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

FORM 10-Q

For the Quarterly Period Ended March 29, 2003

OR

For the Transition Period From ________ to ________

Commission File Number 1-9929

Insteel Industries, Inc.

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

     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 require to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     The number of shares outstanding of the registrant’s common stock as of May 9, 2003 was 8,460,187.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

See accompanying notes to consolidated financial statements.

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INSTEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except for per share data)
(Unaudited)

See accompanying notes to consolidated financial statements.

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INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

See accompanying notes to consolidated financial statements.

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INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation

     The unaudited consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the audited financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 28, 2002.

     The unaudited consolidated financial statements included herein reflect all adjustments (consisting only of normal recurring accruals) that the Company considers necessary for a fair presentation of the financial position, results of operations and cash flows for all periods presented. The results for the interim periods are not necessarily indicative of the results to be expected for the entire fiscal year.

(2) Recent Accounting Pronouncements

     In April 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections.” As a result of rescinding SFAS No. 4, “Reporting Gains and Losses from Extinguishments of Debt,” gains and losses from extinguishments of debt are to be classified as extraordinary items only if they meet the criteria specified in Accounting Principles Board (“APB”) Opinion No. 30. This statement also amends SFAS No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions. Additional amendments include changes to other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. The Company adopted the provisions of SFAS No. 145 during the first quarter of fiscal 2003, which did not have a significant impact on its results of operations or financial position.

     In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring).” This statement requires the recognition of a liability for the costs associated with an exit or disposal activity when the liability is incurred instead of at the date an entity commits to an exit plan. The statement is effective for exit and disposal activities entered into after December 31, 2002. The adoption of this statement did not have a material impact on the Company’s results of operations or financial position.

     In November 2002, the FASB issued FASB Interpretation No. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a guarantee is issued, an entity must recognize an initial liability for the fair value, or market value, of the obligations assumed and disclose such information in its interim and annual financial statements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of this Interpretation did not have a material impact on the Company’s financial statements.

     In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities (VIE).” In general, FIN 46 clarifies how an enterprise should determine if it should consolidate a VIE. FIN 46 is effective immediately for variable interests in VIEs created after January 31, 2003. Additionally, for a variable interest in a VIE created before February 1, 2003, FIN 46 is required to be applied no later than the beginning of the Company’s fourth quarter of fiscal 2003. The Company does not expect that the adoption of this Interpretation will have an impact on its financial statements.

     In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — An Amendment to FASB Statement No. 123.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” providing entities with alternative transition methods should they elect to change to the fair value

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method of accounting for stock-based compensation prescribed by SFAS No. 123. As amended by SFAS No. 148, SFAS No. 123 also requires additional disclosure regarding stock-based compensation in annual and condensed interim financial statements. The new disclosure requirements are effective immediately.

     As allowed under SFAS No. 123, the Company accounts for stock-based compensation using the intrinsic value method in accordance with APB No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Stock options granted for the three months and six months ended March 29, 2003 and March 30, 2002, respectively, were exercisable at prices equal to the fair market value of the Company’s common stock on the dates the options were granted; accordingly, no compensation expense has been recognized for the stock options granted.

     If the Company accounted for stock-based compensation using the fair market value recognition provisions of SFAS No. 123, the net loss and basic and diluted loss per share would have changed to the pro forma amounts indicated below:

     The fair value of the options at the date of grant were estimated using the Black-Scholes option-pricing model based on the following weighted average assumptions:

(3) Restructuring Charges

     In the prior year quarter, the Company recorded restructuring charges totaling $12.8 million (pre-tax) related to its exit from certain product lines. The Company exited the bulk and collated nail business with the closure of the nail manufacturing operations located in Andrews, South Carolina and disposed of most of the nail-related assets. Additionally, the Company disposed of certain of the remaining assets of the galvanized strand business, which the Company had previously exited in May 2001. The restructuring charges consisted of: (1) 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 totaling $5.7 million; (2) estimated costs related to the closure of the Company’s nail operations amounting to $0.2 million; (3) 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 totaling $2.9 million; and (4) an impairment loss on the long-lived assets associated with the industrial wire business amounting to $4.0 million. Approximately $12.6 million of the restructuring charges were non-cash charges related to asset write-downs or losses on asset sales and the remaining $0.2 million were cash charges associated with the closure of the nail business. Total net proceeds from the asset sales amounted to $1.6 million which were received by the Company in the prior year quarter.

