<PAGE>

--------------------------------------------------------------------------------

                                  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, 1999.

                                       Or

[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 for the transition period from ____ to ____


                          Commission file number 0-6669

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


                NEW YORK                                 13-1950672
 ----------------------------------------   ------------------------------------
     (State or other jurisdiction of        (I.R.S. Employer Identification No.)
      incorporation or organization)


     400 POST AVENUE, WESTBURY, NY                         11590
 ----------------------------------------   ------------------------------------
 (Address of principal executive offices)                (Zip Code)


                                 (516) 338-0700
                ------------------------------------------------
                (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 February 1, 2000, 6,091,641 Shares of the issuer's Common Stock were
outstanding.

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

--------------------------------------------------------------------------------
<PAGE>

                    FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

                                   FORM 10-QSB

                      THREE MONTHS ENDED DECEMBER 31, 1999

                                    CONTENTS


                                                                            PAGE
                                                                            ----

PART I.FINANCIAL INFORMATION                                                   3

Item 1. Financial Statements                                                   3

Consolidated Balance Sheets
                as of December 31, 1999 (Unaudited)
                and September 30, 1999                                         3

Consolidated Statements of Income
                (Unaudited) for the Three Months
                ended December 31, 1999 and 1998                               5

Consolidated Statements of Comprehensive Income
                for the Three Months ended December 31, 1999 and 1998          6

Consolidated Statements of Cash Flows
                (Unaudited) for the Three Months
                ended December 31, 1999 and 1998                               7

Notes to Form 10-QSB (Unaudited)                                               9

Item 2. Management's Discussions and Analysis                                 14

PART II.OTHER INFORMATION                                                     17

Item 1. Legal Proceedings                                                     17

Item 2. Changes in Securities                                                 17

Item 3. Defaults upon Senior Securities                                       17

Item 4. Submission of Matters to a Vote of Security Holders                   17

Item 5. Other Information                                                     17

Item 6. Exhibits and Reports on Form 8-K                                      17


                                       2
<PAGE>

PART I. ITEM 1. FINANCIAL STATEMENTS

                    FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                              December 31, September 30,
                                                                  1999         1999
                                                               ----------   ----------
<S>                                                            <C>          <C>
ASSETS                                                        (Unaudited)

CURRENT ASSETS:
     Cash and cash equivalents                                 $  313,784   $1,210,762
     Accounts receivable, less allowance for doubtful
         accounts of  $133,800 and $133,800                     4,512,277    4,738,263
     Inventories - net                                          1,926,889      992,064
     Notes and loans receivable - current portion                 223,879      227,858
     Notes and loans receivable - officers - current portion       65,990       28,490
       Prepaid expenses and other current assets                  415,353      441,002
     Deferred income taxes                                        502,632      502,632
                                                               ----------   ----------

         Total current assets                                   7,960,804    8,141,071
                                                               ----------   ----------

PROPERTY, PLANT AND EQUIPMENT - net                               617,546      492,427
                                                               ----------   ----------

OTHER ASSETS:
     Deferrred income taxes                                       689,415      911,395
     Note receivable - net of current portion                      85,488      126,284
     Notes and loans receivable - officers - net of
         current portion                                           95,337       55,471
Other assets                                                       64,121       73,764

Deferred debt costs                                                 6,442       25,769
                                                               ----------   ----------


                                                                  940,803    1,192,683
                                                               ----------   ----------

                                                               $9,519,153   $9,826,181
                                                               ==========   ==========
</TABLE>


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


                                       3
<PAGE>

                    FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                   December 31,   September 30,
LIABILITIES AND STOCKHOLDERS' EQUITY                                  1999           1999
------------------------------------                               -----------    -----------
                                                                   (Unaudited)
<S>                                                                <C>            <C>
 CURRENT LIABILITIES:
     Borrowings and acceptances under credit line                  $   802,483    $   995,852
     Accounts payable                                                1,749,080      2,301,557
     Accrued expenses and other current liablilites                  1,185,691      1,298,466
     Accrued severance to officer                                      115,000        115,000
                                                                   -----------    -----------

              Total current  liabilities                             3,852,254      4,710,875
                                                                   -----------    -----------


