs of $2.1 million associated with the sale of its galvanized strand business. The $16.1 million impairment loss recorded on the tire bead wire facility was primarily related to unfavorable changes in the market that have occurred since the Company entered the business. The $10.1 million impairment loss recorded on the galvanized strand facility was due to the change in circumstances resulting from the sale of certain assets of the galvanized strand business and the planned closure and liquidation of the remaining assets of the facility.

Other Expense (Income)

     The Company recorded other income of $0.4 million in 2001 compared with other expense of $0.6 million in 2000. During the current year, the Company recorded a $0.6 million gain in other income in connection with the sale of assets associated with its galvanized strand and nail businesses, which was partially offset by $0.2 million of other expense.

Earnings (Loss) Before Interest and Income Taxes

     The Company incurred a loss of $23.7 million before interest and income taxes for 2001 compared with earnings of $12.1 million before interest and income taxes in 2000.

Interest Expense

     Interest expense increased $5.9 million, or 65%, to $14.8 million in 2001 from $8.9 million in 2000. The rise in interest expense was due to increases in amortization expense associated with capitalized financing costs ($2.5 million), average interest rates ($2.3 million) and average borrowing levels ($1.0 million). The increase in amortization expense was principally related to the acceleration in the original maturity date of the Company’s senior secured credit facility and associated reduction in the period over which the capitalized financing costs are amortized together with additional lender fees. In addition, $1.0 million of amortization expense was recorded in 2001 to write off a portion of the capitalized financing costs as a result of the reduction in the amount of the revolving credit facility and the acceleration of the original maturity date.

Income Taxes

     The Company’s effective income tax rate was 37.7% in 2001 compared to 38.2% in 2000.

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Net Earnings (Loss)

     The Company’s net loss for 2001 was $23.8 million, or $2.81 per share, compared with net earnings of $2.1 million, or 25 cents per share, in 2000. On a comparable basis, excluding restructuring charges and other non-recurring items on a pro forma basis, the net loss for 2001 was $5.9 million, or 70 cents per share, compared with net earnings of $2.6 million, or 31 cents per share in 2000.

Liquidity and Capital Resources

Selected Financial Data
(Dollars in thousands)

Cash Flow Analysis

     Operating activities provided $7.8 million of cash in 2002 while using $1.5 million in 2001 and providing $26.6 million in 2000. The increase in 2002 was primarily due to the improvement in the Company’s financial performance, after adjusting for the non-cash accounting change ($14.4 million) and restructuring charges ($13.0 million), compared with the prior year net loss and the associated deferred income tax benefit ($11.4 million). The net change in the working capital components of receivables, inventories and accounts payable and accrued expenses used $4.0 million in the current year while providing $1.6 million in 2001. Depreciation and amortization declined by $4.6 million, or 36%, compared to the prior year due to: (1) lower amortization expense associated with the capitalized financing costs; (2) the elimination of goodwill amortization in the current year in connection with the adoption of SFAS No. 142; (3) the reduced depreciation in the current year resulting from the impairment losses and write-downs in the carrying values of the Company’s tire bead and galvanized strand facilities in the prior year; and (4) the sale of certain assets associated with the galvanized strand, nail and industrial wire businesses.

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     Investing activities provided $18.2 million of cash in 2002 compared to $6.0 million in 2001 while using $74.1 million in 2000. The cash provided in 2002 was principally related to the proceeds from the sale of the South Carolina industrial wire business, the Company’s investment in Structural Reinforcing Products (“SRP”) and certain assets of the Company’s galvanized strand and nail businesses. In 2001, the cash provided included $8.1 million of proceeds from the sale of certain assets of the Company’s galvanized strand and nail businesses. In 2000, the cash used for investing activities was primarily related to the $66.6 million acquisition of FWC. Capital expenditures amounted to $0.5 million, $2.3 million and $9.2 million in 2002, 2001 and 2000, respectively. The decreased capital expenditures in 2002 and 2001 were primarily related to the curtailment of the Company’s capital outlays in connection with its debt reduction efforts. The Company expects that capital expenditures will remain at reduced levels in 2003 in comparison to the recent historical levels prior to 2001.

