** **

| **UNITED STATES	SECURITIES AND  EXCHANGE COMMISSION	Washington,   D.C.   20549**                                                                                                                                                                                                                                                                                                                                |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                      |
| **FORM 10-QSB**                                                                                                                                                                                                                                                                                                                                                                                                 |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                      |
| (Mark One)                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                                                                                                                                            |
| [X]       QUARTERLY REPORT UNDER SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934                                                                                                                                                                                                                                                                                      |
|              for the quarterly period ended March 31, 2005.                                                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                                                                                            |
| or                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                                                                                                                            |
| [   ]       TRANSITION REPORT UNDER SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934                                                                                                                                                                                                                                                                         |
|              for the transition period from  ____ to  ____                                                                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                                                                                                                                                                                            |
| Commission file number	0-6669                                                                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                                                                                                            |
| **FORWARD  INDUSTRIES, INC.**                                                                                                                                                                                                                                                                                                                                                                                   |
| (Exact name of registrant as specified in its charter)                                                                                                                                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                   New York                                 |                          13-1950672                                           |
|                   (State or other jurisdiction of                                                                                                                                                                                                                                                                          | (I.R.S.  Employer Identification No.) |
|                   incorporation or organization)                                                                                                                                                                                                                                                                                |   |
|                                                                                                                                                                                                                                                                                                                                                                                                            |   |
|                                                                                                                                                                                                                                                                                                                                                                                                            |   |
|                   1801 Green Rd., Suite E, Pompano Beach, FL                                                                                                                                                                                              |                                   33064                                      
                   (Address of principal executive  offices) 

(Zip Code)
                                                                       	

 

                                 (954) 419-9544                              

(Issuer's Telephone Number, including Area Code)

 

                                                                                                  

(Former name, former address and former fiscal year,  if changed since last report)
 Check whether the issuer:  (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 [   ]. 
As  of April 21, 2005, 6,777,838 shares of Common Stock were outstanding.
 
Transitional  Small Business Disclosure Format:    Yes [   ]  No [X]	

1

 

** **

**FORWARDINDUSTRIES, INC. AND SUBSIDIARIESFORM 10-QSBTHREEMONTHS ENDED****March 31, 2005****CONTENTS**

PAGE

**PART  I**

** **

**FINANCIAL  INFORMATION**

** **
     
Item  1.

Financial  Statements 

     Consolidated Balance Sheets as of March 31, 2005  (Unaudited)	     and September 30, 2004

3
   
     Unaudited Consolidated Statements of Income for the Three and Six	     Months Ended March 31, 2005 and 2004

4
   
     Unaudited Consolidated Statements of Cash Flows for the Six	     Months Ended March 31, 2005 and 2004

5
   
     Notes to Consolidated Financial Statements

6
   
Item  2.

Management's  Discussion and Analysis of Financial Condition and Results of Operations

  14
   
Item  3.

Controls  and Procedures

25
   
**PART  II**

** **

**OTHER  INFORMATION**

** **
   
Item  6.

Exhibits  

26
   
Signatures

27
   
 

**Note RegardingUse of Certain Terms**

                In this Quarterly Report on Form10-QSB, unless the context otherwise requires, the terms "we","our", and the "Company"  refer to Forward Industries,Inc., a New York corporation, together with its consolidated subsidiaries; "Forward"or "Forward Industries" refers to Forward Industries, Inc., "common stock"refers to the common stock, $.01 par value per share, of Forward Industries,Inc.; "Koszegi" refers to Forward Industries' wholly owned subsidiaryKoszegi Industries Inc., an Indiana corporation; "Koszegi Asia" refers to Forward Industries' wholly owned subsidiaryKoszegi Asia Ltd., a Hong Kong corporation; "Forward Innovations" refers toForward Industries' wholly owned subsidiary Forward Innovations GmbH, a Swisscorporation;  "GAAP" refers to accountingprinciples generally accepted in the United States; "Commission" refers to theUnited States Securities and Exchange Commission; and "Exchange Act" refers tothe United States Securities Exchange Act of 1934.

2

**PART I.   FINANCIAL INFORMATION**

ITEM 1.  FINANCIAL STATEMENTS

**FORWARD INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**

 

**March 31,**

** **

**September 30,**

**2005**

** **

**2004**

**ASSETS**

**(Unaudited)**

** **

** **

 

Current assets:

   Cash and cash equivalents

 $

5,298,343 

 $

4,487,415 

   Accounts receivable - net	

8,671,143 

3,609,559 

   Inventories

1,219,231 

811,694 

   Prepaid expenses and other current assets

152,416 

190,076 

   Deferred tax asset

81,598 

164,413 

      Total current assets

15,422,731 

9,263,157 

Property, plant, and equipment - net

300,965 

264,043 

Deferred tax asset

451,691 

617,199 

Other assets

44,467 

44,967 

     **TOTAL ASSETS**

 $

16,219,854 

 $

10,189,366 

**LIABILITIES AND SHAREHOLDERS' EQUITY**

Current liabilities:

   Accounts payable

 $

2,662,685 

 $

1,813,543 

   Accrued expenses and other current liabilities

826,382 

757,026 

      Total current liabilities

3,489,067 

2,570,569 

Commitments and contingencies

Shareholders' equity:

   Preferred stock, 4,000,000 authorized shares, par value $.01;  none issued

-- 

-- 

   Common stock, 40,000,000  authorized shares, par value $.01; 7,341,331 and 6,789,931 shares issued at  March 31, 2005 and September 30, 2004, respectively (including 563,493 held  in treasury at such dates)

73,413 

67,899 

   Paid-in capital

10,674,165 

8,948,339 

   Retained earnings (accumulated deficit)

2,836,368 

(544,282)

13,583,946 

8,471,956 

   Less: Cost of shares in treasury

(853,159)

(853,159)

      Total shareholders' equity

12,730,787 

7,618,797 

**TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY**

 $

16,219,854 

 $

10,189,366 

 

The accompanying notes are an integral part of theconsolidated financial statements.

3

**FORWARD INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(UNAUDITED)**

** **

** **

**Three Months Ended March 31,**

** **

**Six Months Ended March 31,**

**2005**

** **

**2004**

** **

**2005**

** **

**2004**

Net  sales

 $

11,238,283 

 $

5,000,995 

 $

20,154,173 

 $

9,493,968 

Cost of goods sold

7,105,669 

3,316,224 

12,791,464 

6,339,516 

Gross profit

4,132,614 

1,684,771 

7,362,709 

3,154,452 
   
Operating expenses:

Selling

767,298 

681,111 

1,532,814 

1,409,333 

General and administrative

584,877 

445,522 

1,293,649 

1,017,655 

Total operating expenses

1,352,175 

1,126,633 

2,826,463 

2,426,988 
   
Income  from operations

2,780,439 

558,138 

4,536,246 

727,464 
   
Other income (expense):

Interest income

8,314 

1,968 

21,621 

4,193 

Other income (expense) -  net

(58,586)

(25,813)

12,736 

15,784 

Total other income  (expense) 

(50,272)

(23,845)

34,357 

19,977 
   
Income before provision for  income taxes

2,730,167 

534,293 

4,570,603 

747,441 

Provision for income taxes

714,553 

44,700 

1,189,953 

66,311 
   
Net income 

 $

2,015,614 

 $

489,593 

    

 $

3,380,650 

 $

681,130 
   
Net income per common and  common equivalent share

Basic

 $

0.30 

 $

0.08 

 $

0.53 

 $

0.11 

Diluted

 $

0.27 

 $

0.08 

 $

0.48 

 $

0.11 
   
Weighted average number of  common and common equivalent shares outstanding

Basic

6,621,099 

6,101,108 

6,427,187 

6,063,077 

Diluted

7,438,169 

6,414,501 

7,042,164 

6,370,807 
   
The accompanying notes are an integral part of theconsolidated financial statements.

4

**FORWARD INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)**

**Six Months Ended March 31,**

**     2005**

** **

**2004**

**OPERATING ACTIVITIES:**

Net  income

$  3,380,650 

$   681,130 

Adjustments to reconcile net  income to net cash used          by operating activities:

Depreciation  and amortization

63,002 

59,381 

Deferred  income taxes

952,113 

-- 

     Provision for obsolete inventory

38,976 

129,867 

 Loss on disposal of property, plant and equipment

4,000 

-- 

     Changes in operating assets and  liabilities:

Accounts  receivable

(5,061,584)

518,500 

Inventories

(446,513)

(276,260)

Prepaid  expenses and other current assets

37,660 

(31,276)

Other  assets

500 

2,380 

Accounts  payable

849,142 

162,995 

Accrued  expenses and other current liabilities

69,356 

(489,790)

**NET CASH  (USED)  PROVIDED BY OPERATING ACTIVITIES**

**(112,698)**

** **

**756,927 **
     
**INVESTING ACTIVITIES:**

Proceeds from the sale of property,  plant, and equipment

1,000 

-- 

Purchases of property,  plant, and equipment

(104,924)

(12,793)

**NET CASH USED BY  INVESTING ACTIVITIES**

**(103,924)**

** **

**(12,793)**
     
**FINANCING ACTIVITIES:**

Proceeds from exercise of  stock options

1,027,550 

189,916 

Purchase of treasury shares

-- 

(4,385)

**NET  CASH PROVIDED BY FINANCING ACTIVITIES**

**1,027,550 **

** **

**185,531 **

NET INCREASE IN CASH AND  CASH EQUIVALENTS

810,928 

929,665 
     
CASH AND CASH  EQUIVALENTS - beginning of period

4,487,415 

2,125,300 
     
CASH  AND CASH EQUIVALENTS - end of period

$  5,298,343 

$  3,054,965 

The accompanying notes are an integral part of theconsolidated financial statements.

