----

**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 December 31, 2004.    |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------|
|            | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            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| (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 January 20, 2005, 6,289,338 shares of Common Stock were outstanding.

Transitional  Small Business Disclosure Format:    Yes [   ]  No [X]	

 

 

 

 

**FORWARDINDUSTRIES, INC. AND SUBSIDIARIESFORM 10-QSBTHREEMONTHS ENDED DECEMBER 31, 2004 CONTENTS**

PAGE

**PART  I**

** **

**FINANCIAL  INFORMATION**

** **

Item  1.

Financial  Statements 

     

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

3
     
     Unaudited Consolidated	Statements of Income for the Three    Months Ended December 31, 2004 and 2003

4
     
     Unaudited Consolidated Statements of Cash Flows for the Three    Months Ended December 31, 2004 and 2003

5
     
     Notes to Consolidated Financial Statements

6
     
Item  2.

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

  12
     
Item  3.

Controls  and Procedures

19
     
**PART  II**

** **

**OTHER  INFORMATION**

** **
     
Item  6.

Exhibits  

21
     
Signatures

21
     
 

**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**

 

**December 31,**

** **

**September 30,**

**2004**

** **

**2004**

**ASSETS**

**(Unaudited)**

** **

** **

 

Current assets:

   Cash and cash equivalents.............................................................

$  2,981,360

 $  4,487,415

   Accounts receivable - net...............................................................

7,051,067

3,609,559

   Inventories........................................................................................

1,421,394

811,694

   Prepaid expenses and other current assets..................................

201,118

190,076

   Deferred tax asset.............................................................................

164,413

164,413

      Total current assets......................................................................

11,819,352

9,263,157

Property, plant, and equipment - net................................................

292,670

264,043

Deferred tax asset................................................................................

234,199

617,199

Other assets.........................................................................................

44,967

44,967

     **TOTAL ASSETS**...........................................................................

$12,391,188

 $10,189,366

**LIABILITIES AND SHAREHOLDERS' EQUITY**

Current liabilities:

   Accounts payable............................................................................

$  2,745,837

 $  1,813,543

   Accrued expenses and other current liabilities............................

567,169

757,026

      Total current liabilities..................................................................

3,313,006

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; 6,852,831 and 6,789,931 shares issued at December 31, 2004 and September 30, 2004, respectively (including 563,493 held in treasury,  respectively)

68,528

67,899

   Paid-in capital..........

9,042,059

8,948,339

   Retained earnings (accumulated deficit)......................................

820,754

(544,282)

9,931,341

8,471,956

   Less: Cost of shares in treasury....................................................

(853,159)

(853,159)

      Total shareholders' equity...........................................................

9,078,182

7,618,797

**TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY**..........

$12,391,188

 $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 December 31,**

**2004**

** **

**2003**

Net  sales..................................................................

$8,915,890

$  4,492,973

Cost of goods sold................................................

5,685,795

3,023,293

Gross profit.............................................................

3,230,095

1,469,680

Operating expenses:

Selling.............................................................

765,516

728,222

General and administrative..........................

708,772

572,133

Total operating expenses........................

1,474,288

1,300,355

Income  from operations........................................

1,755,807

169,325

Other income:

Interest income..............................................

13,307

2,226

Other income - net.........................................

71,322

41,597

Total other income...................................

84,629

43,823

Income before provision for  income taxes.........

1,840,436

213,148

Provision for income taxes....................................

475,400

21,611

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

$1,365,036

$    191,537

Net income per common and  common equivalent share

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

$0.22

$0.03

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

$0.21

$0.03

Weighted average number of  common and common equivalent shares outstanding

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

6,247,405

6,025,046

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

6,660,289

6,327,112

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

4

** **

** **

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

** **

**Three Months Ended December 31,**

**     2004**

** **

**2003**

**OPERATING ACTIVITIES:**

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

$1,365,036

$   191,537

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

Depreciation  and amortization..............................................

31,222

29,806

Deferred  income taxes............................................................

383,000

--

     Provision for obsolete inventory..........................................

7,382

35,850

     Changes in operating assets and  liabilities:.......................

Accounts  receivable....................................................

(3,441,508)

(11,207)

Inventories....................................................................

(617,082)

(255,126)

Prepaid  expenses and other current assets..............

(11,042)

20,823

Accounts  payable........................................................

932,294

478,627

Accrued  expenses and other current liabilities........

(189,857)

(491,342)

**NET CASH  USED  BY OPERATING ACTIVITIES**

**(1,540,555)**

** **

**(1,032)**
     
**INVESTING ACTIVITIES:**

Purchases of property,  plant, and equipment.............................

(59,849)

(12,793)

**NET CASH USED BY  INVESTING ACTIVITIES**

**(59,849)**

** **

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

Proceeds from exercise of  stock options.....................................