     The $4.0 million impairment loss recorded on the long-lived assets related to the industrial wire business was primarily related to the impact of the closure of the nail business and related reduction in wire requirements together with unfavorable changes in the market. In evaluating the potential impairment and determining the impairment loss, the Company considered historical performance and future estimated results. This analysis indicated that the carrying amount of the assets was not recoverable through the future undiscounted cash flows expected to result from the use of the assets. The impairment

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charge was recorded to reduce the carrying value of the property, plant and equipment to its estimated fair market value based on estimated selling prices less the associated selling costs.

(4) Goodwill and Intangible Assets

     The Company adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” as of September 30, 2001, the first day of fiscal 2002. In accordance with this statement, the Company will no longer amortize goodwill and intangible assets which have indefinite lives. SFAS No. 142 requires that the Company assess goodwill and certain intangible assets with indefinite useful lives for impairment upon adoption and at least annually thereafter. The Company has determined that it will perform its annual impairment review during the fourth quarter of each year.

     Under SFAS No. 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. For purposes of the impairment testing as of the implementation date, the Company determined that the goodwill asset to be tested was entirely related to the continuing operations of Florida Wire and Cable, Inc. (“FWC”), a subsidiary of the Company that was acquired in January 2000. In calculating the impairment charge, the fair value of the impaired reporting unit, FWC, was estimated using a multiple of earnings before interest, taxes, depreciation and amortization (“EBITDA”) based on recent comparable transactions and using a discounted cash flow methodology based on estimated future cash flows.

     Based on the impairment testing, the Company recorded a non-cash charge of $14.4 million, or $1.70 per share, in the prior year as the cumulative effect of a change in accounting principle to write off the entire goodwill balance associated with FWC as of the beginning of fiscal year 2002.

(5) Deferred Tax Asset

     The Company has recorded the following amounts for deferred tax assets on its consolidated balance sheet as of March 29, 2003: a current deferred tax asset of $2.4 million in prepaid expenses and other, and a noncurrent deferred tax asset of $5.3 million (net of valuation allowance of $7.5 million) in other assets. The realization of the Company’s deferred tax assets is entirely dependent upon the Company’s ability to generate future taxable income. GAAP require that the Company periodically assess the need to establish a valuation allowance against its deferred tax assets to the extent the Company no longer believes it is more likely than not that the tax assets will be fully utilized. Based on the Company’s projections of future operations, the Company believes that it will generate sufficient taxable income to utilize all of its net operating loss carryforwards. Under GAAP, however, projected financial performance alone is not sufficient to warrant the recognition of a deferred tax asset to the extent the Company has had cumulative losses in recent years. Rather, the presumption exists that absent recent historical evidence of the Company’s ability to generate taxable income, a valuation reserve against deferred tax assets should be established. Accordingly, in connection with the loss incurred for fiscal year 2002, the Company established a valuation allowance of $7.5 million against its deferred tax assets. The valuation allowance established by the Company is subject to periodic review and adjustment based on changes in facts and circumstances. No adjustments to the valuation allowance have been recorded during fiscal 2003.

(6) Credit Facilities

     The Company has a senior secured credit facility with a group of banks, consisting of a $42.0 million revolving credit facility, a $28.5 million term loan and a $12.6 million term loan. In February 2003, 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 October 15, 2003 to March 31, 2004. The amendment also provided for certain other terms and conditions, including: (1) changes in the applicable margins that allow the Company to lower its interest rates through future reductions in the term loan; (2) additional fees which become payable to the lenders on certain dates unless a refinancing of the credit facility is completed before such dates; (3) the deferral of the payment dates of other contingent fees consistent with the period of time for which the maturity date was extended; (4) adjustments to the financial covenants that are applicable under the credit agreement; (5) limitations on the amount of capital expenditures to $1.8 million for each fiscal year; and (6) 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 March 29, 2003, interest rates on the credit facility were as follows: 6.75% on the

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revolver and 8.25% on the term loan. In addition, a commitment fee is payable on the unused portion of the revolving credit facility and a utilization fee is payable on the $12.6 million term loan.