     Financing activities used $26.7 million and $6.5 million of cash in 2002 and 2001, respectively, while providing $49.7 million in 2000. The reduction in financing requirements in 2002 and 2001 was primarily related to the Company’s debt reduction efforts. In 2000, the Company entered into a new senior secured credit facility which was used to fund the acquisition of FWC and pay off the balances outstanding on its previous unsecured revolving credit facility. Also during 2000, the Company executed a sale-leaseback transaction that generated $2.8 million of cash, which was used to pay down the term loan balance outstanding on the credit facility.

     Although long-term debt decreased $27.8 million, or 27%, during 2002, the Company’s total debt to capital ratio increased to 76% at September 28, 2002 compared with 67% and 58% at September 29, 2001 and September 30, 2000, respectively. The increase was primarily related to the net loss of $25.7 million in 2002 and associated reduction in shareholder’s equity. 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. The Company intends to refinance its senior secured credit facility prior to its amended maturity date of October 15, 2003. In the event that such efforts are unsuccessful, the Company believes that it would likely experience a material adverse impact on its financial condition, liquidity and results of operations.

Credit Facilities

     The Company has a senior secured credit facility with a group of banks, consisting of a $50.0 million revolving credit loan and a $57.5 million term loan. In May 2002, the Company and its senior lenders agreed to an amendment to the credit agreement that extended the previously amended maturity date of the credit facility from January 15, 2003 to October 15, 2003. The amendment also provided for certain other terms and conditions, including: (1) changes in the applicable margin that allow the Company to lower its interest rates through improvements in the ratio of debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) or future reductions in the amounts outstanding under the term loan; (2) a reduction in the amount of the revolving credit commitment from $50.0 million to $42.0 million based on decreases in the borrowing base resulting from the Company’s divestitures and expected reductions in the Company’s borrowing requirements (which reduction occurred in May 2002); (3) the deferral of certain scheduled fee payments and increases in the fee amounts payable; (4) annual limitations on the amount of capital expenditures to $3.0 million; and (5) mandatory prepayments of the term loan should actual EBITDA exceed certain thresholds.

     Under the amended terms of the credit agreement, interest rates on the credit facility are determined based upon a base rate that is established at the higher of the prime rate or 0.50% plus the federal funds rate, plus, in either case, an applicable interest rate margin. As of September 28, 2002, interest rates on the credit facility were as follows: 7.25% on the revolver, 8.50% on $40.6 million of the term loan and 11.75% on $4.3 million of the term loan. In addition, a commitment fee is payable on the unused portion of the revolving credit facility.

     Advances under the revolving credit facility are limited to the lesser of the revolving credit commitment or a borrowing base amount that is calculated based upon a percentage of eligible receivables and inventories. At September 28, 2002, approximately $10.6 million was available under the revolving credit facility. Under the amended terms of the credit agreement, the Company is subject to financial covenants that require the maintenance of EBITDA and net worth above specified levels. The Company was in compliance with all of the financial covenants as of September 28, 2002. The senior secured credit facility is collateralized by all of the Company’s assets.

     The Company and its senior lenders have agreed to certain modifications in the credit facility through a series of amendments to the credit agreement. The previous amendments had the effect of increasing the Company’s interest expense from the amounts that would have been incurred under the original terms of the credit agreement as a result of: (1) increases

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in the applicable interest rate margins; (2) additional fees, a portion of which are calculated based upon the Company’s stock price, payable to the lenders on certain dates and in increasing amounts based upon the timing of the completion of a refinancing of the credit facility; and (3) a reduction in the term of the credit facility and the period over which the capitalized financing costs are amortized, resulting in higher amortization expense. Upon an event of default, the lenders would be entitled to the right to payment of that portion of the fees that are calculated based upon the Company’s stock price.

     The Company intends to refinance the senior secured credit facility prior to its amended maturity date of October 15, 2003. In the event that such efforts are unsuccessful, the Company believes that it would likely experience a material adverse impact on its financial condition, liquidity and results of operations.