94,349

100,530

**NET  CASH PROVIDED BY FINANCING ACTIVITIES**

**94,349**

** **

**100,530**

NET (DECREASE) INCREASE IN  CASH AND CASH EQUIVALENTS

(1,506,055)

86,705
     
CASH AND CASH  EQUIVALENTS - beginning of period.........

4,487,415

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

$2,981,360

$  2,212,005
     
The accompanying notes are an integral part of theconsolidated financial statements.

5

**Forward Industries, Inc.Notes to Consolidated FinancialStatementsThree-Month PeriodsEnded December 31, 2004 and 2003(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 andwith the instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required byaccounting principles 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-month period ended December 31, 2004 are not necessarily indicative of the results that may be expected forthe fiscal year 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 Company's annual report on Form 10-KSB for the fiscal year endedSeptember 30, 2004 and should be read in conjunction with the disclosurespresented therein.  

For the three-month periods endedDecember 31, 2004 and 2003 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 shall be 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 ageneral exception for exchanges of nonmonetary assets that do not havecommercial substance. A nonmonetary exchange has commercial substance if thefuture cash flows of the entity are expected to change significantly as aresult of the exchange.  The provisions of this Statement shall beeffective for nonmonetary asset exchanges occurring in fiscal periods beginningafter June 15, 2005. The Company does not expect this pronouncement to have amaterial impact on the financial statements.

The Financial AccountingStandards Board revised Statement of Financial Accounting Standards No. 123,Share-Based Payments, in December 2004.  Under the revised standard, TheCompany will be required to recognize compensation cost, related to its stockoptions, beginning January 1, 2006.  The cost of services received fromemployees in exchange for awards of share-based compensation generally shall bemeasured based on the grant-date fair value of the equity instrumentsissued.  The Company expects the effect of this pronouncement toapproximate the pro forma amounts disclosed below.

6
****
**Forward Industries, Inc.Notes to Consolidated FinancialStatementsThree-Month PeriodsEnded December 31, 2004 and 2003(Unaudited) **

1.             BASIS OF PRESENTATION(CONTINUED)

**Accounting for Stock Based Compensation**

In December 2002, theFASB issued SFAS No. 148, *Accounting for Stock-Based Compensation -Transition and Disclosure - an amendment of SFAS 123*, which providesalternative methods for a voluntary change to the fair value method ofaccounting for stock-based employee compensation and amends the disclosurerequirements of SFAS 123. The Company has elected to continue to account forits stock-based employee compensation plans under APB Opinion 25, *Accountingfor Stock Issued to Employees*, and related interpretations. The followingdisclosures are 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.

If the Company hadelected to recognize expense in the three month periods ended December 31, 2004and 2003, for the stock options granted based on the fair value at the date ofgrant consistent with the method prescribed by SFAS No. 123, unaudited netincome and income per share would have been changed to the pro forma amountsindicated below:

Three Months Ended

December 31,

2004

2003

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

$1,365,036

$   191,537

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

29,070

25,623

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

$1,335,966

$   165,914
     
Earnings per share:

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

$        0.22

$        0.03

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

$        0.21

$        0.03
     
Diluted  - as reported.............................. 

$        0.21

$        0.03

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

$        0.20

$        0.03

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.

7

**Forward Industries, Inc.Notes to Consolidated FinancialStatementsThree-Month PeriodsEnded December 31, 2004 and 2003(Unaudited)**

2.            CREDITFACILITIES

In March 2004, the Company renewed its bank creditfacility that provides for an uncommitted line of credit in the maximum amountof $1.5 million, including a $1.0 million sub-limit for direct borrowings andbankers acceptances and a $500,000 sub-limit for letters of credit. The line isrenewable annually at the discretion of the bank and expires March 31, 2005. The Company is required to eliminate borrowings for thirty consecutive days duringthe term of the facility and is required to maintain operating performance thatis acceptable to the bank.  Amounts drawn under the credit facility bearinterest at the bank's prime rate in effect from time-to-time (5.25% as ofDecember 31, 2004) plus one half of one percent and are secured bysubstantially all of a subsidiary's assets. There are no fees with respect toundrawn balances. At December 31, 2004, there were no outstanding borrowings orletter of credit obligations under this facility. 