COMMITMENTS


STOCKHOLDER'S EQUITY:
     Preferred stock, 4,000,000 authorized shares par
              value $.01; none issued                                     --             --
     Common stock, 40,000,000 authorized shares, par value
              $.01; issued 6,286,531 shares and 6,286,531 shares
              (including 194,890 and 184,890 held in treasury)          62,865         62,865
     Paid-in capital                                                 7,402.768      7,402,768
     Accumulated deficit                                            (1,465,598)    (2,048,569)
     Foreign currency adjustment                                        (1,342)          (589)
                                                                   -----------    -----------
                                                                     5,998,693      5,416,475
     Less: Cost of shares in treasury                                 (331,794)       301,169
                                                                   -----------    -----------

              Total stockholders' equity                             5,666,899      5,115,306
                                                                   -----------    -----------

                                                                   $ 9,519,153    $ 9,826,181
                                                                   ===========    ===========
</TABLE>


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


                                       4
<PAGE>

                    FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                         Three Months Ended
                                                            December 31,
                                                     --------------------------
                                                        1999           1998
                                                     -----------    -----------
<S>                                                  <C>            <C>
NET SALES                                            $ 5,862,774    $ 3,963,133
COST OF GOODS SOLD                                     3,791,082      2,786,407
                                                     -----------    -----------
GROSS PROFIT                                           2,071,692      1,176,726
                                                     -----------    -----------

OPERATING EXPENSES:
      Selling                                            535,423        370,493
      General and administration                         712,142        651,503
                                                     -----------    -----------
                                                       1,247,565      1,021,996
                                                     -----------    -----------

INCOME FROM OPERATIONS                                   824,127        154,730
                                                     -----------    -----------

OTHER INCOME (DEDUCTIONS):
      Interest expense                                   (37,077)       (46,339)
      Interest expense - related parties                    --             (950)
      Interest income                                     22,575          7,996
      Other income - net                                  (4,674)        16,165
                                                     -----------    -----------
                                                         (19,176)       (23,128)
                                                     -----------    -----------

INCOME BEFORE PROVISION
      FOR INCOME TAXES                                   804,951        131,602
PROVISION FOR INCOME TAXES                               221,980         52,641
                                                     -----------    -----------
INCOME BEFORE EXTRAORDINARY ITEM                         582,971         78,961

EXTRAORDINARY ITEM:
      Non-cash interest charge upon conversion
      of promissory notes (net of income tax
      benefit of $ -0-)                                     --         (277,000)
                                                     -----------    -----------
   NET INCOME (LOSS)                                 $   582,971    $  (198,039)
                                                     ===========    ===========

NET INCOME (LOSS) PER COMMON AND COMMON
      EQUIVALENT SHARE:
         Basic:
               Income before extraordinary item      $       .10    $       .02
               Extraordinary item                           --            .(05)
                                                     -----------    -----------
                                                     $       .10    $      (.03)
                                                     ===========    ===========

            Diluted:
            Income before Extraordinary Item         $       .08    $       .02
               Extraordinary item                           --             (.05)
                                                     -----------    -----------
                                                     $       .08    $      (.03)
                                                     ===========    ===========

WEIGHTED AVERAGE NUMBER OF
    COMMON AND COMMON EQUIVALENT
    SHARES OUTSTANDING                                 6,098,308      5,167,474
                                                     ===========    ===========

DIVIDENDS                                                   NONE           NONE
</TABLE>

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


                                       5
<PAGE>

                    FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED STATEMENTS OF
                              COMPREHENSIVE INCOME
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                         Three Months Ended
                                                            December 31,
                                                     --------------------------
                                                        1999             1998
                                                     ---------        ---------
<S>                                                  <C>              <C>
NET INCOME (LOSS)                                    $ 582,971        $(198,039)

COMPREHENSIVE INCOME ADJUSTMENTS:
       Foreign currency translation                       (753)         (14,450)
                                                     ---------        ---------

COMPREHENSIVE INCOME (LOSS)                          $ 582,218        $(212,489)
                                                     =========        =========
</TABLE>