5

**Forward Industries, Inc.Notes to Consolidated FinancialStatementsThree- and Six-MonthPeriods Ended****March 31, 2005****and 2004(Unaudited)**

 

** **

1.             BASIS OF PRESENTATION             

The accompanying unaudited consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States for interim financial information and with theinstructions to Form 10-QSB and Article 10 of Regulation S-X.  Accordingly,they do not include all the information and footnotes required by accountingprinciples generally accepted in the United  States for complete financialstatements.  In the opinion of management, all adjustments (consisting ofnormal recurring accruals) considered necessary for a fair presentation havebeen included.  Operating results for the three- and six-month periods ended March 31, 2005 arenot necessarily indicative of the results that may be expected for the fiscalyear ending September 30, 2005.

The consolidated balance sheet at September 30, 2004, has been derived from the audited consolidated balance sheet at that date, butdoes not include all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements.

The accounting policies used in the preparation ofthe financial statements included in this Form 10-QSB are the same as those setforth in the financial statements included in the Company's annual report onForm 10-KSB for the fiscal year ended September 30, 2004 and should be read inconjunction with the disclosures presented therein.  

For the three- and six-month periodsended March 31, 2005 and 2004, the Company did not have any components ofcomprehensive income other than net income. The functional currency of theCompany's wholly owned foreign subsidiaries is the U.S. dollar.

**RecentAccounting Pronouncements**

The Financial AccountingStandards Board issued Statement of Financial Accounting Standards No. 151, InventoryCosts - an Amendment to ARB No. 43, Chapter 4 in November 2004.  ThisStatement requires that abnormal amounts of idle facility expense, freight,handling costs, and wasted material (spoilage) costs be recognized ascurrent-period charges.  In addition, this Statement requires thatallocation of fixed production overheads to the costs of conversion be based onthe normal capacity of the production facilities.  The provisions of thisStatement are effective for inventory costs incurred during fiscal yearsbeginning after June 15, 2005. The Company does not expect this pronouncementto have a material impact on the financial statements.

The Financial AccountingStandards Board issued Statement of Financial Accounting Standards No. 153, Exchangesof Nonmonetary Assets - an amendment of APB Opinion No. 29 in December2004.   The guidance in APB Opinion No. 29, Accounting forNonmonetary Transactions, is based on the principle that exchanges ofnonmonetary assets should be measured based on the fair value of the assetsexchanged. The guidance in that Opinion, however, included certain exceptionsto that principle. This Statement amends Opinion 29 to eliminate the exceptionfor nonmonetary exchanges of similar productive assets and replaces it with a generalexception for exchanges of nonmonetary assets that do not have commercialsubstance. A nonmonetary exchange has commercial substance if the future cashflows of the entity are expected to change significantly as a result of theexchange.  The provisions of this Statement are effective for nonmonetaryasset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect this pronouncement to have a material impact on thefinancial statements.

 

 

 

6

 

**Forward Industries, Inc.Notes to Consolidated FinancialStatementsThree- andSix-Month Periods Ended****March 31, 2005****and 2004(Unaudited)**
 
1.             BASIS OF PRESENTATION (CONTINUED)

In December 2004 the Financial Accounting StandardsBoard (FASB) issued Statement of Financial Accounting Standard No. 123, asrevised*, Share-based Payment* (FAS 123(R)). The provisions of the new standard were scheduled togo into effect for all interim or annual periods beginning after June 15, 2005. FAS 123(R) requires that compensation cost for all share-basedemployee payments be recognized in the statement of operations based on grantdate fair values of the awards, adjusted to reflect actual forfeitures and theoutcome of certain other conditions. The fair value is generally notre-measured, except in limited circumstances, or if the award is subsequentlymodified. The statement will require the Company to estimate the fair value ofstock-based awards and recognize expense in the statement of operations as therelated services are provided. This will change current practice as, uponadoption, the Company must cease using the "intrinsic value" method ofaccounting, currently permitted by APB 25 that resulted in no expense for allof the Company's stock option awards.

In March 2005, the U.S. Securities andExchange Commission (SEC) issued Staff Accounting Bulletin No. 107 (SAB 107)which expresses views of the SEC staff regarding the application of FAS 123(R).Among other things, SAB 107 provides interpretive guidance related to theinteraction between FAS 123(R) and certain SEC rules and regulations, as wellas provides the SEC staff's views regarding the valuation of share-basedpayment arrangements for public companies. On April 14, 2005, the SEC announcedthe adoption of a new rule that amends the compliance dates of FAS 123(R). Thenew rule allows companies to implement FAS 123(R) at the beginning of theirnext fiscal year instead of the next reporting period that begins after June15, 2005  or December 15, 2005 for small business issuers.

The Company will adopt the provisions of the statementas of the beginning of its fiscal year ending September 30, 2007 and for futureperiods. Adoption of the standard may have a material impact on the results ofoperations in future periods. However, the impact of adoption will depend onlevels of share-based payments granted in the future. 

**Accounting for Stock Based Compensation**

In December 2002, the FASBissued SFAS No. 148, *Accounting for Stock-Based Compensation - Transitionand Disclosure - an amendment of SFAS 123*, which provides alternativemethods for a voluntary change to the fair value method of accounting forstock-based employee compensation and amends the disclosure requirements ofSFAS 123. The Company has elected to continue to account for its stock-basedemployee compensation plans under APB Opinion 25, *Accounting for StockIssued to Employees*, and related interpretations. The following disclosuresare provided in accordance with SFAS 148.

The Company has a stockoption plan and accounts for that plan under the recognition and measurementprinciples of APB Opinion No. 25, *Accounting for Stock Issued to Employees*,and related Interpretations.  No stock-based employee compensation cost hasbeen reflected in net income, as all options granted under the plan had anexercise price equal to the quoted market value of the underlying common stockon the date of grant.

 

 

7
 
 

**Forward Industries,Inc.Notes to Consolidated Financial StatementsThree- and Six-Month Periods Ended****March 31, 2005****and 2004(Unaudited)**
 
 

1.             BASIS OF PRESENTATION (CONTINUED)

**Accounting for Stock Based Compensation (continued)**

If the Company hadelected to recognize expense in the three and six-month periods ended March 31,2005 and 2004, for the stock options granted based on the fair value at thedate of grant consistent with the method prescribed by SFAS No. 148, unauditednet income and income per share would have been changed to the pro formaamounts indicated below:

**Three Months Ended**

** **

**Six Months Ended**

**March 31,**

** **

**March 31,**

**2005**

** **

**2004**

** **

**2005**

** **

**2004**

Net income, as reported...........................

$2,015,614

$489,593

$3,380,650

$681,130

Less: Stock-based employee compensation costs  determined under fair value based method for all awards, net of related tax  effects......................

--

29,112

29,070

62,235

Pro forma net income................................

$2,015,614

$460,481

$3,351,580

$618,895

Earnings per share:

Basic  - as reported.................................

$        0.30

$      0.08

$        0.53

$      0.11

Basic  - pro forma....................................

$        0.30

$      0.08	

$        0.52

$      0.10

Diluted  - as reported..............................

$        0.27

$      0.08

$        0.48

$      0.11

Diluted  - pro forma.................................

$        0.27

$      0.07

$        0.48

$      0.10

The above stock-basedemployee compensation costs determined under the fair value based method werecalculated using the Black-Scholes option valuation model.  The Black-Scholesoption valuation model was developed for use in estimating the fair value oftraded options, which have no vesting restrictions, are fully transferable, anddo not include a discount for large block trades.  In addition, optionvaluation models require the input of highly subjective assumptions includingthe expected stock price volatility, expected life of the option and otherestimates.  Because the Company's employee stock options have characteristicssignificantly different from those of traded options, and because changes inthe subjective input assumptions can materially affect the fair value estimate,in management's opinion, the existing models do not necessarily provide areliable single measure of the fair value of its employee stock options.