In February 2003, Forward Innovations GmbH, awholly-owned subsidiary of the Company, established a credit facility with a Swissbank that provides for an uncommitted line of credit in the maximum amount of$400,000.  Amounts borrowed under the facility may be structured as a term loanor loans, with a maximum repayment period of 12 months, or as a guaranteefacility, or any combination of the foregoing.  Either party may terminate thefacility at any time; however, such termination would not affect the statedmaturity of term loans outstanding.  Amounts borrowed other than as a term loanmust be settled quarterly or converted into term loans.  In connection withthis facility, Forward Innovations has agreed to certain covenants, and anintercompany balance owed by Forward Innovations to Forward Industries securesForward Innovations' obligations under the facility.  Amounts drawn under thiscredit facility bear interest at variable rates established by the bank (5.5%as of December 31, 2004).  At December 31, 2004, Forward Innovations iscontingently liable to the bank under a letter of credit, issued on its behalfin the amount of €168,000 (approximately $228,500 as of December 31, 2004), 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 segment:providing 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	December 31,

2004

2003

United States

   $  2,444

   $  2,049

Europe

3,501

2,154

Asia

2,971

290

Total net sales

$  8,916

$  4,493

8

**Forward Industries, Inc.Notes to Consolidated FinancialStatementsThree-Month PeriodsEnded December 31, 2004 and 2003(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-month periods ended December 31, 2004 and 2003 were $2.88 and $2.36, respectively. Calculation of basic and dilutedearnings per share is as follows:

Three Months Ended December 31,

2004

2003

Numerator:

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

$1,365,036   

 $ 191,537 

 

Denominator:

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

6,247,405

6,025,046

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

412,884

302,066

Denominator for diluted earnings per share -  weighted average shares............. 
6,660,289
6,327,112
               
Net  income per common share

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

$0.22

$0.03

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

$0.21

    $0.03

Shares excluded due to antidilution

216,250

616,250

5.            INCOME TAXES

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

Three Months Ended	December 31,

U.S. Federal and State

2004

2003

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

$29,400

$21,611

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

               383,000

--

Foreign:

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

                63,000

               --

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

--

--

Income  tax provision

$475,400  

$ 21,611

9

**Forward Industries, Inc.Notes to Consolidated FinancialStatementsThree-Month PeriodsEnded December 31, 2004 and 2003(Unaudited)**

 

5.            INCOME TAXES(CONTINUED)

During the first quarterof Fiscal 2004, the Company did not record a provision for U.S. Federal incometaxes (other than alternative minimum tax) as it had established a valuationallowance against its deferred tax assets (consisting primarily of cumulativenet operating loss carryforwards).  Subsequently, during the fourth quarter ofFiscal 2004, the Company completely eliminated the valuation allowance againstit deferred tax assets.  Accordingly, for the first Quarter of Fiscal 2005, theCompany recorded a current provision for U.S. income taxes of $29,400 anddeferred taxes of $383,000 as it had eliminated the valuation allowance. Theeffective tax rate does not approximate the statutory federal income tax rateprimarily due to state taxes and a foreign tax rate differential.

In June 2001, theCompany established a wholly owned foreign subsidiary in Switzerland to engage in marketing and distribution activities throughout Europe, the Middle Eastand Africa. At December 31, 2004, the subsidiary had cumulative undistributedearnings of approximately $1,075,000.  The Company considers its investment inthe subsidiary to be permanent.   Accordingly, no provision has been made for U.S. federal income taxes on such undistributed foreign earnings. 

6.            COMMITMENTSAND CONTINGENCIES

**Royalty Commitments**

The Company has licensed the use ofcertain trademarks of Motorola, Inc. ("Motorola") for products to besold throughout Europe, the Middle East and Africa (the "EMEARegion") under a new agreement effective October 1, 2004.  Under the terms of the license agreement, the Company is required to pay Motorola aroyalty based upon a percentage of the Company's net sales to third parties oflicensed products within the EMEA Region. The license requires the Company tomake payments of minimum royalties to Motorola over the following threecontract periods:

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

•         Contract Period 2:  January 1, 2006 to December 31, 2006 

•         Contract Period 3:  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 ofContract Periods 1 and 2, the Company and Motorola have agreed to establish newminimum royalty amounts for Contract Period 2 and Contract Period 3,respectively.  If the Company is unable to reach agreement at such timewith Motorola on the minimum royalty payment for Contract Period 2 or ContractPeriod 3, then the parties have agreed that the minimum royalty payment for therelevant period will be seventy-five per cent (75%) of the actual annualizedroyalty payable for the prior contract period, provided, however, that in no eventshall the minimum royalty be less than seventy-five percent (75%) nor more thanone-hundred-twenty-five percent (125%) of the amount of the prior period'sannualized minimum royalty ($225,000 in the case of Contract Period 2). 

If the Company elects to terminate thelicense before December 31, 2007, it is required to pay a penalty of an amountequal to up to one year's minimum guaranteed royalty under certain conditionsas specified in the agreement. The minimum royalty commitments are recognizedas expense over the applicable contract period.  Under its licenseagreement with Motorola, the Company recorded royalty expense of $75,000 and$102,000 during the three-month periods ended December 31, 2004 and 2003,respectively, which is included in selling expenses in the accompanying consolidatedstatements of income.