     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 March 29, 2003, approximately $4.3 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 March 29, 2003. 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 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 March 31, 2004. In the event that such efforts are unsuccessful, the Company believes that it will 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.” As of March 29, 2003, the fair value of the swap agreements was ($5.0 million) and was recorded in other liabilities on the Company’s consolidated balance sheet.

(7) Stock Option Plans

     In order to enable employees to acquire or increase their holdings of the Company’s common stock and to promote a closer identification of their interests with those of the Company and its shareholders, on November 12, 2002, the Board of Directors approved a one-time exchange program under the 1994 Employee Stock Option Plan. Under the terms of the exchange, participants that elected to surrender eligible options prior to December 9, 2002 will be issued one option for every three options surrendered on a date that will be more than 6 months from the date of cancellation of the surrendered options. The new options will be issued at an exercise price equal to the market price of the Company’s stock on the grant date. The Chief Executive Officer and the Chairman of the Board of Directors elected not to participate in the exchange program.

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(8) Earnings Per Share

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

     Options to purchase 545,000 shares and 1,169,000 shares for the three months ended March 29, 2003 and March 30, 2002, respectively, were antidilutive and were not included in the diluted EPS computation. Options to purchase 759,000 shares and 1,177,000 shares for the six months ended March 29, 2003 and March 30, 2002, respectively, were antidilutive and were not included in the diluted EPS computation.

(9) Comprehensive Loss

     The components of comprehensive loss, net of tax, for the three months and six months ended March 29, 2003 and March 30, 2002, respectively, are as follows:

     The change in the accumulated other comprehensive loss for the six months ended March 29, 2003 is as follows:

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(10) Other Financial Data

     Balance sheet information:

Item 2. 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 future 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.

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Results of Operations

Statements of Operations — Selected Data
($ in thousands)

N/M = Not meaningful

Second Quarter of Fiscal 2003 Compared to Second Quarter of Fiscal 2002

Net Sales

     Net sales for the quarter decreased 29% to $45.9 million from $64.9 million in the same year-ago period primarily due to the elimination of revenues from the product lines that the Company has exited, including nails and certain segments of the industrial wire business, together with lower sales of concrete reinforcing products. On a comparable basis, excluding the revenues from these discontinued product lines, sales declined 10% from the same year-ago period.

     Sales of the Company’s concrete reinforcing products (welded wire fabric and PC strand) declined 13% from the year-ago quarter, but rose to 85% of consolidated sales from 69%. Demand for the Company’s concrete reinforcing products was unfavorably impacted by severe weather conditions in certain of its markets together with the reduced level of commercial construction activity. Pricing pressure for PC strand and standard styles of welded wire fabric remained intense during the quarter. Sales of industrial wire products (tire bead wire and other industrial wire), excluding revenues from the segments that the Company has exited, rose 12% from the year-ago quarter, increasing to 15% of consolidated sales from 10%. Sales of the product lines that the Company has exited represented 21% of consolidated sales in the year-ago quarter. The changes in the Company’s product mix were primarily due to its exit from the nail and certain segments of the industrial wire business in the prior year together with increased sales of industrial wire products in the current year.

Gross Profit

     Gross profit declined 26% to $3.7 million, or 8.1% of net sales in the quarter compared with $5.0 million, or 7.7% of net sales in the same year-ago period. The decrease in gross profit was largely driven by the reduction in sales and compression in spreads between average selling prices and raw material costs together with the unfavorable impact of reduced schedules and downtime on the operating costs of certain of the Company’s facilities.