8

**Forward Industries, Inc.Notes to Consolidated FinancialStatementsThree- andSix-Month Periods Ended****March 31, 2005****and 2004(Unaudited)**
 
2.            CREDITFACILITIES

In March 2005, Forward and Koszegi entered into anew credit facility with a U.S. bank that provides for a committed line of creditin the maximum amount of $3 million, including a $1.5 million sub-limit forletters of credit. The line is renewable annually and expires in March 2006.The Company is required to eliminate borrowings for thirty consecutive daysduring the term of the facility and is required to maintain certain financialcovenants including the maintenance of current and tangible net worth ratios,as defined. Amounts drawn under the credit facility bear interest at LIBOR plus2.5% and are secured by substantially all of Koszegi's assets and certainassets of Forward.  At March 31, 2005, there were no outstanding borrowings orletter of credit obligations under this facility. 

In February 2003, Forward Innovations established a creditfacility with a Swiss bank that provides for an uncommitted line of credit inthe maximum amount of $400,000.  Amounts borrowed under the facility may bestructured as a term loan or loans, with a maximum repayment period of 12months, or as a guarantee facility, or any combination of the foregoing.  Eitherparty may terminate the facility at any time; however, such termination wouldnot affect the stated maturity of term loans outstanding.  Amounts borrowedother than as a term loan must be settled quarterly or converted into termloans.  In connection with this facility, Forward Innovations has agreed tocertain covenants, and an intercompany balance owed by Forward Innovations to ForwardIndustries secures Forward Innovations' obligations under the facility. Amounts drawn under this credit facility bear interest at variable ratesestablished by the bank (5.5% as of March 31, 2005).  At March 31, 2005, Forward Innovations is contingently liable to the bank under a letter of credit,issued on its behalf in the amount of €224,000 (approximately $290,000 as of March 31, 2005), in favor of Forward Innovations' freight forwarder and customs agent inconnection with its logistics operations in The Netherlands (Refer to Note 6). The effect of the issuance of the letter of credit is to reduce theavailability of the credit line in an amount equal to the face amount of theletter of credit.

3.            BUSINESS SEGMENT INFORMATION

The Company operates in a single business segmentproviding carrying solutions for portable electronic devices. The Companydesigns and markets its products primarily to original equipment manufacturersof portable, personal electronic devices such as wireless telecommunicationsdevices and medical equipment.  Geographic locations are determined basedprimarily on the location of the customer.   Information as to revenue source bygeographic location is as follows:

**Revenues from external customers (all amounts inthousands of dollars):**

 
**Three Months Ended	March 31,**

** **

**Six Months Ended	March 31,**

**2005**

**2004**

** **

**2005**

** **

**2004**

United States

   $3,232

   $ 2,095

   $5,676

   $ 4,134

Europe

    4,376

2,473

7,877

4,627

Asia

3,630

433

6,601

733

Total net sales

$11,238

$ 5,001

$20,154

$ 9,494

 

 

9

**Forward Industries, Inc.Notes to Consolidated FinancialStatementsThree- andSix-Month Periods Ended****March 31, 2005****and 2004(Unaudited)**
 
4.            EARNINGS PER SHARE

Basic earnings pershare is computed using the weighted-average number of shares of common stockoutstanding during each period. Diluted earnings per share is computed usingthe weighted-average number of common and dilutive common-equivalent sharesoutstanding during the period. Dilutive common-equivalent shares consist ofshares that would be issued upon the exercise of stock options and warrants,computed using the treasury stock method. For this purpose, the average quotedmarket prices for the Company's common stock for the three and six-monthperiods ended March 31, 2005 were $7.61 and $5.18. The average quoted marketprices for the Company's common stock for the three and six-month periods ended March 31, 2004 were $2.42 and $2.39, respectively. Calculation of basic and dilutedearnings per share is as follows:

**Three Months Ended	March 31,**

**Six Months Ended	March 31,**

**2005**

** **

**2004**

** **

**2005**

** **

**2004**

Numerator:

Net  income......................................

$2,015,614 

$ 489,593 

$3,380,650 

 $ 681,130 

Denominator:

Denominator for basic earnings per share - weighted  average shares..............

6,621,099

6,101,108

6,427,187

6,063,077

Dilutive stock options and warrants - treasury stock  method...................

817,070

313,393

614,977

307,730

Denominator for diluted earnings per share -  weighted average shares............. 

7,438,169

6,414,501

7,042,164

6,370,807

Net  income per common share

Basic..........................................

$0.30 

$       0.08

$0.53 

$       0.11

Diluted.......................................

$0.27 

    $       0.08

$ 0.48

    $       0.11

Shares excluded due to antidilution

--

616,250

--

616,250

 

 

 

10

**Forward Industries, Inc.Notes to Consolidated FinancialStatementsThree- andSix-Month Periods Ended****March 31, 2005****and 2004(Unaudited)**
 
5.            INCOME TAXES

The Company's incometax provision consists of the following United States and foreign components:

**Three Months Ended	March 31,**

**Six Months Ended	March 31,**

U.S.  Federal and State

**2005**

** **

**2004**

** **

**2005**

** **

**2004**

   Current..............................

$755,430

$ 44,700

$784,829

$ 66,311

Deferred..........................

(134,677) 

 --

248,324

 -- 

Foreign:

Current............................	

93,800

--

156,800

--

Deferred..........................	

--

--

--

--

Income  tax provision

$714,553

$ 44,700

$1,189,953

$ 66,311

During the three- andsix-month periods ended March 31, 2004, the Company recorded a benefit, and nota provision, in respect of U.S. Federal income taxes (other than alternativeminimum tax) as it had reduced the valuation allowance it had established againstits deferred tax assets (consisting primarily of cumulative net operating losscarryforwards) during those periods. Subsequently, during the fourth quarter ofthe fiscal year ended September 30, 2004, the Company completely eliminated thevaluation allowance against its deferred tax assets and, as a result, realizedthe tax benefits attributable thereto.  For the three- and six-month periodsended March 31, 2005, the Company recorded a current provision for U.S. incometaxes of $755,000 and $785,000, respectively. The Company's effective tax ratedoes not approximate the statutory federal income tax rate primarily due to taxrate differentials in respect of United States state and foreign taxes. Due tothe availability of deferred tax assets and additional tax benefits resultingfrom the exercise of stock options by certain employees during the three- andsix-month periods ended March 31, 2005, the Company has not recorded any amountspayable for U.S. Federal income taxes (other than alternative minimum tax) anddoes not expect any cash outlay to be required in connection with therespective income tax provisions.

In June 2001, theCompany established a wholly owned foreign subsidiary in Switzerland to engagein marketing and distribution activities throughout Europe, the Middle East and Africa. At March 31, 2005, the subsidiary had cumulative undistributed earningsof approximately $2,047,000.  The Company considers its investment in thesubsidiary to be permanent.   Accordingly, no provision has been made for U.S.federal income taxes on such undistributed foreign earnings.  

11

**Forward Industries, Inc.Notes to Consolidated FinancialStatementsThree- andSix-Month Periods Ended****March 31, 2005****and 2004(Unaudited)**

 

6.            COMMITMENTSAND CONTINGENCIES

RoyaltyCommitments

The Company has licensed the use ofcertain trademarks of Motorola, Inc. ("Motorola") for the distributionand sale of carry solution products throughout Europe, the Middle East and Africa (the "EMEA Region")under a license agreement effective October 1, 2004, which replaces a previousagreement that expired September 30, 2004.  Under the terms of the licenseagreement, the Company is required to pay Motorola a royalty based upon apercentage of the Company's net sales to third parties of licensed productswithin the EMEA Region, subject to payment of minimum royalties (irrespectiveof actual net sales) to Motorola over the following three contract periods: 

•        Contract Period1:  October 1, 2004 to December 31, 2005 

•        Contract Period2:  January 1, 2006 to December 31, 2006 

•        Contract Period3:  January 1, 2007 to December 31, 2007 

The minimum royalty payment to Motorola for ContractPeriod 1 is $375,000, or $300,000 annualized.  Prior to the end of ContractPeriod 1 and Contract Period 2, the Company and Motorola have agreed that, atsuch times, they will establish new minimum royalty amounts for Contract Period2 and Contract Period 3, respectively.  If the Company is unable to reach agreementat such time with Motorola on the minimum royalty payment for Contract Period 2or Contract Period 3, as the case may be, then the parties have agreed that theminimum royalty payment for the relevant period may not be less than seventy-fiveper cent (75%) of the annualized royalties payable in respect of actual sales forthe prior contract period, provided, however, that in no event shall theminimum royalty in such contract period be less than seventy-five percent (75%)nor more than one-hundred-twenty-five percent (125%) of the amount of the priorperiod's annualized minimum royalty. 