 

10
****
**Forward Industries, Inc.Notes to Consolidated FinancialStatementsThree-Month PeriodsEnded December 31, 2004 and 2003(Unaudited) **

 

6.            COMMITMENTSAND CONTINGENCIES (CONTINUED)

**Legal Proceedings**

In October 2001, theCompany initiated an action against Royal Industries Inc. ("Royal"),in the Supreme Court of the State of New York, Kings County, asserting causesof action for conversion and unjust enrichment. The Company alleges that,without consent or authority, and with full knowledge of the Company's rightsunder a security agreement, Royal wrongfully took possession of certain assetsin which the Company had a properly perfected security interest. The Companyseeks compensatory damages of $1,000,000. Royal filed a counterclaim againstthe Company alleging abuse of process and harassment and seeking an award ofpunitive damages in the amount of $1,000,000.  Although the parties havemade discovery demands, neither has complied, having each interposed objectionsto the nature and scope of the discovery sought, and the action has remainedessentially dormant since service of the answer on November 5, 2001.  Nodepositions have been held, no judicial intervention in the discovery disputehas been sought, and no trial has been scheduled or is likely to be scheduledin the foreseeable future. To date, efforts to resolve the matter bynegotiation have not borne fruit, yet Royal declines to prosecute itscounterclaims.  After consultation with the Company's legal counsel,management believes the case is without merit and it does not appear reasonablypossible that Royal's counterclaims will result in material losses andtherefore, at December 31, 2004, no provision for losses related to this actionhas been recorded in the accompanying consolidated financial statements.

**Bank Guarantee**

In July 2002, ForwardInnovations, the Company's Swiss subsidiary, and its European logisticsprovider (freight forwarding and customs agent) entered into a RepresentationAgreement whereby, among other things, the European logistics provider agreedto act as such subsidiary's fiscal representative in The Netherlands for thepurpose of providing services in connection with any value added tax matters.As part of this agreement, the subsidiary agreed to provide an undertaking tothe logistics provider with respect to any value added tax liability arising inThe Netherlands that the logistics provider paid on the subsidiary's behalf,and in February 2004, such subsidiary entered into a guarantee agreement with aSwiss bank relating to the repayment of any amount up to €168,000(approximately $228,500 as of December 31, 2004) paid by such bank to thelogistics provider pursuant to a letter of credit issued by the bank in favorof the logistics provider.  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 DutchReceiver of Taxes to pay such taxes, and (iii) the subsidiary or the Company onits behalf fails or refuses to remit the amount of value added tax due to thelogistics provider. On December 31, 2004 and on each anniversary thereafteruntil December 31, 2009, the bank letter of credit will be renewed automaticallyfor one-year periods. The subsidiary has agreed to keep a letter of creditguarantee in place for five years following the date its relationshipterminates with the logistics provider. As of December 31, 2004, the Company has not recorded a liability in connection with this guarantee.

7.             EQUITY

**Stock OptionExercises**

During the three-month period ended December 31, 2004, 62,900 shares of common stock were issued due to the exercise of stock options at anaverage price of $1.50.

**Treasury Share Purchases**

The Company did notpurchase any shares of its common stock during the three-month period ended December 31 , 2004. 11

 

11

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

**Cautionary statement forpurposes of the "Safe Harbor" provisions of the Private Securities LitigationReform 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 terms orcomparable 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 Condition andResults 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 OEMcustomers; governmental regulations and changes in, or the failure to complywith, governmental regulations; and other factors included elsewhere in thisreport and its other reports filed with the Commission, including withoutlimitation, those described under the caption Risk Factors contained in ourAnnual Report on Form 10-KSB for the year ended September 30, 2004.  Accordingly,there can be no assurance that any such forward looking statement, projections,forecasts or estimates can be realized or that actual returns or results willnot be materially lower than those that may be 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**.

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 Report and in our Annual Report on Form 10-KSB for the fiscalyear ended September 30, 2004.  Such discussion and analysis compares ourconsolidated results of operations for the three months ended December 31, 2004(the "2004 Quarter"), with the three months ended December 31, 2003 (the "2003Quarter"), and is based on or derived from the Unaudited Consolidated FinancialStatements included elsewhere in this Report. There have been no materialchanges in critical accounting estimates since September 30, 2004.  All figures in the following discussion are presented on a consolidated basis. Alldollar amounts and percentages presented herein have been rounded toapproximate values.

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.