    The accompanying notes are an integral part of these financial statements


                                       6
<PAGE>

                    FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                               Three Months Ended
                                                                                   December 31,
                                                                             ----------------------
                                                                               1999          1998
                                                                             ---------    ---------
<S>                                                                          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net Income (Loss)                                                       $ 582,971    $(198,039)
     Adjustments to reconcile net income to net cash
         provided by (used in) continuing operations:
              Extraordinary interest charge                                       --        277,000
              Depreciation and amortization                                     19,876        9,375
              Amortization of deferred debt costs                               19,327       22,387
         Deferred taxes                                                        221,980       52,641
         Changes in assets and liabilities:
              Accounts receivable                                              225,986      724,166
              Inventories                                                     (934,825)    (135,721)
              Prepaid expenses and other current assets                         25,649     (130,731)
              Other assets                                                       9,643       (1,467)
              Accounts payable                                                (552,477)      32,159
              Accrued expenses and other current liabilities                  (112,775)     (88,659)
              Accrued severance to officer                                        --         (3,296)
                                                                             ---------    ---------
NET CASH (USED IN) PROVIDED BY OPERATIONS                                     (494,645)     559,815
                                                                             ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Proceeds from notes and loans receivable                                   44,775      107,254
     (Loans to) proceeds from notes to officers                                (77,366)       3,822
     Purchases of property, plant and equipment                               (144,995)    (109,811)
     Purchase of treasury stock                                                (30,625)        --
                                                                             ---------    ---------
NET CASH PROVIDED BY
     INVESTING ACTIVITIES                                                     (208,211)       1,265
                                                                             ---------    ---------
</TABLE>

         The accompanying notes are an integral part of the consolidated
                              financial statements.


                                       7
<PAGE>

                    FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                              Three Months Ended
                                                                 December 31,
                                                          --------------------------
                                                             1999           1998
                                                          -----------    -----------
<S>                                                       <C>            <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from (repayment of) short-term borrowings      (193,369)      (753,488)
     Payments of notes payable - related parties                 --          (15,146)
     Deferred offering costs                                     --           (7,500)
                                                          -----------    -----------

NET CASH USED IN FINANCING ACTIVITIES                        (193,369)      (776,134)
                                                          -----------    -----------

EFFECT OF EXCHANGE RATE CHANGES                                  (753)         3,267
                                                          -----------    -----------

NET CHANGE IN CASH AND CASH EQUIVALENTS                      (896,978)      (211,787)

CASH AND CASH EQUIVALENTS - beginning                       1,210,762        703,920
                                                          -----------    -----------

CASH AND CASH EQUIVALENTS - ending                        $   313,784    $   492,133
                                                          ===========    ===========

SUPPLEMENTAL DISCLOSURES OF
     CASH FLOW INFORMATION:
     Cash paid during the period for:
     Interest                                             $    11,024    $    19,215
Income taxes                                              $    49,650    $    10,000

SCHEDULE OF NON-CASH ACTIVITES:
     Issuance of common stock upon conversion of                 --      $   554,000
               long-term debt
     Sale of property and equipment held for sale                --      $    86,167
</TABLE>

         The accompanying notes are an integral part of the consolidated
                              financial statements.


                                       8
<PAGE>

                    FORWARD INDUSTRIES, INC.AND SUBSIDAIRIES

                              NOTES TO FORM 10-QSB

                 THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
                                  (UNAUDITED)


1.       BASIS OF PRESENTATION

         The information in this Form 10-QSB includes the results of operations
         of Forward Industries, Inc. ("the Company") and its wholly-owned
         subsidiary, Koszegi Industries, Inc. ("Koszegi"), for the periods ended
         December 31, 1999 and 1998. The data is unaudited, but includes all
         adjustments including the elimination of intercompany accounts and
         transactions which are, in the opinion of management, necessary for a
         fair presentation of the interim periods presented.

         The accounting policies utilized in the preparation of this Form 10-QSB
         are the same as those set forth in the Company's annual Form 10-KSB for
         the fiscal year ended September 30, 1999 and should be read in
         conjunction with the disclosures presented therein.

         Certain prior period balances have been reclassified to conform to the
         current period classification.

         This Quarterly Report may contain forward-looking statements which
         involve certain risks and uncertainties. Important factors could arise,
         including those indentified in "Risk Factors" in the Company's Form
         10-KSB for the year ended September 30, 1999, which could cause the
         Company's operating results to differ materially from those contained
         in any forward looking statement.


2.       EARNINGS PER SHARE

         Earnings per share are based on the weighted average number of shares
         outstanding during each period presented. The Company has adopted FAS
         128, "Earnings Per Share" and has restated prior periods to comply with
         the provisions of this pronouncement.