If the Company elects to terminate thelicense before December 31, 2007, it is required to pay a penalty of an amount equalto up to one year's minimum royalty under certain conditions as specified inthe agreement. The minimum royalty commitments are recognized as expense overthe applicable contract period.  Under the current and expired licenseagreements with Motorola, as applicable, the Company recorded royalty expenseof $75,000 and $102,000 during the three-month periods ended March 31, 2005 and2004, respectively, and $150,000 and $204,000 for the six-month periods endedMarch 31, 2005 and 2004, respectively, which are included in selling expensesin the accompanying consolidated statements of income.

**Legal Proceedings**In October 2001, the Company initiated an actionagainst Royal Industries Inc. ("Royal"), in the Supreme Court of theState of New York, Kings County, asserting causes of action for conversion andunjust enrichment. The Company alleges that, without consent or authority, andwith full knowledge of the Company's rights under a security agreement, Royalwrongfully took possession of certain assets in which the Company had aproperly perfected security interest. The Company seeks compensatory damages of$1,000,000. Royal filed a counterclaim against the Company alleging abuse ofprocess and harassment and seeking an award of punitive damages in the amountof $1,000,000.  Although the parties have made discovery demands, neitherhas complied, having each interposed objections to the nature and scope of thediscovery sought, and the action has remained essentially dormant since serviceof the answer on November 5, 2001.  No depositions have been held, nojudicial intervention in the discovery dispute has been sought, and no trialhas been scheduled or is likely to be scheduled in the foreseeable future. Todate, efforts to resolve the matter by negotiation have not borne fruit, yetRoyal declines to prosecute its counterclaims.  After consultation withthe Company's legal counsel, management believes the case is without merit andit does not appear reasonably possible that Royal's counterclaims will resultin material losses and therefore, at March 31, 2005, no provision for lossesrelated to this action has been recorded in the accompanying consolidatedfinancial statements.

 

12

**Forward Industries, Inc.Notes to Consolidated FinancialStatementsThree- andSix-Month Periods Ended****March 31, 2005****and 2004(Unaudited)**

 

6.            COMMITMENTS AND CONTINGENCIES(CONTINUED)

**Bank Guarantee**In July 2002, Forward Innovations, the Company'sSwiss subsidiary, and its European logistics provider (freight forwarding andcustoms agent) entered into a Representation Agreement whereby, among otherthings, the European logistics provider agreed to act as such subsidiary'sfiscal representative in The Netherlands for the purpose of providing servicesin connection with any value added tax matters. As part of this agreement, thesubsidiary agreed to provide an undertaking to the logistics provider withrespect to any value added tax liability arising in The Netherlands that thelogistics provider paid on the subsidiary's behalf. In February 2004, suchsubsidiary entered into a guarantee agreement with a Swiss bank relating to therepayment of any amount up to €224,000 (approximately $290,000 as of March 31,2005) paid by such bank to the logistics provider pursuant to a letter ofcredit that was issued by the bank in favor of the logistics provider in orderto satisfy such undertaking.  The subsidiary would be required to performunder the guarantee only in the event that: (i) a value added tax liability isimposed on the Company's sales in The Netherlands, (ii) the logistics providerasserts that it has been called upon in its capacity as surety by the Dutch Receiverof Taxes to pay such taxes, (iii) the subsidiary or the Company on its behalffails or refuses to remit the amount of value added tax due to the logisticsprovider, and (iv) the logistics provider makes a drawing under the letter ofcredit. On December 31, 2004 and on each anniversary thereafter until December 31, 2009, the bank letter of credit will be renewed automatically for one-yearperiods. The subsidiary has agreed to keep a letter of credit guarantee inplace for five years following the date its relationship terminates with thelogistics provider. As of March 31, 2005, the Company has not recorded aliability in connection with this guarantee.

7.             EQUITY

**Stock Option Exercises**During the three-and six-month periods ended March  31, 2005, 488,500 and 551,400 shares ofcommon stock were issued as a result of the exercise of stock options at an averageprice of $1.91 and $1.86, respectively.

**Treasury SharePurchases**The Company did notpurchase any shares of its common stock during the three- and six-month periodsended March 31, 2005. 

 

 

 

 

13

ITEM 2:   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS

**Cautionary statement forpurposes of the "****Safe Harbor****" provisions of thePrivate Securities Litigation Reform Act of 1995**

This quarterly reportcontains forward-looking statements that are not based on historical fact and thatinvolve assessments of certain risks and uncertainties.  Such forward lookingstatements, within the meaning of the Private Securities Litigation Reform Actof 1995, can be identified by the use of forward-looking terminology such as"may", "will", "should", "expect", "anticipate", estimate", "intend", "continue", or "believe", or the negatives or other variations of these termsor comparable terminology.  Forward looking statements also include projections,forecasts or estimates of future performance.  Forward looking statements,including projections, forecasts and estimates, are based upon assumptions thatwe believe to be reasonable at the time such forward looking statements aremade.  Whether those assumptions will be realized will be determined by future factorsand events, which are difficult to predict and may be beyond our control. Actual factors and events may differ materially from those assumed.  These riskfactors, uncertainties, contingencies, and developments, including thosediscussed in this Management's Discussion and Analysis of Financial Conditionand Results of Operations and those identified in "Risk Factors" in our annualreport on Form 10-KSB for the fiscal year ended September 30, 2004, could causeour future operating results to differ materially from those set forth in anyforward looking statement.  Such factors include, among other, the following:general economic and business conditions, nationally and internationally in thecountries in which we do business; demographic changes; changes in technology,including developments in cellular handsets or the control of diabetes;increased competition; changes affecting one or more of our principal OriginalEquipment Manufacturer, ("OEM") customers; governmental regulations and changesin, or the failure to comply with, governmental regulations; and other factorsincluded elsewhere in this report and our other reports filed with theCommission, including without limitation, those described under the captionRisk Factors contained in our Annual Report on Form 10-KSB for the year endedSeptember 30, 2004.  Accordingly, there can be no assurance that any suchforward looking statement, projection, forecast or estimate can be realized orthat actual returns or results will not be materially lower than those that maybe estimated.

**Given theseuncertainties, readers are cautioned not to place undue reliance on suchforward-looking statements**.  **The Company disclaims any obligation toupdate any such factors or to publicly announce the results of any revisions toany of the forward-looking statements contained herein to reflect futureresults, events or developments**.

**Management's Discussionand Analysis of Financial Condition and Results of Operations** 

The following discussion and analysis should be read in conjunction with our ConsolidatedFinancial Statements and the notes thereto and other financial information appearingelsewhere in this Quarterly Report and in our Annual Report on Form 10-KSB forthe fiscal year ended September 30, 2004.  Such discussion and analysis compares ourconsolidated results of operations for the three months ended March 31, 2005(the "2005 Quarter"), with the three months ended March 31, 2004 (the "2004Quarter"), and the six months ended March 31, 2005 ("the 2005 Period"), withthe six months ended March 31, 2004 ("the 2004 Period"), and is based on orderived from the Unaudited Consolidated Financial Statements included elsewherein this Report. There have been no material changes in critical accountingestimates since September 30, 2004.  All figures in the following discussion arepresented on a consolidated basis. All dollar amounts and percentages presentedherein have been rounded to approximate values.

 

 

14

The preparation of financial statements in conformitywith GAAP requires us to make estimates and assumptions that affect thereported amounts of assets, liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting periods.  On an on-going basis, weevaluate our estimates.  We base our estimates on historical experience and onvarious other assumptions that are believed to be reasonable under thecircumstances, the results of which form the basis for making assumptions aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources.  Actual results could differ from these estimates.

**Variability of Revenues and Results ofOperations**

We depend for the predominant proportionof our sales on orders from our six largest customers, each of which is alarge, multinational corporation and each of which may purchase productsaccessories, such as carrying cases, from many different vendors.  Because ofthe high concentration of sales to these few, large customers, our revenuelevels, as well as geographic sales trends, are difficult to predict, andsignificant shifts in our operating results may occur in a relatively shortperiod of time if and when one or more of these customers increases ordecreases the size(s) of (or eliminates) its orders from us by amounts that arematerial to our business.  These customers' order flows to us in any period, orfrom period to period, depend in large part, among other factors, on: (i) ourability to successfully compete against other vendors for the "in-box"business; (ii) the demand for product offerings (both cellular handsets anddiabetes monitoring kits) that include our carrying case accessories "in-box";and (iii) the timing of our customers' product launches and the longevity andsuccess of such launches.   In addition, our revenue levels are dependent on generaleconomic conditions, as well as conditions and developments specific to ourcustomers' businesses, as these may impact demand for our carry solutions. Becausewe may supply carry solutions for a very small percentage of the productsmarketed by our customers and our business is so dependent on specific productlaunches, the level of our revenues and profits may not necessarily vary inline with those of our customers.   Correspondingly, our levels of net salesrevenues, and consequently our results of operations, are variable and subjectto significant changes in a relatively short period of time.  For example,sales of carrying cases and related accessory products for cellular telephonesincreased 218% in the 2005 Period compared to the 2004 Period, while sales ofcarrying cases for blood glucose monitoring kits increased only 23% over thesame period.  These fluctuations are typical of the volatility we experience inour revenues and product mix. 