12

** **

**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.  Because of the high concentration of oursales to these large customers, revenue levels and geographic sales trends aredifficult to predict and significant shifts in operating results may occur in arelatively short period of time.  Demand for their products and, consequently,their order flow to us, are dependent on general economic conditions as well asconditions and developments specific to their businesses and may be difficultto predict.  As a result, any one or more of these customers may increase ordecrease the level of (or eliminate) orders to us on relatively short notice inamounts that could significantly impact our revenues but that may notnecessarily be viewed by such customers as significant to their businesses. The level of demand for our licensed products is susceptible to similaruncertainties.  Accordingly, our levels of net sales revenues, and consequentlyour results of operations, are variable and subject to significant changes in arelatively short period of time.  For example, sales of carrying cases andrelated accessory products for cellular telephones increased 170% in the 2004 Quartercompared to the 2003 Quarter, while sales of carrying cases for blood glucosemonitoring kits for all of our major customers except one declined over thesame period.  These fluctuations are typical of the volatility we experience inour revenues and product mix.

**Trends in Results of Operations**

•      As discussed above at Note 5 tothe consolidated 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 valuationallowance against our deferred income tax assets to zero.  Accordingly,commencing with the three months ended December 31, 2004, and for futureperiods, assuming that we continue to generate U.S. taxable income, our resultsof operations will not reflect any tax benefit attributable to the reduction ofthe allowance against deferred tax assets, and, instead, our consolidatedstatement of income will show United States Federal (as well as applicablestate)  income tax expense at our effective tax rate applied to the amount ofincome before income taxes.  

•      Net sales increased $4,423,000 or 98% to $8,916,000 in the 2004 Quartercompared to $4,493,000 in the 2003 Quarter,primarily as a result of a significant increase in sales of cell phone carryingcases to our two largest cell phone customers during the 2004 Quarter,  duringwhich both these customers initiated new product launches.  We expect thisspike in sales to persist into the three months ending March 31, 2005, with difficulty in assessing periods beyond that time.

•      Approximately $90,000 or 2% of theincrease in net sales was due to appreciation of the Euro against the US Dollarduring the 2004 Quarter.  A continuation of the appreciation of the Euroagainst the US Dollar will benefit revenue levels in respect ofEuro-denominated sales. US Dollar appreciation against the Euro will adverselyaffect revenue levels in respect of Euro-denominated sales.  Increasing levelsof Euro-denominated sales will exacerbate the trend.  During the 2004 Quarter,approximately 13% 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, for example, soft-sided carrying casesand other carry solutions such as straps, clips and camera attachment cases. Because of the broad variability in price ranges and product types, weanticipate that gross margins will continue to fluctuate depending on our OEMcustomers' order patterns and preferences.  Such fluctuations may have theeffect of masking the impact of fluctuations in unit sale trends.

 

13

 

•      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  January20, 2005, 1,750,850 shares of common stock (equal to an additional 28% of thenumber of shares of common stock issued and outstanding on such date) are issuable upon the exercise of stock options under our 1996 Stock Incentive Planat exercise prices ranging from $1.50 to $3.25 per share to one or more of ourexecutive officers, directors and employees.  Assuming the continuation of presentmarket conditions in respect of the price of our common stock, we anticipatethat employees who hold such stock options, including our three principalexecutive officers (who hold options covering an aggregate of 1,362,000 of theabove stated number of such shares), may exercise stock options.    Theexercise of a significant number of such options, which may be anticipated inparticular in the case of certain such individuals insofar as 1,122,100 of theiroptions are due to expire commencing April 2005 and ending December 31, 2005,will result in a greater number of shares outstanding and, correspondingly,assuming a given amount of fixed income, a reduction in the amount of earningsper share, as well as corresponding increases in the cash and shareholders'equity accounts on our balance sheet.

**Results of Operations for the 2004Quarter compared to the 2003 Quarter**

Netincome in the 2004 Quarter was $1,365,000 compared to net income of $192,000 inthe 2003 Quarter, an increase of approximately $1,173,000 or 611%.  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 $0.22 and $0.21, respectively, for the 2004 Quarter, compared to$0.03 basic and diluted earnings per share for the 2003 Quarter. 

**Net Sales**

Net sales increased $4,423,000 or 98% to $8,916,000in the 2004 Quarter compared to $4,493,000 in the 2003 Quarter.  Theincrease in net sales was due to higher sales of cell phone carrying casesolutions products, which increased $3,519,000 or 170%, and, to a lesser extent,higher sales of carrying cases for medical monitoring kits for diabetics, whichincreased $503,000 or 26%, 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 2004 Quarter	3  Months ended December 31, 2004	(millions  of dollars)**

** **

**US**

**Europe**

**Asia**

Total

Cell Phone  Products

$ 0.97

$ 3.09

$ 1.53

$ 5.59

Diabetic  Products

 0.73

 0.41

1.30

 2.44

Other Product Sales

0.74

--

0.14

0.88

**Total***

**$2.44**

**$3.50**

**$2.97**

**$8.92**

                               

**Net  Sales for 2003 Quarter 	3  Months ended December 31, 2003	(millions  of dollars)**

** **

**US**

**Europe**

**Asia**

Total

Cell Phone  Products

$ 0.71

$ 1.28

$ 0.08

$ 2.07

Diabetic  Products

 0.87

 0.86

 0.21

1.94

Other Product Sales

0.47

 0.01

--

0.48

**Total***

**$ 2.05**

**$ 2.15**

**$ 0.29**

**$ 4.49**

* Tablesmay not total due to rounding.