3.       BORROWINGS UNDER CREDIT LINE

         In April 1998, the Company established a credit facility with a bank
         which provides for a maximum line of credit for working capital of $4.5
         million, including letters of credit. Borrowing availability is based
         on a formula of accounts receivable and inventory. At December 31, 1999
         amounts outstanding for direct borrowings were $802,483 and acceptances
         were $198,150. The Company was contingently liable under letters of
         credit in the amount of $152,740. The credit agreement provides for
         certain financial covenants which Forward and Koszegi were in
         compliance at December 31, 1999. On February 1, 2000, the direct
         borrowings and acceptances were repaid from the proceeds of borrowings
         under a new credit agreement, as described below.

         In January 2000, the Company established a $5.0 million credit line
         with a new bank, Chase Manhattan Bank, to accommodate it's growth.
         There are no formula or covenants associated with the line. The Company
         is required to eliminate borrowings for 30 consecutive days each year.

4.       ISSUANCE OF COMMON STOCK FOR PROMISSORY NOTES

         In December 1997, the Company consummated a private offering of
         securities consisting of units ("Units"), each Unit comprised of (i)
         30,000 shares of Common Stock, (ii) one warrant (a "Private Placement
         Warrant") to purchase up to 30,000 shares of Common Stock at $4.00 per
         share and (iii) one unsecured convertible promissory note (a "Note") in
         the principal amount of $10,000, bearing interest at a rate of 10% per
         annum (convertible at the sole option of the Company under certain
         circumstances, into 20,000 shares of Common Stock and one Private
         Placement Warrant) maturing on December 4, 1998. A total of 55.4 Units
         were sold for $25,000 per unit,


                                       9
<PAGE>

         aggregating gross proceeds of $1,385,000. Included in the Units sold
         was $554,000 aggregate principal amount of convertible promissory
         notes. On December 4, 1998, the company exercised its option to convert
         all of such Notes into a total of 1,108,000 shares of Common Stock and
         Private Placement Warants to purchase 1,662,000 shares of Common Stock.
         Interest, which had accrued on such Notes of approximately $72,000, was
         paid on that date.

         In connection with the conversion of its Notes into Common Stock, the
         Company recorded a non-cash, extraordinary charge against earnings of
         $277,000 during the prior year's quarter ended Deceember 31, 1998. This
         amount, recorded as interest expense, reflects the difference between
         the average bid and asked price per share of the Company's stock on
         December 4, 1998 (the date on which such conversion occurred) on the
         Nasdaq SmallCap Market, $.75, and, the price at which the Company
         converted such shares, $.50, aggregated by the total shares issued. No
         tax benefit has been recorded in connection with this interest charge
         as it is not deductible for federal income taxes.


5.       INVENTORY

         Inventory consists of the following:


<TABLE>
<CAPTION>
                                          DECEMBER 31, 1999   SEPTEMBER 30, 1999
                                          -----------------   ------------------
                                             (Unaudited)
<S>                                           <C>                  <C>
                  Raw materials                   38,405           $ 34,662
                  Finished goods               1,888,484            957,402
                                              ----------           --------
                                              $1,926,889           $992,064
                                              ==========           ========
</TABLE>


                                       10
<PAGE>

                    FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

               EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE

<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED DECEMBER 31,
                                                            -------------------------------
                                                      1999                                 1998
                                                    ---------                           ----------
<S>                                                 <C>                                 <C>
NUMERATOR

   Income from continuing operations:
     Income from continuing operations:             $  582,971                          $   78,961
     Less: Preferred dividends                            --                                  --
                                                    ----------                          ----------

     Income available to common stockholders
      used in basic EPS                                582,971            BASIC             78,961


     Income available to common stockholders after
      assumed conversions of dilutive securities    $  582,971          DILUTED         $   78,961
                                                    ==========                          ==========

   Loss from extraordinary item                     $     --                            $ (277.000)
                                                    ==========                          ==========

DENOMINATOR

   Weighted average number of common shares
     outstanding  - See schedule                     6,098,308            BASIC          5,167,474

   Impact of potential common shares:
     Stock options and warrants                      1,245,981                              91,016
     Convertible debt                                      N/A                                 N/A


                                                     7,344,289          DILUTED          5,258,490

BASIC EPS

   Income from continuing operations                $     0.10                          $     0.02
   Extaordinary Item                                      --                                 (0.05)
                                                    ----------                          ----------
                                                    $     0.10                          $    (0.03)
                                                    ==========                          ==========