**Trends in Results of Operations**

•       Net sales increased $6,237,000 or 125% to $11,238,000 in the 2005 Quarter comparedto $5,001,000 in the 2004 Quarter.  The trend of significantly increasing salesrevenues and profitability in the 2005 Quarter and during the 2005 Period comparedto the 2004 Quarter and the 2004 Period, respectively, is primarily the result of significant increases insales of cell phone carrying cases to our two largest cell phone customers. More specifically, the significant increase in our cell phone product sales forthe quarter and year to date periods was driven by demand for a limited numberof our products by Motorola and Nokia that were bundled as "in box" accessorieswith  some of their handsets that were launched beginning in 2004.  Webelieve that sales of these models continue to be well received in the market,and as a result we expect this spike in sales, compared to sales levels in the2004 Period and prior periods, to persist into the three months ending June 30, 2005, withdifficulty in assessing periods beyond that time. There can be no assurance, thatthe level of sales for the three months ending June 30, 2005, will represent acontinuation of the trend established in the first two quarters of our currentfiscal year.  Further, as reflected in the discussion above under "Variabilityof Revenues and Results of Operations", when demand for the these handsetmodels (and thus, for the carrying solutions packaged "in-box" with them) declines,and introduction of new models do not include one of our carrying solutions asan accessory "in-box", or such models do not result in a comparable level ofdemand for our carrying case accessories, the level of our sales may declinesignificantly from current levels.

15

•       Approximately $58,000 or less than1% of the increase in net sales was due to appreciation of the Euro against theUS Dollar during the 2005 Quarter. A continuation of the appreciation of theEuro against the US Dollar will benefit revenue levels in respect of afixed-amount of Euro-denominated sales. US Dollar appreciation against the Eurowill adversely affect revenue levels in respect of a fixed amount of Euro-denominatedsales.  Increasing levels of Euro-denominated sales will exacerbate the trend. During the 2005 Quarter, approximately 11% of net sales were Euro-denominated.

•      There is a broad range of sellingprices within our soft-sided carrying cases product line, and there is also abroad range of selling prices between product lines, for example, soft-sidedcarrying cases compared to other carry solutions such as straps, clips andcamera attachment cases.  Because of the broad variability in price ranges withinand between product types, we anticipate that gross margins will continue tofluctuate depending on our OEM customers' order patterns and preferences andother product mix factors.  Such fluctuations may have the effect of maskingthe impact of fluctuations in unit sale trends.

•      As more specifically described inour Annual Report on Form 10-KSB for the fiscal year ended September 30, 2004, andupdated for the purposes of this quarterly report on Form 10-QSB, as of  April 21,2005, 1,262,350 shares of common stock (equal to an additional 19% of thenumber of shares of common stock issued and outstanding on such date) are issuable upon the exercise of stock options granted under our 1996 StockIncentive Plan at exercise prices ranging from $1.75 to $3.25 per share to oneor more of our executive officers, directors and employees.  Assuming thecontinuation of present market conditions in respect of the price of our commonstock, we anticipate that employees who hold such stock options, including our twomost highly compensated executive officers (who hold options covering anaggregate of 951,000 of the above stated number of such shares), may exercise allor a portion of the stock options they hold.  In particular, the exercise of allor a significant number of such options may be anticipated in the case of suchindividuals insofar as options covering 701,100 shares of common stock are dueto expire on or before December 31, 2005.  The exercise of these options willhave a further dilutive effect on earnings per share in future quarters, however,our cash position would be strengthened, the degree to which will depend on thenumber of options exercised 

•       As discussed above at Note 5 to theconsolidated financial statements included herein, and in greater detail under"Deferred Income Taxes" in our Annual Report on Form 10-KSB for thefiscal year ended September 30, 2004, at that date, we reduced the valuation allowanceagainst our deferred income tax assets to zero.  Accordingly, for the three andsix-month periods ended March 31, 2005, and for future periods, assuming thatwe continue to generate U.S. taxable income, our results of operations nolonger reflect any tax benefit attributable to the reduction of the allowanceagainst deferred tax assets (as was the case in fiscal 2004 and 2003), and,instead, our consolidated statement of income will show United States Federal(as well as applicable state)  income tax expense at our effective tax rateapplied to the amount of income before income taxes.  

**Results of Operations for the 2005Quarter Compared to the 2004 Quarter**

Netincome in the 2005 Quarter was $2,016,000 compared to net income of $490,000 inthe 2004 Quarter, an increase of approximately $1,526,000 or 311%.  Theincrease was due to higher gross profit, primarily as a result of an increasein sales of cell phone carrying case products. Basic and diluted earnings pershare were $0.30 and $0.27, respectively, for the 2005 Quarter, compared to$0.08 basic and diluted earnings per share for the 2004 Quarter. 

 

 

16

**Net Sales**

Net sales increased $6,240,000 or 125% to $11,240,000in the 2005 Quarter compared to $5,000,000 in the 2004 Quarter.  Theincrease in net sales was due to higher sales of cell phone carrying casesolutions products, which increased $5,360,000 or 268%, and, to a lesser extent,higher sales of carrying cases for medical monitoring kits for diabetics, whichincreased $500,000 or 20%, as well as higher sales of other products. Thetables below set forth approximate sales by product line and geographiclocation of our customers for the periods indicated.

**Net  Sales for 2005 Quarter	3  Months ended March 31, 2005	(millions  of dollars)**

** **

**US**

**Europe**

**Asia**

**Total**

Cell Phone Products

$1.56

$ 3.65

$2.15

$7.36

Diabetic  Products

1.00

 0.72

1.31

3.03

Other Product Sales

0.67

0.01

0.17

0.85

**Total***

**$3.23**

**$4.38**

**$3.63**

**$11.24**

                               

**Net  Sales for 2004 Quarter 	3  Months ended March 31, 2004	(millions  of dollars)**

** **

**US**

**Europe**

**Asia**

**Total**

Cell Phone  Products

$0.64

$1.18

$0.18

$2.00

Diabetic  Products

1.02

1.27

0.24

2.53

Other Product Sales

0.44

0.02

0.01

0.47

**Total***

**$2.10**

**$2.47**

**$0.43**

**$5.00**

* Tablesmay not total due to rounding.

**Cell Phone Product Sales:**Our cell phone carrysolutions products include carrying cases for handsets and camera attachments,plastic belt clips, carrying case straps and bags, hand straps, decorativefaceplates and other attachments used to carry or enhance the appearance ofcellular telephone handsets.  We sell these products directly to cellphone handset original equipment manufacturers such as Motorola andNokia.  Our cases are packaged as an accessory "in-box" with thehandsets that are sold by our OEM customers.  In addition, under theMotorola license agreement we distribute our products as stand aloneaccessories directly to third party wholesalers and retailers in the EMEAregion.  During the 2005 Quarter, we entered into a one-year, renewable,non-exclusive license agreement with the French telecommunications companySAGEM relating to the distribution and sale of carry cases in the EMEA market.However, we do not expect a significant contribution to revenues under thislicense agreement in the fiscal year ending September 30, 2005.

Sales of cell phone products increased $5,360,000 or268% to $7,360,000 in the 2005 Quarter from $2,000,000 in the 2004 Quarter. The significant increase was primarily attributable to sales of a limitednumber of our carrying solutions sold "in-box" with some of the handset modelslaunched by Motorola and Nokia in 2004 sales of which, we believe, continue tobe well received in the market.  OEM sales to Motorola (including itssubsidiaries and affiliates) and Nokia increased $5,480,000 or 391% to $6,880,000in the 2005 Quarter from $1,400,000 in the 2004 Quarter. Sales to third partiesunder our Motorola license agreement decreased $170,000 or 28% to $430,000 inthe 2005 Quarter from $600,000 in the 2004 Quarter, which we believe, in part, isa function of the strong take-up of new OEM handset models generally (includingcarry accessories "in-box" from numerous vendors), which tends to undercut demandfor carry solutions sold through distributors and retailers in the aftermarket.

** **

17

**Diabetic Product Sales:**We design to the order of and sell directly to OEMscarrying cases used by diabetics to carry their personal electronic, bloodglucose monitoring kits. OEM customers for these carrying cases include AbbottLabs, Bayer, Lifescan (a subsidiary of Johnson & Johnson), and RocheDiagnostics.  Our carrying cases are packaged as an accessory "in thebox" with the monitoring kits that are sold by our OEM customers.

Sales of cases for blood glucose monitoring kits increased$500,000 or 20% to $3,030,000 in the 2005 Quarter from $2,530,000 in the 2004Quarter. The increase was due primarily to higher sales to Lifescan, ourlargest OEM customer for these cases, which increased $650,000 or 76%. Thisincrease, in addition to lesser increases in sales of cases of blood glucose monitoringkits to other OEM customers, more than offset a decline in sales of these casesto Abbott Labs of $400,000 or 43%.  Sales of our carrying cases for OEM diabeticmonitoring kits represented 27% of our total net sales in the 2005 Quartercompared to 51% of total net sales in the 2004 Quarter, which is due predominantlyto the increase in cell phone product sales revenues in the 2005 Quarter.