 

14

** **
****
**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 the box" withthe handsets 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 EMEA region.

Sales of cell phone products increased $3,519,000 or170% to $5,592,000 in the 2004 Quarter from $2,073,000 in the 2003 Quarter. The increase was primarily the result of launches of new cell phone product linesby two of our largest customers, Motorola and Nokia, during the 2004 Quarter.Both Motorola and Nokia included our carrying cases "in the box" with popularnew handset offerings, while neither customer included our cases in comparable launchesin the 2003 Quarter. OEM sales to Motorola (including its subsidiaries andaffiliates) and Nokia increased $3,222,000 or 192% to $4,900,000 in the 2004Quarter from $1,678,000 in the 2003 Quarter. In addition, sales to thirdparties under our Motorola license agreement increased $274,000 or 69% to $669,000in the 2004 Quarter from $395,000 in the 2003 Quarter as the EMEA marketparticipated in the strong market for handsets worldwide in the 2004 Quarter.

**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$503,000 or 26% to $2,440,000 in the 2004 Quarter from $1,937,000 in the 2003Quarter. The increase was due entirely to higher sales to Lifescan, our largestOEM customer for these cases, which increased 195% to $1,363,000. This increasemore than offset declines in sales of cases for blood glucose monitoring kitsto our other principal customers for these cases.  Sales of our carrying casesfor OEM diabetic monitoring kits represented 27% of our total net sales in the2004 Quarter compared to 43% of total net sales in the 2003 Quarter, thedecrease in part due to the increase in cell phone product sales revenues inthe 2004 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 $403,000 or 83% to $886,000 in the 2004 Quarter from$483,000 in the 2003 Quarter. 

**Gross Profit**

Gross profit increased $1,760,000, or 120% to $3,230,000in the 2004 Quarter from $1,470,000 in the 2003 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 36.2% inthe 2004 Quarter from 32.7% in the 2003 Quarter due to lower freight and Hong Kong inspection costs as percentage of total net sales, which more than offset highercosts of raw materials. Our freight costs depend in large part on the distanceof our customers' facilities from our shipping points and our sales terms tothem. In recent periods, an increasing percentage of our shipments are sent to China directly from our Chinese manufacturers or from our Hong Kong distribution facility as certainof our customers have relocated manufacturing facilities to China.  Despite the significant increase in sales in the 2004 Quarter,  freight, duties and customscosts were $215,000 compared to  $183,000  in the 2003 Quarter, representing2.4% and 4.1% of total net sales, respectively. We include the cost ofoperating our Hong Kong procurement and quality assurance facility as acomponent of our cost of goods sold. The costs of operating the Hong Kong facility were $472,000 and $338,000, or 5.3% and 7.5% of total net sales, for the2004 Quarter and 2003 Quarter, respectively.    Other components of cost of goodssold also contributed to the improvement in margins, more than offsettinghigher materials costs. 

15

**Selling, General, and Administrative Expenses**

Selling expenses increased $37,000, or 5%, to$766,000 in the 2004 Quarter from $728,000 in the 2003 Quarter due to increasesin selling personnel expense, travel and entertainment expense, and advertisingexpense, offset in part by a reduction in royalty expense. Selling personnelexpenses increased $39,000 in the 2004 Quarter compared to the 2003 Quarter primarilydue to higher, performance based bonus expense and adjustments to other sellingpersonnel compensation, offset in part by lower recruitment and training costs. Royalty expense decreased $27,000 or 27% in the 2004 Quarter compared to the2003 Quarter due to a decrease in the minimum royalty commitment as provided inthe Motorola license agreement. The ratio of selling expenses to total netsales decreased to 8.6% in the 2004 Quarter compared to 16.2% in the 2003Quarter.