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Selling, General and Administrative Expense

     Selling, general and administrative expense (“SG&A expense”) increased 7% to $3.0 million, or 6.5% of net sales in the quarter from $2.8 million, or 4.3% of net sales in the same year-ago period primarily due to higher selling expenses for concrete reinforcing products.

Restructuring Charges

     In the prior year quarter, the Company recorded restructuring charges totaling $12.8 million (pre-tax), for losses on the sale of assets associated with the nail and galvanized strand businesses, write-downs in the carrying value of the remaining assets to be disposed of, closure costs associated with the nail business, and an impairment loss on the long-lived assets of the industrial wire business. Approximately $12.6 million of the restructuring charges were non-cash charges related to asset write-downs or losses on asset sales and the remaining $0.2 million were cash charges associated with the closure of the nail business (see Note 3 — Restructuring Charges).

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

     The Company’s earnings before interest, income taxes and accounting change for the quarter was $0.7 million compared with a loss of $10.5 million in the same year-ago period. On a comparable basis, excluding restructuring charges in the prior year quarter, the Company’s earnings before interest, income taxes and accounting change was $2.3 million.

Interest Expense

     Interest expense for the quarter decreased $0.5 million, or 18%, to $2.5 million from $3.0 million in the same year-ago period. The decrease was primarily due to lower average borrowing levels on the Company’s senior secured credit facility ($0.6 million) and reduced amortization of capitalized financing costs ($0.1 million), partially offset by higher average interest rates ($0.2 million).

Income Taxes

     The Company’s effective income tax rate increased to 34.4% in the quarter compared to 13.1% in the same year-ago period, due to the decreasing impact of permanent book — tax differences in the current year together with the $7.5 million valuation allowance that was recorded in the prior year period.

Net Loss

     The Company’s net loss for the quarter was $1.2 million, or 14 cents per share compared to $11.7 million, or $1.39 per share, in the same year-ago period. The prior year net loss reflects restructuring charges totaling $12.8 million (pre-tax).

First Six Months of Fiscal 2003 Compared With First Six Months of Fiscal 2002

Net Sales

     Net sales for the first six months of fiscal year 2003 decreased 27% to $92.7 million from $127.6 million in the same year-ago period primarily due to the elimination of revenues from the product lines that the Company has exited, including nails and certain segments of the industrial wire business, together with lower sales of concrete reinforcing products. On a comparable basis, excluding the revenues from these discontinued product lines, sales declined 8% from the same year-ago period.

     Sales of the Company’s concrete reinforcing products (welded wire fabric and PC strand) declined 12% from the year-ago period, but rose to 85% of consolidated sales from 70%. Demand for the Company’s concrete reinforcing products was unfavorably impacted by severe weather conditions in certain of its markets together with the reduced level of commercial construction activity. Pricing pressure for PC strand and standard styles of welded wire fabric remained intense during the period. Sales of industrial wire products (tire bead wire and other industrial wire), excluding revenues from the segments that the Company has exited, rose 21% from the year-ago period, increasing to 15% of consolidated sales from 9%. Sales of the product lines that the Company has exited represented 21% of consolidated sales in the year-ago period. The

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changes in the Company’s product mix were primarily due to its exit from the nail and certain segments of the industrial wire business in the prior year together with increased sales of industrial wire products in the current year.

Gross Profit

     Gross profit declined 23% to $7.7 million, or 8.3% of net sales for the first six months of fiscal 2003 compared with $10.1 million, or 7.9% of net sales in the same year-ago period. The decrease in gross profit was largely driven by the reduction in sales and compression in spreads between average selling prices and raw material costs together with the unfavorable impact of reduced schedules and downtime on the operating costs of certain of the Company’s facilities.

Selling, General and Administrative Expense

     Selling, general and administrative expense (“SG&A expense”) fell 6% to $5.7 million, or 6.2% of net sales for the first six months of fiscal 2003 from $6.1 million, or 4.8% of net sales in the same year-ago period. The decrease in SG&A expense was primarily due to the elimination of the selling and administrative costs which supported the product lines the Company has exited as well as the savings generated from previously implemented cost reduction measures. These reductions were partially offset by higher selling expenses for concrete reinforcing products.