**Other Product Sales:**We design and sell a number of other carryingsolutions for items such as cameras, portable oxygen tanks, bar code scanners,MP3 players and other carrying solutions for an assortment of products on amade-to-order basis that are customized to meet the individual needs of oursmaller OEM customers.  By their nature, sales of these customizedproducts to order vary from period to period without necessarily reflecting asignificant trend in overall demand for these items.  Sales of otherproducts increased $380,000 or 81% to $850,000 in the 2005 Quarter from $470,000in the 2004 Quarter.

**Gross Profit**

Gross profit increased $2,448,000, or 145% to $4,133,000in the 2005 Quarter from $1,685,000 in the 2004 Quarter as a result of highersales volume and, to a lesser extent, lower cost of goods sold as a percentageof sales. Gross profit as a percentage of total net sales increased to 37% in the2005 Quarter from 34% in the 2004 Quarter due to lower freight, duties andcustoms costs and Hong Kong inspection costs as percentages of total net sales,which more than offset higher costs of raw materials, as a percentage of salesas well as in absolute terms. Our freight costs depend in large part on thedistance of our customers' facilities from our shipping points and on our salesterms to them. In recent periods, an increasing percentage of our shipments havebeen routed within or to China directly from our Chinese manufacturers or fromour Hong Kong distribution facility as certain of our customers have relocatedmanufacturing facilities to China.  This has had the effect of reducingfreight, duties and customs costs as a percentage of sales.  Despite thesignificant increase in sales in the 2005 Quarter, freight, duties and customscosts increased only 23% in the 2005 Quarter from the 2004 Quarter andrepresented 2.3% and 4.2% of total net sales, respectively. We include the costof operating our Hong Kong procurement and quality assurance facility as acomponent of our cost of goods sold. The costs of operating the Hong Kongfacility were $534,000 and $365,000 or 4.8% and 7.3% of total net sales, for the2005 Quarter and 2004 Quarter, respectively.    Other components of cost ofgoods sold also contributed to the improvement in margins.

**Selling, General, and Administrative Expenses**

Selling expenses increased $86,000, or 13%, to $767,000in the 2005 Quarter from $681,000 in the 2004 Quarter due primarily to increasesin selling personnel expense, advertising expense, and office expenses, offsetin part by a reduction in royalty expense. Selling personnel expenses increased$90,000 in the 2005 Quarter compared to the 2004 Quarter primarily due tohigher, performance based bonus expense and adjustments to other sellingpersonnel compensation.  Royalty expense decreased $16,000 or 13% in the 2005Quarter compared to the 2004 Quarter due to a decrease in the minimum royaltycommitment as provided in the Motorola license agreement. The ratio of sellingexpenses to total net sales decreased to 6.8% in the 2005 Quarter compared to13.6% in the 2004 Quarter.

 

 

18

General and administrative expenses increased $139,000,or 31%, to $585,000 in the 2005 Quarter from $446,000 in the 2004 Quarter due primarilyto an increase in personnel expenses and professional fees as well as increasesin other components. Personnel expenses increased $78,000 in the 2005 Quartercompared to the 2004 Quarter primarily due to higher, performance based bonus compensationaccrued in respect of the current fiscal year to executives in accordance withthe terms of their employment agreements and adjustments to compensation toother employees.  Professional fees increased $47,000 in the 2005 Quartercompared to the 2004 Quarter due to higher legal and tax preparation fees.

**Income from Operations**

Pretax income from operations increased $2,222,000or 398% to $2,780,000 in the 2005 Quarter from $558,000 in the 2004 Quarter asa result of the increase in gross profit as described above, offset in small partby the increases in selling, general and administrative expenses.

**Other Income (Expense)**

Total other income (expense) decreased $26,000 or 108%to expense of $50,000 in the 2005 Quarter compared to expense of $24,000 in the2004 Quarter.  The components of this change are as follows:

Component

**2005  	Quarter**

** **

**2004  	Quarter**

** **

**Change**

Foreign  currency gain (loss)

$(54,000)

$(26,000)

$(28,000)

Loss  on disposal

(4,000)

--

(4,000)

Net  interest income

8,000

2,000

6,000

             Totals:

$(50,000)

$(24,000)

$(26,000)

Foreign currency losses increased $28,000 dueprimarily to the weakening of the Euro relative to the U.S. Dollar and itsimpact on our Euro denominated assets and liabilities as of March 31, 2005. The volatility of the Euro during the 2005 Quarter resulted in foreign currency lossesattributable to settlement of Euro denominated transactions.

During the 2005 Quarter we recorded a loss of $4,000in connection with the disposal of furniture, fixtures, and equipment that hada net book value of approximately $5,000 as of the disposal date.

Because we had no interest bearing debt outstandingat any time during the 2005 Quarter and maintained higher average cashbalances, our net interest income increased $6,000 in the 2005 Quarter comparedto the 2004 Quarter.

**Income Taxes**

Our provision forincome taxes increased $670,000 in the 2005 Quarter to $715,000 from $45,000 inthe 2004 Quarter.  The provision in the 2005 Quarter consists primarily ofestimated U.S. federal income taxes, and to a lesser extent, current state andforeign income taxes. Other than for estimated federal alternative minimum taxand state taxes, we did not record a provision for U.S. income taxes in the2004 Quarter, as we had sufficient net operating tax loss carryforwardsavailable to offset the current U.S. taxable income for which we had recorded avaluation allowance. 

               **Resultsof Operations for the 2005 Period Compared to the 2004 Period**

Netincome in the 2005 Period was $3,381,000 compared to net income of $681,000 inthe 2004 Period, an increase of approximately $2,700,000 or 397%.  The increasewas due to higher gross profit, primarily as a result of an increase in salesof cell phone carrying case products. Basic and diluted earnings per share were$0.53 and $0.48, respectively, for the 2005 Period, compared to $0.11 basic anddiluted earnings per share for the 2004 Period. 

 

 

19

**Net Sales**

Net sales increased $10,660,000 or 112% to $20,150,000in the 2005 Period compared to $9,490,000 in the 2004 Period.  Theincrease in net sales was due to higher sales of cell phone carrying casesolutions products, which increased $8,880,000 or 218%, and, to a lesser extent,higher sales of carrying cases for medical monitoring kits for diabetics, whichincreased $1,010,000 or 23%, as well as higher sales of other products. Thetables below set forth approximate sales by product line and geographiclocation of our customers for the periods indicated.

**Net  Sales for 2005 Period	6  Months ended March 31, 2005	(millions  of dollars)**

** **

**US**

**Europe**

**Asia**

**Total**

Cell Phone  Products

$2.53

$6.74

$3.68

$12.95

Diabetic  Products

1.73

1.13

2.61

5.47

Other Product Sales

1.41

0.01

0.31

1.73

**Total***

**$5.67**

**$7.88**

**$6.60**

**$20.15**

                               

**Net  Sales for 2004 Period 	6  Months ended March 31, 2004	(millions  of dollars)**

** **

**US**

**Europe**

**Asia**

**Total**

Cell Phone  Products

$1.34

$2.47

$0.26

$4.07

Diabetic  Products

1.88

2.12

0.46

4.46

Other Product Sales

0.90

0.04

0.02

0.96

**Total***

**$4.12**

**$4.63**

**$0.74**

**$9.49**

*Tables may not total due to rounding.

**Cell Phone Product Sales:**Sales of cell phone products increased $8,880,000 or218% to $12,950,000 in the 2005 Period from $4,070,000 in the 2004 Period. The significant increase was primarily attributable to sales of a limited numberof our carrying solutions sold "in-box" with some of the handset models launchedby Motorola and Nokia in 2004. OEM sales to Motorola (including its subsidiariesand affiliates) and Nokia increased $8,700,000 or 283% to $11,780,000 in the2005 Period from $3,080,000 in the 2004 Period. In addition, sales to thirdparties under our Motorola license agreement decreased $130,000 or 13% to$870,000 in the 2005 Period from $1,000,000 in the 2004 Period, which we believe, in part, is a function of the strong take-up of new OEMhandset models generally (including carry accessories "in-box" from numerousvendors), which tends to undercut demand for carry solutions sold throughdistributors and retailers in the after market.