DILUTED EPS

   Income from continuing operations                $     0.08                          $     0.02
   Extraordinary Item                                     --                                 (0.05)
                                                    ----------                          ----------
                                                    $     0.08                          $    (0.03)
                                                    ==========                          ==========
</TABLE>


                                       11
<PAGE>

                    FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

               EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED
                                                              DECEMBER 31,
                                                            1999         1998
                                                         ----------   ----------
<S>                                                      <C>          <C>
CALCULATIONS

   Stock Options

        Treasury Stock Method Applied to Stock Options
        Sale of common stock
           Total options and warrants outstanding         2,483,125      219,000
            Average price                                $     1.40   $     0.50
                                                         ----------   ----------

                           Total                         $3,476,375   $  109,500
                                                         ==========   ==========

        Repurchase of common stock
           Proceeds                                      $3,476,375   $  109,500
            Average stock price                          $     2.81   $     0.86
                                                         ----------   ----------

            Shares repurchased                            1,237,144      127,984
                                                         ==========   ==========

        Net increase in shares
            Shares sold                                   2,483,125      219,000
            Shares repurchased                            1,237,144      127,984
                                                         ----------   ----------

            Increase in shares                            1,245,981       91,016
                                                         ==========   ==========
</TABLE>


                                       12
<PAGE>

                    FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

               EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE

Computation of Weighted Average Number of Common Shares Outstanding


                                DECEMBER 31, 1999


<TABLE>
<CAPTION>
                                                                        Weighted
        Dates                                    Shares    Fraction of   Average
     Outstanding                               Outstanding   Period      Shares
     -----------                               -----------   ------      ------
<S>                                             <C>           <C>      <C>
October through November                        6,101,641     2/3      4,067,761

Treasury stock repurchased in open market
      Transactions, in December                   (10,000)
                                               ----------

December                                        6,091,641     1/3      2,030,547
                                                                       ---------

Weighted Average Shares                                                6,098,308
                                                                       =========

<CAPTION>
                               DECEMBER 31, 1998

                                                                        Weighted
        Dates                                    Shares    Fraction of   Average
     Outstanding                               Outstanding   Period      Shares
     -----------                               -----------   ------      ------
<S>                                             <C>           <C>      <C>
October through November                        4,798,141     2/3      3,198,761

Common stock issued in connection with
     conversion of private placement debt
     in December                                1,108,000
                                                ---------
December                                        5,906,141     1/3      1,968,714
                                                                       ---------

Weighted Average Shares                                                5,167,474
                                                                       =========
</TABLE>


                                       13
<PAGE>

PART I. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                AND RESULTS OF OPERATIONS

         The following discussion and analysis should be read in conjunction
with the Company's Financial Statements and the notes thereto appearing
elsewhere in this Report. This Report contains statements which constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company cautions that forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties,(including those identified in "Risk Factors" in the Company's
Form 10-KSB for the year ended September 30, 1999), and that actual results may
differ materially from those in the forward-looking statements as a result of
various factors.

         The following discussion and analysis compares the results of the
Company's continuing operations for the three months ended December 31, 1999,
and the three months ended December 31, 1998.

THREE MONTHS ENDED DECEMBER 31, 1999 (THE "1999 QUARTER") COMPARED TO THREE
MONTHS ENDED DECEMBER 31, 1998 (THE "1998 QUARTER").

         The 1999 Quarter reflected net income of $583,000 compared to
($198,000) in the 1998 Quarter. Basic earnings per share increased to $.10 in
the 1999 Quarter from ($.03) in the 1998 Quarter, while diluted earnings per
share from continuing operations increased to $.08 in the 1999 Quarter from
($.03) in the 1998 Quarter.

REVENUES.

         Net sales increased $1,899,700 (48%) to $5,862,800 in the 1999 Quarter,
from $3,963,100 in the 1998 Quarter. The increase is attributable to growth in
business from both existing and new customers. Sales increases from customers in
the wireless telecommunications industry continues to be a significant
contributor to this growth.


OPERATING INCOME.

         Consolidated pretax income from continuing operations increased by
$673,400 to a profit of $805,000 in the 1999 Quarter, from $131,600 in the 1998
Quarter. The increase in pretax profits relates to increases in revenues,
described above, coupled with improved gross margin percentage. The gross profit
increased $895,000 from $1,176,700 in the 1998 quarter to $2,071,700 in the 1999
Quarter, while the gross margin percentage increased from 30% in the 1998
Quarter to 35% in the 1999 Quarter. The higher gross profit percentage is
largely the result of higher revenues without the fixed cost component of a
manufacturing facility. The Company continued to reduce other elements of its
cost of sales as well.