General and administrative expenses increased$137,000, or 24%, to $709,000 in the 2004 Quarter from $572,000 in the 2003Quarter due to an increase in personnel expenses and, to a lesser extent, professionalfees. Personnel expenses increased $152,000 in the 2004 Quarter compared to the2003 Quarter primarily due to higher, performance based bonus compensation accruedin respect of the current fiscal year to executives in accordance with theterms of their employment agreements and adjustments to compensation to otheremployees.  Professional fees increased $19,000 in the 2004 Quarter compared tothe 2003 Quarter due to higher audit fees. These increases were offset in partby reductions in other general and administrative expense components and in traveland entertainment in the 2004 Quarter compared to the 2003 Quarter.

**Income from Operations**

Pretax income from operations increased $1,586,000or 939% to $1,756,000 in the 2004 Quarter from $169,000 in the 2003 Quarter asa result of the increase in gross profit as described above, offset in part bythe increase in selling, general and administrative expenses.

**Other Income **Total other income increased $41,000 or 93% toincome of $85,000 in the 2004 Quarter compared to income of $44,000 in the 2003Quarter.  The components of this change are as follows:

Component

2004	Quarter

2003	Quarter

Increase  (Decrease)

Foreign  Currency Gain

$72,000

$40,000

$32,000

Bad  debt recovery

--

2,000

(2,000)

Net  interest income

13,000

2,000

11,000

             Totals:

$85,000

$44,000

$41,000

The increase in foreign currency gains of $32,000 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 steadyincrease in the Euro during the 2004 Quarter resulted in foreign currency gainsattributable to settlement of Euro denominated transactions. 

Because we had no interest bearing debt outstandingat any time during the 2004 Quarter and maintained higher average cashbalances, our net interest income increased $11,000 in the 2004 Quartercompared to the 2003 Quarter.

16

**Income Taxes**

Our provision forincome taxes increased $454,000 in the 2004 Quarter to $475,000 from $22,000 inthe 2003 Quarter.  The provision in the 2004 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 in the 2003 Quarter for U.S. income taxes, as we had sufficient net operating tax loss carryforwards available to offset thecurrent U.S. taxable income for which we had recorded a valuation allowance.

**Liquidity and Capital Resources**

During the 2004 Quarter, we used $1,541,000 of cashfrom operations compared to $1,000 in the 2003 Quarter.  Our operatingcash flows in the 2004 Quarter consisted of net income of $1,365,000, adjustedfor non-cash items consisting of provisions for depreciation of $31,000, obsoleteinventory $7,000 and deferred income taxes of $383,000, less net changes inworking capital items of $3,327,000.  Changes in working capital items inthe 2004 Quarter consisted primarily of increases in accounts receivable andinventories of $3,442,000 and $617,000, respectively. These increases wereoffset in part by an increase in accounts payable of $932,000.  The higherlevels of accounts receivable and accounts payable in the 2004 Quarter areattributable to our higher sales in the 2004 Quarter compared to the 2003Quarter. The higher level of inventory in the 2004 Quarter is in support ofexisting sales orders. Operating cash flows in the 2003 Quarter resultedprimarily from net income of $192,000, adjusted for non-cash items includingdepreciation expense of $30,000 and a provision for obsolete inventory of$36,000, plus changes in our working capital accounts. The inventory balanceincreased $255,000 in the 2003 Quarter to meet demand for our products based onexisting sales orders. The increase in the inventory balance accounts for themajority of the increase in the accounts payable balance of $479,000 in the2003 Quarter. The remainder of the increase in the accounts payable balance inthe 2003 Quarter is attributed to timing differences. Accrued liabilitiesdecreased $491,000 in the 2003 Quarter primarily as a result of performancebonuses that were accrued as of December 31, 2002, and paid in the 2003 Quarter.

Net investing activities used $60,000 and $13,000for purchases of property, plant and equipment, primarily computer and telecommunicationshardware and software, in the 2004 Quarter and 2003 Quarter, respectively.

Net financing activities generated $94,000 and$101,000 from the issuance of common stock upon the exercise of stock optionsto purchase 62,900 and 84,300 shares of common stock under our 1996 StockIncentive Plan during the 2004 Quarter and 2003 Quarter, respectively.

At December 31, 2004, our current ratio (currentassets divided by current liabilities) was 3.57; our quick ratio (currentassets less inventories divided by current liabilities) was 3.14; and ourworking capital (current assets less current liabilities) was $8,506,000. As of such date, we had 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.

 

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In March 2004, we renewed our bank credit facilitythat provides for an uncommitted line of credit in the maximum amount of$1,500,000, including a $1,000,000 sub-limit for direct borrowings and bankersacceptances and a $500,000 sub-limit for letters of credit. The line isrenewable annually at the discretion of the bank and expires March 31, 2005. We are required to eliminate borrowings for thirty consecutive days during the termof the facility and are required to maintain operating performance that isacceptable to the bank.  Amounts drawn under the credit facility bearinterest at the bank's prime rate in effect from time-to-time (5.25% as ofDecember 31, 2004) plus one half of one percent and are secured bysubstantially all of Koszegi's assets. There are no fees with respect toundrawn balances. At December 31, 2004, there were no outstanding borrowings orletter of credit obligations under this facility.  We expect this facilityto be renewed under similar terms and conditions upon expiry.