**Diabetic Product Sales:**Sales of cases for blood glucose monitoring kitsincreased $1,010,000 or 23% to $5,470,000 in the 2005 Period from $4,460,000 inthe 2004 Period. The increase was due primarily to higher sales to Lifescan,our largest OEM customer for these cases, which increased 118% to $2,870,000. Thisincrease, in addition to slight increases in sales of cases of blood glucosemonitoring kits to other principal OEM customers, more than offset a decline insales of these cases to Abbott Labs of $580,000 or 36%. Sales of our carryingcases for OEM diabetic monitoring kits represented 27% of our total net salesin the 2005 Period compared to 47% of total net sales in the 2004 Period, thedecrease in predominant part due to the increase in cell phone product salesrevenues in the 2005 Period.

**Other Product Sales:**Sales of other products increased $770,000 or 80% to $1,730,000in the 2004 Period from $960,000 in the 2004 Period. 

 

 

20

**Gross Profit**

Gross profit increased $4,209,000, or 134% to $7,363,000in the 2005 Period from $3,154,000 in the 2004 Period as a result of highersales volume and, to a lesser extent, lower cost of goods sold as a percentageof sales. Gross profit as a percentage of total net sales increased to 37% in the2005 Period from 33% in the 2004 Period due to lower freight, duties andcustoms costs and Hong Kong inspection costs as percentages of total net sales,which more than offset higher costs of raw materials, as a percentage of totalnet sales as well as in absolute terms. Our freight costs depend in large parton the distance of our customers' facilities from our shipping points and oursales terms to them. In recent periods, an increasing percentage of ourshipments have been routed within and to China directly from our Chinesemanufacturers or from our Hong Kong distribution facility as certain of ourcustomers have relocated manufacturing facilities to China.  This has had theeffect of reducing freight, duties and customs costs as a percentage of sales. Despite the significant increase in sales in the 2005 Period, freight, dutiesand customs costs increased only 20% in the 2005 Period from the 2004 Period andrepresented 2.3% and 4.1% of total net sales, respectively. We include the costof operating our Hong Kong procurement and quality assurance facility as acomponent of our cost of goods sold. The costs of operating the Hong Kongfacility were $1,007,000 and $703,000 or 5.0% and 7.4% of total net sales, forthe 2005 Period and 2004 Period, respectively.    Other components of cost ofgoods sold also contributed to the improvement in margins. 

**Selling, General, and Administrative Expenses**

Selling expenses increased $124,000, or 9%, to $1,533,000in the 2005 Period from $1,409,000 in the 2004 Period due primarily toincreases in selling personnel expense, as well as lesser increases in othercomponents such as, advertising and promotion, office expense, and travel andentertainment expense, offset in part by a significant reduction in royaltyexpense and a small decrease in utilities. Selling personnel expenses increased$130,000 in the 2005 Period compared to the 2004 Period primarily due to higher,performance based bonus expense and adjustments to other selling personnelcompensation, offset in part by lower recruitment and training costs.  Royaltyexpense decreased $45,000 or 18% in the 2005 Period compared to the 2004 Perioddue to a decrease in the minimum royalty commitment as provided in the Motorolalicense agreement. The ratio of selling expenses to total net sales decreasedto 8% in the 2005 Period compared to 15% in the 2004 Period.

General and administrative expenses increased $276,000,or 27%, to $1,294,000 in the 2005 Period from $1,018,000 in the 2004 Period dueto an increase in personnel expenses and, to a lesser extent, professionalfees. Personnel expenses increased $230,000 in the 2005 Period compared to the2004 Period primarily due to higher, performance based bonus compensationaccrued in respect of the current fiscal year to executives in accordance withthe terms of their employment agreements and adjustments to compensation toother employees.  Professional fees increased $66,000 in the 2005 Periodcompared to the 2004 Period due to higher legal and tax preparation fees. Theseincreases were offset in small part by reductions in other general andadministrative expense components and in travel and entertainment in the 2005Period compared to the 2004 Period.

**Income from Operations**

Pretax income from operations increased $3,809,000or 524% to $4,536,000 in the 2005 Period from $727,000 in the 2004 Period as aresult of the increase in gross profit as described above, offset in minor partby the increase in selling, general and administrative expenses.

 

 

21

**Other Income (Expense)**

Total other income (expense) increased $14,000 or 70%to income of $34,000 in the 2005 Period compared to $20,000 in the 2004 Period. The components of this change are as follows:

Component

**2005  	Period**

** **

**2004  	Period**

** **

**Change**

Foreign  currency gain

$16,000

$14,000

$2,000

Bad  debt recovery

--

2,000

(2,000)

Loss  on disposal
   
(4,000)

--

(4,000)

Net  interest income

22,000

4,000

18,000

             Totals:

$34,000

$20,000

$14,000

The increase in foreign currency gains of $2,000 isdue primarily to the strength of the Euro relative to the U.S. Dollar and itsimpact on our Euro denominated assets and liabilities. An overall steady increasein the Euro during the first half of the 2005 Period resulted in foreigncurrency gains attributable to settlement of Euro denominated transactions.   Asnoted above in the discussion of the results for the 2005 Quarter, the Euroappreciation against the Dollar that produced the foreign currency gain in the2005 Period as a whole substantially reversed during the 2005 Quarter.

During the 2005 Period we recorded a loss of $4,000in connection with the disposal of furniture, fixtures, and equipment that hada net book value of approximately $5,000 as of the disposal date.

Because we had no interest bearing debt outstandingat any time during the 2005 Period and maintained higher average cash balances,our net interest income increased $18,000 in the 2005 Period compared to the2004 Period.

**Income Taxes**

Our provision forincome taxes increased $1,124,000 in the 2005 Period to $1,190,000 from $66,000in the 2004 Period.  The provision in the 2005 Period consists primarily ofestimated U.S. federal income taxes, and to a lesser extent, current state andforeign income taxes. Other than for estimated federal alternative minimum taxand state taxes, we did not record a provision in the 2004 Period for U.S.income taxes, as we had sufficient net operating tax loss carryforwardsavailable to offset the current U.S. taxable income for which we had recorded avaluation allowance. 

**Liquidity and Capital Resources**

During the 2005 Period, we used $113,000 of cashfrom operations compared to the 2004 Period during which we generated $757,000of cash.  Our operating cash flows in the 2005 Period consisted of netincome of $3,380,000, adjusted for non-cash items consisting of deferred incometaxes of $952,000, provisions for depreciation of $63,000 and obsolete inventoryof $39,000, and a loss on disposition of property, plant and equipment of$4,000.  These cash flows were more than offset by net changes in workingcapital items of $4,551,000, consisting primarily of increases in accounts receivableand inventories of $5,062,000 and $447,000, respectively. These increases wereoffset in part by an increase in accounts payable of $849,000.  The higherlevels of accounts receivable and accounts payable in the 2005 Period areattributable to our higher sales in the 2005 Period compared to the 2004 Period.The higher level of inventory in the 2005 Period is in support of existingsales orders. Operating cash flows in the 2004 Period resulted primarily fromnet income of $681,000, adjusted for non-cash items including depreciationexpense of $59,000 and a provision for obsolete inventory of $130,000, pluschanges in our working capital accounts. The inventory balance increased$276,000 in the 2004 Period to meet demand for our products based on existingsales orders. The increase in the inventory balance accounts for the increasein the accounts payable balance of $163,000 in the 2004 Period. Accruedliabilities decreased $490,000 in the 2004 Period primarily as a result of performancebonuses that were accrued as of September 30, 2003, and paid in the 2004 Period.There were no such bonuses accrued for during the 2004 Period.

22

 

Net investing activities used $105,000 and $13,000 ofcash for purchases of property, plant and equipment, primarily computer andtelecommunications hardware and software, in the 2005 Period and 2004 Period,respectively, and generated $1,000 from the sale of such property, plant andequipment in the 2005 Period.

Net financing activities generated $1,028,000 and$190,000 in cash from the issuance of common stock upon the exercise of stockoptions to purchase 551,400 and 138,500 shares of common stock under our 1996Stock Incentive Plan during the 2005 Period and 2004 Period, respectively.

At March 31, 2005, our current ratio (current assetsdivided by current liabilities) was 4.42; our quick ratio (current assets lessinventories divided by current liabilities) was 4.07; and our working capital(current assets less current liabilities) was $11,934,000.  As of such date, wehad no long-term debt balances outstanding. 

Our primary sources of liquidity are cash on hand,our operating cash flow, our bank credit facilities and, under current marketconditions, exercises of employee stock options until such options are exercisedor they expire. The primary demands on our working capital are: our accountspayable arising in the ordinary course of business, the most significant ofwhich arise when our customers place orders and we order from our suppliers;and our commitments under our license agreement with Motorola. Historically,our sources of liquidity have been adequate to satisfy working capitalrequirements arising in the ordinary course of business. However, it ispossible that, if one of our significant original equipment manufacturercustomers places an unusually large order with us at a time when our cash onhand and/or our credit facility could not accommodate the increased demands onour working capital, we might have to seek additional sources of liquidity.Although there can be no assurance, we believe that, under such circumstances,we could obtain an increase in our credit facility or obtain necessary fundsunder an additional facility.