         Selling expenses increased $164,900 (45%) from $370,500 in the 1998
Quarter to $535,400 in the 1999 Quarter due to additional investments in
manpower and related selling efforts, along with commissions and travel.
However, the ratio of selling expenses to net sales remained unchanged at 9%
because of an increase in revenues.

         General and administrative expenses decreased as a percent of net
sales, to 12% in the 1999 Quarter from 16% in the 1998 Quarter due to higher
revenues but the dollar amount of expenses increased $60,600 (9%) to $712,100 in
the 1999 Quarter from $651,500 in the 1998 Quarter. The increase is primarily
related to bonuses which are predicated on operating performance measures.

OTHER INCOME (DEDUCTIONS).

         Total interest expenses decreased by $10,200 to $37,100 in the 1999
Quarter from $47,300 in the 1998 Quarter. The decrease was due to conversion of
the Company's convertible notes into equity in the 1998 Quarter.


         Interest and other income - net decreased $6,300 to $17,900 in the 1999
Quarter from the $24,200 1998 Quarter.


                                       14
<PAGE>

EXTRAORDINARY ITEM IN 1998 QUARTER.

         In December 1997, the Company consummated a private offering of
securities which included $554,000 in aggregate principal amount of convertible
Promissory Notes. The Notes were converted into Common Stock in December 1998,
at the option of the Company. In connection with the conversion of its Notes
into Common Stock, the Company recorded a non-cash, extraordinary charge against
earnings of $277,000. This amount, recorded as interest expense, reflects the
difference between the average bid and asked price per share of the Company's
stock on December 4, 1998 (the date on which such conversion occurred) on the
Nasdaq SmallCap Market, $.75, and, the price at which the Company converted such
shares, $.50, aggregated by the total shares issued. There was no comparable
item in the 1999 Quarter.

INCOME TAXES.

         The provision for income taxes increased by $169,300 due to a $673,300
increase in pretax profits in the 1999 Quarter from the comparable period in
1998 Quarter. The effective tax rates for the 1999 and 1998 Quarters were 28%
and 40%, respectively. The tax rate in the 1999 Quarter was lower due to the
reduction of the valuation allowance established for deferred taxes. No tax
benefit was recorded during the 1998 Quarter relating to the extraordinary
interest charge in the 1998 Quarter as it was not deductible for income tax
purposes.

LIQUIDITY AND CAPITAL RESOURCES.

         In the 1999 Quarter, $494,600 of cash was used by operating activities.
This use in operating funds resulted primarily from increases in inventory of
$934,800 and payments and reductions of accounts payable and accrued liabilities
of $665,300 offset by net income of $583,000, reductions in accounts receivables
of $226,000, and the add back of non-cash charges in the deferred tax account of
$222,000 and, depreciation and amortization of $39,200.

         Net investing activities in the 1999 Quarter used cash of $208,200. The
Company collected $44,800 of notes receivable, which arose from the sale of its
discontinued operations in 1997 and provided $77,400 in additional loans to
officers, net of collections of loans. In the 1999 Quarter, the Company
purchased 10,000 shares of its common stock in open market transactions, for
$30,600 and $145,000 of property, plant and equipment.

         Financing activities in the 1999 Quarter used cash of $193,400. Funds
were used for payments of borrowing under the bank credit line.

         In December 1997, the Company consummated the 1997 Private Placement of
Units. Each Unit was comprised of (i) 30,000 shares of Common Stock, (ii) one
Private Placement Warrant to purchase up to 30,000 shares of Common Stock at
$4.00 per share and (iii) one unsecured convertible promissory note. The "Note"
in the principal amount of $10,000, bearing interest at a rate of 10% per annum
(convertible at the sole option of the Company under certain circumstances, into
20,000 shares of Common Stock and one Private Placement Warrant) maturing on
December 4, 1998. A total of 55.4 Units were sold for $25,000 per unit,
aggregating gross proceeds of $1,385,000. Included in the Units sold was
$554,000 aggregate principal amount of debt. A commission in the amount of
$169,000 was paid by the Company in connection with such sales. The sales were
made to accredited investors pursuant to Regulation D promulgated under the
Securities Act of 1933, as amended. On December 4, 1998, the Company exercised
its option to convert $554,000 of debt into 1,108,000 shares of Common Stock and
warrants to purchase 1,662,000 shares of Common Stock, and paid accumulated
interest on the Notes of approximately $72,000. Certain officers and directors
participated in this transaction.