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 intercompany balanceowed by Forward Innovations to Forward Industries secures Forward Innovations'obligations under the facility.  Amounts drawn under this credit facilitybear interest at variable rates established by the bank (5.5% as of December 31, 2004). At December 31, 2004, Forward Innovations is contingently liable tothe bank under a letter of credit, issued on its behalf in the amount of  €168,000(approximately $228,500 as of December 31, 2004) in favor of ForwardInnovations' 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.

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 to 486,200.As of December 31, 2004, we have repurchased an aggregate of 102,600 shares ata cost of approximately $171,000, but none during the 2004 Quarter, under thatauthorization.

**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.   Thefollowing is a summary of such contractual cash obligations as of December 31, 2004:

**Contractual  Obligation or Commitment**

**Jan 05 - Dec 05**

**Jan 06- Dec 07**

**Jan 08 - Dec 09**

**Thereafter**

Employment & Consulting Agreements

$     680,000

$              --	

$             --

$             --

Operating Leases

193,000

                188,000

--

--

License Agreements**

300,000

394,000

--

--

Totals

$  1,173,000

$   582,000

$            	--

$             --	

**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.  

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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) and 15d-15(e)under the Exchange Act) that is designed to ensure that information required tobe disclosed 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 and 15d-15, our management, with the participation of ourChief Executive Officer and Chief Financial Officer, performed an evaluation ofthe effectiveness of the Company's disclosure controls and procedures as of theend of the period covered by this Quarterly Report. Based on that evaluation,and taking into account the steps described below under "Changes in InternalControls", the Company's Chief Executive Officer and Chief Financial Officerconcluded that the Company's disclosure controls and procedures were effective,as of the end of the period covered by this Quarterly Report, to providereasonable assurance that information required to be disclosed in the Company'sreports filed or submitted under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the Commission'srules and forms. 

**Changes in internal controls**.

As previously disclosed in our Annual Report onForm 10-KSB for the fiscal year ended September 30, 2004, in the course of the audit of the Company'sconsolidated financial statements for the year ended September 30, 2004, inNovember 2004 our Independent Registered Public Accounting Firm, Ernst &Young LLP, in respect of such fiscal year advised our Audit Committee that a significantdeficiency existed in the design and operation of our internal controls overrevenue recognition. Specifically, we did not have controls in place to verifythat "FOB destination" or equivalent term shipments made from one ofour third-party inventory locations to our customers on or during the few daysbefore September 30, 2004 met the criteria for revenue recognition in Fiscal2004, including the customer's taking physical delivery on or before September30, 2004.  Certain such shipments did not meet that criterion. As a result,prior to the issuance of our audited consolidated financial statements, werecorded a post fiscal-year-end closing adjustment to ensure that revenue wasrecognized in the appropriate period.  Subsequently, we have designed andimplemented the following improved internal controls over our revenuerecognition procedures that, address the issue described above: 
-  we have standardized our sales terms to our customers; 
-  we have redesigned our customer order entry procedures to ensure that  sales orders clearly indicate the terms of sale to our customers; 
-  we require our sales terms to be confirmed to us by our customers; 
-  we ensure that all revenue is recognized in accordance with the agreed upon sales terms by requiring invoices with "FOB Origin" (or equivalent terms) terms are supported by proof of shipment and invoices with "FOB Destination" (or equivalent terms) terms are supported by proof of delivery; 
-  we review all sales at quarter end to ensure that revenue has been recognized in the appropriate period based on the supporting sales documentation; 

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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 (as defined in Rule 13a-15 and 15d-15 under the Exchange Act) occurred during the 2004 Quarter.  Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, other than as described above with respect to revenue recognition issues in respect of late-in-period shipments, no change occurred in the Company's internal controls over financial reporting during the 2004 Quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.

 

 

 

 

 

 

 

 

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**PART II.   OTHER INFORMATION**

ITEM 6.       EXHIBITS 

 Exhibits filed herewith:

31.1 Certification of the ChiefExecutive Officer under Section 302 of the Sarbanes-Oxley Act of 200231.2 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:  January 20, 2005

FORWARDINDUSTRIES, INC.(Registrant)

 
 
By:/s/Jerome E. Ball                                        
 
JeromeE. Ball     
 
Chairmanand Chief Executive Officer
 
                                                                               
 
By:/s/Douglas W. Sabra                                
 
DouglasW. Sabra   
 
VicePresident, Chief Financial Officer and
 
PrincipalAccounting Officer

                                                                               

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