In March 2005, we entered into a new credit facilitywith a U.S. bank that provides for a committed line of credit in the maximumamount of $3 million, including a $1.5 million sub-limit for letters of credit.The line is renewable annually and expires in March 2006. We are required toeliminate borrowings for thirty consecutive days during the term of thefacility and are required to maintain certain financial covenants includingthe  maintenance of current and tangible net worth ratios, as defined. Amountsdrawn under the credit facility bear interest at LIBOR plus 2.5% and aresecured by substantially all of Koszegi's assets and certain assets of Forward. At March 31, 2005, there were no outstanding borrowings or letter of creditobligations under this facility. 

In February 2003, Forward Innovations established acredit facility with a Swiss bank that provides for an uncommitted line ofcredit in the maximum amount of $400,000.  Amounts borrowed under thefacility may be structured as a term loan or loans, with a maximum repaymentperiod of 12 months, or as a guarantee facility, or any combination of theforegoing.  Either party may terminate the facility at any time; however,such termination would not affect the stated maturity of term loansoutstanding.  Amounts borrowed other than as a term loan must be settledquarterly or converted into term loans.  In connection with this facility,Forward Innovations has agreed to certain covenants, and an intercompanybalance owed by Forward Innovations to Forward Industries secures ForwardInnovations' obligations under the facility.  Amounts drawn under thiscredit facility bear interest at variable rates established by the bank (5.5%as of March 31, 2005). At March 31, 2005, Forward Innovations is contingentlyliable to the bank under a letter of credit, issued on its behalf in the amountof  €224,000 (approximately $290,000 as of March 31, 2005) in favor of Forward Innovations' freight forwarder and customs agent in connection with itslogistics operations in The Netherlands.  The effect of the issuance of theletter of credit is to reduce the availability of the credit line in an amountequal to the face amount of the letter of credit.

23

On September 27, 2002, our Board of Directorsauthorized the repurchase of up to 400,000 shares of our outstanding commonstock, or approximately 7% of the number of shares then outstanding. On January 21, 2004, our Board increased the amount of shares authorized for repurchase to486,200. As of March 31, 2005, we have repurchased an aggregate of 102,600shares at a cost of approximately $171,000, but none during the 2005 Period,under that authorization.

**Contractual Obligations and Commercial Commitments**

The Company has entered into various contractualobligations and commercial commitments that, under accounting principlesgenerally accepted in the United States, are not recorded as a liability.   The following isa summary of such contractual cash obligations as of March 31, 2005:

**Contractual  Obligation or Commitment**

**Apr 05 - Mar 06**

**Apr 06- Mar 08**

**Apr 08 - Mar 10**

**Thereafter**

Employment & Consulting Agreements

$     510,000	

$             --	

$               --

$             --

Operating Leases

190,000 

                156,000

--

--

License Agreements**

281,000

338,000

--

--

Totals

$     981,000

$   494,000

$               --

$             --

**The amounts shown as licensee agreement obligations represent the minimumamounts the Company would incur as a royalty expense under the present terms ofits Motorola license agreement. 

TheCompany has not guaranteed the debt of any unconsolidated entity and does notengage in derivative transactions or maintain any off-balance sheet specialpurpose entities.  

24

ITEM 3.          CONTROLS AND PROCEDURES

**Evaluation ofdisclosure controls and procedures**.  

Our management is responsible for establishing and maintaining a system ofdisclosure controls and procedures (as defined in Rule 13a-15(e))  under theExchange Act) that is designed to ensure that information required to bedisclosed by the Company in the reports that we file or submit under theExchange Act is recorded, processed, summarized and reported, within the timeperiods specified in the Commission's rules and forms. Disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed by an issuer in the reportsthat it files or submits under the Exchange Act is accumulated and communicatedto the issuer's management, including its principal executive officer orofficers and principal financial officer or officers, or persons performingsimilar functions, as appropriate to allow timely decisions regarding requireddisclosure.

In accordance with Exchange ActRules 13a-15, our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, performed an evaluation of theeffectiveness of the Company's disclosure controls and procedures as of the endof the period covered by this Quarterly Report. Based on that evaluation, theCompany's Chief Executive Officer and Chief Financial Officer concluded thatthe Company's disclosure controls and procedures were effective, as of the endof the period covered by this Quarterly Report, to provide reasonable assurancethat information required to be disclosed in the Company's reports filed orsubmitted under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Commission's rules and forms.

**Changes in internal controls**.

Our management, with the participation our Chief Executive Officer and Chief Financial Officer, performed an evaluation as to whether any change in our internal controls over financial reporting  occurred during the 2005 Quarter.  Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that  no change occurred in the Company's internal controls over financial reporting during the 2005 Quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.

 

 

 

 

 

 

25

**PART II.   OTHER INFORMATION**

ITEM 6.        EXHIBITS

EXHIBITSINCORPORATED BY REFERENCE:

3.0  ARTICLESOF INCORPORATION AND BY-LAWS

3.1   Certificateof Incorporation of the Company as amended (incorporated by reference toExhibit 2(a) to the Form 10-SB) 

3.2   By-Laws(incorporated by reference to Exhibit 2(b) to the Form 10-SB)

3.3   Amendmentto By-Laws (Article I, Section 2) (incorporated by reference to Exhibit 3(c) tothe Company's Registration Statement on Form SB-2 filed November 13, 1995 (Reg. No. 33-99338) (the "1995 SB-2 Registration Statement")

3.4   Certificateof Amendment of Certificate of Incorporation filed by the New York Departmentof State on August 22, 1997 (incorporated by reference to the Company's AnnualReport on Form 10-KSB for the period ended September 30, 1997)

10.   MATERIALCONTRACTS:

10.1  LicenseAgreement, effective as of October 1, 2004, between Motorola, Inc.and the Company (incorporated by reference to Exhibit 10.1 to the Company'sCurrent Report on Form 8-K, filed October 18, 2004.

10.2 EmploymentAgreement effective as of October 1, 1998, between the Company andMichael Schiffman (incorporated by reference to the Company's 10-KSB Exhibit4(W) for the period ended September 30, 1999).

10.3 EmploymentAgreement effective as of January 1, 2001 between the Company and Jerome E. Ball(incorporated by reference to the Company's 10-QSB Exhibit 10.1 for the periodended March 31, 2001).

10.4 LetterAgreement dated as of January 30, 2001 between the Company and Jerome E. Ballwith respect to an apartment located at 300 East 56h Street New York, NY (incorporated by reference to the Company's 10-QSBExhibit 10.2 for the period ended March 31, 2001).

10.5 EmploymentAgreement effective as of January 1, 2001 between the Company and Michael M.Schiffman (incorporated by reference to the Company's 10-QSB Exhibit 10.3 forthe period ended March 31, 2001).

10.6 Exhibit Ato Employment Agreement between the Company and Michael M. Schiffman(incorporated by reference to the Company's 10-QSB Exhibit 10.4 for the periodended March 31, 2001).

10.7 EmploymentAgreement effective as of January 1, 2001 between the Company and Douglas W.Sabra (incorporated by reference to the Company's 10-QSB Exhibit 10.5 for theperiod ended March 31, 2001).

10.8 EmploymentAgreement effective as of October 1, 2003 between the Company and Jerome E.Ball (incorporated by reference to Exhibit 99.1 to the Company's Current Reporton Form 8-K filed on October 1, 2003).

26

10.9 EmploymentAgreement effective as of October 1, 2003 between the Company and MichaelSchiffman (incorporated by reference to Exhibit 99.2 to the Company's CurrentReport on Form 8-K filed on October 1, 2003).

10.10 EmploymentAgreement effective as of October 1, 2003 between the Company and Douglas W.Sabra (incorporated by reference to Exhibit 99.3 to the Company's CurrentReport on Form 8-K filed on October 1, 2003).

21.   SUBSIDIARIESOF THE SMALL BUSINESS ISSUER

21.1 List ofthe Subsidiaries of Forward Industries, Inc.

 Exhibits filed herewith:

                31.1 Certification of the ChiefExecutive Officer under Section 302 of the Sarbanes-Oxley Act of 2002

                31.2 Certification of the Chief Financial Officer under Section302 of the Sarbanes-Oxley Act of 2002

                32.1Certifications of the Chief Executive Officer and Chief Financial Officer underSection 906 of the Sarbanes-Oxley Act of 2002

               

 

 

 

**SIGNATURES**

        Inaccordance with the requirements of the Securities Exchange Act of 1934, theregistrant caused this report to be signed on its behalf by the undersigned,hereunto duly authorized.

Dated:  April 21, 2005

FORWARDINDUSTRIES, INC.              (Registrant)

By:/s/Jerome E. Ball                                          JeromeE. Ball Chairmanand Chief Executive Officer

By:/s/Douglas W. Sabra                                    DouglasW. SabraVicePresident, Chief Financial Officer andPrincipalAccounting Officer

 

 

 

27 |