     As required by its lenders under the terms of the credit facility, in April 2000, the Company entered into interest rate swap agreements to reduce the financial impact of future interest rate fluctuations on its earnings and cash flows. These agreements effectively converted $50.0 million of the Company’s variable rate debt to a fixed rate of 7.08% plus the applicable margin under the credit facility. The Company has designated its interest rate swap agreements as cash flow hedges and formally assesses on an ongoing basis whether these agreements are highly effective in offsetting the changes in the fair values of the interest cash flows under its senior secured credit facility. Interest rate differentials paid or received under these swap agreements are recognized in income over the life of the agreements as adjustments to interest expense. Changes in the fair value of the swap agreements are recorded as a component of “accumulated other comprehensive loss.” The fair value of the swap agreements were ($5.6 million) as of September 28, 2002 and ($5.0 million) as of September 29, 2001 and was recorded in other liabilities on the Company’s consolidated balance sheet.

Outlook

     The Company believes that the overall weakening in the economy will continue to create challenging business conditions during fiscal 2003. In addition, reduced domestic wire rod capacity together with recent antidumping and countervailing duty orders entered against certain offshore suppliers of wire rod could result in higher raw material costs. In the event that it was unsuccessful in recovering higher costs in its markets, the Company’s financial performance would be negatively impacted as a result of the compression in gross margin.

     In view of the Company’s recent financial performance and the expected continuation of difficult market conditions, it is continuing to pursue a range of initiatives to reduce operating costs and debt. Over the prior year, the Company focused on improving the performance of its core operations, divested non-core operations, completed related staffing reductions, curtailed discretionary spending, and achieved higher productivity levels at its manufacturing facilities in reducing operating costs. The Company anticipates that the reductions in operating costs together with the suspension of its cash dividend, curtailment of capital outlays, improved management of working capital, disposal of under performing businesses and excess assets will facilitate further reductions in its debt. Although there can be no assurances, the Company believes that these actions will have a favorable impact on its financial performance for fiscal 2003 (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Cautionary Note Regarding Forward-Looking Statements”).

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk

     The Company’s cash flows and earnings are subject to fluctuations resulting from changes in commodity prices, interest rates and foreign exchange rates. The Company manages its exposure to these market risks through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. The Company does not use financial instruments for trading purposes and is not a party to any leveraged derivatives. The Company monitors its underlying market risk exposures on an ongoing basis and believes that it can modify or adapt its hedging strategies as necessary.

Commodity Prices

     The Company does not generally use derivative commodity instruments to hedge its exposures to changes in commodity prices. The principal commodity price exposure is hot-rolled carbon steel wire rod, the Company’s primary raw material, which is purchased from both domestic and foreign suppliers and denominated in U.S. dollars. The Company typically negotiates 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. The Company’s ability to acquire steel wire rod from foreign sources on favorable terms is impacted by fluctuations in foreign currency exchange rates, foreign taxes, duties, tariffs, and other trade actions. Although changes in wire rod costs and 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 reduces its gross profit and cash flow from operations.

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Interest Rates

     The Company has debt obligations that are sensitive to changes in interest rates under its senior secured credit facility. As required by its lenders under the terms of its senior secured credit facility, in April 2000, the Company entered into interest rate swap agreements to reduce the financial impact of future interest rate fluctuations on its earnings and cash flows. These agreements effectively converted $50.0 million of the Company’s floating rate debt to a fixed rate of 7.08% plus the applicable margin under the credit facility. Interest rate differentials paid or received under these swap agreements are recognized in income over the life of the agreements as adjustments to interest expense. Based on the Company’s interest rate exposure and floating rate debt levels as of September 28, 2002, and considering the effect of the interest rate swap, a 100 basis point change in interest rates would have an estimated $0.2 million impact on pre-tax earnings over a one-year period.

Foreign Exchange Exposure

     The Company has not typically hedged foreign currency exposures related to transactions denominated in currencies other than U.S. dollars, although such transactions have not been material in the past. The Company will occasionally hedge firm commitments for certain equipment purchases that are denominated in foreign currencies. The decision to hedge any such transactions is made by the Company on a case-by-case basis. There were no forward contracts outstanding as of September 28, 2002.

Item 8.   Financial Statements and Supplementary Data.

(a)  Financial Statements

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(b)  Supplementary Data

     Selected quarterly financial data is as follows:

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

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INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements.

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INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements.

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INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements.

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INSTEEL INDUSTRIES, INC.