Restructuring Charges

     In the prior year period, the Company recorded restructuring charges totaling $12.9 million (pre-tax) for losses on the sale of assets associated with the nail and galvanized strand businesses, write-downs in the carrying value of the remaining assets to be disposed of, closure costs associated with the nail business, an impairment loss on the long-lived assets of the industrial wire business, and separation costs associated with other selling and administrative staffing reductions. Approximately $12.6 million of the restructuring charges were non-cash charges related to asset write-downs or losses on asset sales and the remaining $0.3 million were cash charges associated with the closure of the nail business and employee separation costs (see Note 3 — Restructuring Charges).

Other Expense (Income)

     In the prior year period, the Company recorded a $1.0 million gain on an insurance settlement related to a property damage and business interruption claim for an accident that occurred at the Fredericksburg, Virginia facility in August 1999.

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

     The Company’s earnings before interest, income taxes and accounting change for the first six months of fiscal 2003 was $2.0 million compared with a loss of $8.0 million in the same year-ago period. On a comparable basis, excluding restructuring charges and the gain on an insurance settlement in the prior year period, the Company’s earnings before interest, income taxes and accounting change was $3.9 million.

Interest Expense

     Interest expense for the first six months of fiscal 2003 decreased $1.2 million, or 19%, to $4.9 million from $6.1 million in the same year-ago period. The decrease was primarily due to lower average borrowing levels on the Company’s senior secured credit facility ($1.3 million) and reduced amortization of capitalized financing costs ($0.2 million), partially offset by higher average interest rates ($0.3 million).

Income Taxes

     The Company’s effective income tax rate increased to 35.5% for the first six months of fiscal 2003 compared to 13.8% in the same year-ago period due to the decreasing impact of permanent book — tax differences in the current year together with the $7.5 million valuation allowance that was recorded in the prior year period.

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Net Loss

     The Company’s net loss for the first six months of fiscal 2003 was $1.9 million, or 23 cents per share compared to $26.4 million, or $3.13 per share, in the same year-ago period. The prior year net loss reflects a $14.4 million, or $1.70 per share, non-cash goodwill impairment charge that was recorded in connection with the Company’s adoption of SFAS No. 142, restructuring charges totaling $12.9 million (pre-tax) and a $1.0 million pre-tax gain on an insurance settlement. The year-ago loss before the accounting change was $12.2 million, or $1.43 per share.

Liquidity and Capital Resources

Selected Financial Data
($ in thousands)

Cash Flow Analysis

     Operating activities provided $1.9 million of cash for the first six months of fiscal 2003 compared to $2.3 million in the same year-ago period. The net change in the working capital components of receivables, inventories and accounts payable and accrued expenses used $2.5 million in the current year compared to $4.2 million in the same year-ago period. Depreciation and amortization declined by $1.0 million, or 23%, compared to the prior year primarily due to the sale of certain assets of the nail and industrial wire businesses and lower amortization expense associated with capitalized financing costs. Other changes for the current year reflects the receipt of a $3.0 million federal tax refund during the first fiscal quarter.

     Investing activities used $0.4 million of cash for the first six months of fiscal 2003 compared to essentially breakeven in the same year-ago period. The Company expects that capital expenditures will remain at reduced levels in 2003 in comparison to the recent historical levels prior to 2001 in connection with its debt reduction efforts and consistent with the limitations imposed under the terms of its amended credit facility.

     Financing activities used $1.4 million of cash for the first six months of fiscal 2003 compared to $3.2 million in the same year-ago period. The reduction in financing requirements was primarily due to the receipt of a $3.0 million federal tax refund during the first fiscal quarter of the current year, which was used to pay down term debt on the credit facility.

     The Company’s total debt to capital ratio decreased to 77% at March 29, 2003 from 79% at March 30, 2002 primarily due to the $21.9 million reduction in long-term debt.

Credit Facilities

     The Company has a senior secured credit facility with a group of banks, consisting of a $42.0 million revolving credit facility, a $28.5 million term loan and a $12.6 million term loan. In February 2003, 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 October 15, 2003 to March 31, 2004. The amendment also provided for certain other terms and conditions, including: (1) changes in the applicable margins that allow the Company to lower its interest rates through future reductions in the term loan; (2) additional fees which become payable to the lenders on certain dates unless a refinancing of the credit facility is completed before such dates; (3) the deferral of the payment dates of other contingent fees consistent with the period of time

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for which the maturity date was extended; (4) adjustments to the financial covenants that are applicable under the credit agreement; (5) limitations on the amount of capital expenditures to $1.8 million for each fiscal year; and (6) 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 March 29, 2003, interest rates on the credit facility were as follows: 6.75% on the revolver and 8.25% on the term loan. In addition, a commitment fee is payable on the unused portion of the revolving credit facility and a utilization fee is payable on the $12.6 million term loan.

     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 March 29, 2003, approximately $4.3 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 March 29, 2003. 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 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 March 31, 2004. In the event that such efforts were 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.” As of March 29, 2003, the fair value of the swap agreements was ($5.0 million) and was recorded in other liabilities on the Company’s consolidated balance sheet.

Trade Actions — PC Strand

     On January 31, 2003, the Company together with a coalition of U.S. producers of PC strand filed petitions with the U.S. International Trade Commission (“ITC”) alleging that imports from five countries have injured the domestic PC strand industry. The petitions allege that imports of PC strand from Brazil, India, Korea, Thailand and Mexico were being “dumped” or sold in the U.S. at a lower price than in their home markets and that imports from India were also receiving subsidies from the government of India. The petitioners are alleging anti-dumping margins of up to 122 percent, and in the case of India, countervailing duty margins. On March 17, 2003, the ITC reached a preliminary determination that imports of PC strand from Brazil, India, Korea, Thailand and Mexico had injured the domestic industry. The final determination of the cases is scheduled for January 2004.

Outlook

     The Company believes that the overall weakening in the economy will continue to create challenging business conditions through the remainder of fiscal 2003. In addition, reduced domestic wire rod capacity together with recent

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anti-dumping 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 the remainder of fiscal 2003 (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Note Regarding Forward-Looking Statements”).

Item 3. Qualitative and Quantitative 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.

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 March 29, 2003, 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 March 29, 2003.

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Item 4. Controls and Procedures

     Within the 90 days prior to the filing date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its subsidiaries) required to be included in the Company’s periodic SEC filings.

     Since the date of the evaluation, there have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls.

Part II — Other Information

Item 6. Exhibits and Reports on Form 8-K

a. Exhibits:

b. Reports of Form 8-K

     On April 25, 2003, the Company filed a Report on Form 8-K with respect to information provided pursuant to Item 12 of Form 8-K, regarding the issuance of its April 25, 2003 press release announcing its financial results for the second fiscal quarter and six months ended March 29, 2003.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

				INSTEEL INDUSTRIES, INC. Registrant
Date: May 9, 2003		By:		/s/ H.O. Woltz III H.O. Woltz III President and Chief Executive Officer
Date: May 9, 2003		By:		/s/ Michael C. Gazmarian Michael C. Gazmarian Chief Financial Officer and Treasurer

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CERTIFICATION

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

1.		I have reviewed this quarterly report on Form 10-Q of Insteel Industries, Inc.;
2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

		(a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period which this quarterly report is being prepared;
		(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
		(c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

		(a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
		(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.

The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 9, 2003

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

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CERTIFICATION

I, Michael C. Gazmarian, certify that:

1.		I have reviewed this quarterly report on Form 10-Q of Insteel Industries, Inc.;
2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

		(a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period which this quarterly report is being prepared;
		(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
		(c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

		(a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
		(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.

The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 9, 2003

/s/ MICHAEL C. GAZMARIAN MICHAEL C. GAZMARIAN Chief Financial Officer and Treasurer

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