         Forward and Koszegi Industries, Inc., a wholly-owned subsidiary of
Forward ("Koszegi"), established a line of credit with a bank in April 1998 and
are indebted to such bank for short-term borrowings and, upon their
presentation, letters of credit. The total line is for $4,500,000. The line of
credit was scheduled to mature on March 31, 2001 (see below). Borrowing
availability is determined based on a formula of accounts receivable and
inventory. The interest rate on the line is the prime rate in effect from time
to time plus three quarters of one percent. The Company secured this line of
credit with all of its assets and those of Koszegi. The facility contains
certain financial covenants for which the Company was in compliance. Amounts
owed the bank at December 31, 1999 including contingent liability for letters of
credit were $1,153,400.

         In January, 2000 the Company obtained a $5.0 million credit line with a
new bank to accommodate its growth, and terminated its former credit
arrangement. The new credit line has no borrowing formula or specific covenants.
However a mandatory 30-consecutive-day period, in which there are no outstanding
borrowings, is required along with continued


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<PAGE>

reasonable business performance. On February 1, 2000 the Company repaid its
outstanding balance at the former bank with the proceeds from initial borrowings
under the new credit line.

         In September 1998, the Company commenced a plan intended to streamline
its operations and reduce its cost structure over time. The Company announced a
plan of restructuring, and recorded restructuring charges for its fiscal year
ended September 30, 1998, pursuant to which it closed its manufacturing
operations by February 28, 1999, but continued to provide any required domestic
manufacturing through contractual arrangements with sub-contractors. The vast
majority of its orders are now manufactured overseas. The Company sold to a
subcontractor certain key production equipment and provided technical support,
and maintained quality assurance personnel at its factory. The Company also uses
other third party sub-contracting sources, as appropriate. The Company incurred
expenditures related to the plant shutdown, which were accrued at September 30,
1998. Funds for such expenditures were paid from existing cash or cash generated
by operations.

         In addition, the Company renovated a building which it owns, adjacent
to its former leased factory in South Bend, to house its remaining sales staff,
customer support and other administrative personnel who remain in Indiana. The
renovation, which was completed at the end of February 1999, cost approximately
$107,000 and was paid from the Company's existing funds.

         The Company, like many others which own computer software, was required
to address the issue of software applications which were unable to recognize
`OO' in their program code. The Company evaluated alternatives to resolve this
problem and concluded that acquiring a new data system, rather than upgrading
its existing systems and applications, was of greater long-term value. The
Company expended approximately $150,000 during fiscal 1999, encompassing the
cost of installing new hardware and software. Such amounts were paid from
existing cash. The Company incurred internal staff costs associated with
training. Cost of staff time was expensed as incurred, while cost of the new
system was capitalized and is being amortized over its useful life. The Company
believes its data systems are Year 2000 compliant.

         In connection with its restructuring, the Company hired a new Chief
Executive Officer and received the resignation of Mr. Theodore H. Schiffman, its
co-founder and former Chief Executive Officer. Mr. Schiffman received a
five-year consulting arrangement with annual consulting payments of $200,000 per
year and a severance package totaling $350,000, of which $200,000 was paid on
January 1, 1999, $35,000 on September 30, 1999, $60,000 on January 19, 2000, and
$55,000 is payable on the 15th month anniversary thereof. Such amounts were and
will be paid out of the Company's existing cash position or from internally
generated funds.

         The Company determined that for managerial and cost efficiencies it
would close and consolidate its New York and South Bend offices into one office
in Deerfield Beech, Florida. The consolidation is expected to occur during the
third and fourth fiscal quarters. The Company believes that the net cost of the
consolidation will not have a material effect on its financial position in the
current fiscal year, and will have a beneficial impact in subsequent years.

         The Company did not incur any other long-term debt in the 1999 Quarter.
At December 31, 1999, there was no long-term debt and all installment note and
capital lease payments were made on a timely basis.

DEFERRED INCOME TAXES.

         The Company's balance sheet at December 31, 1999 includes $1,192,000 of
deferred income taxes as an asset. The Company was profitable in the 1999
Quarter, in fiscal year 1999, and in the fiscal year 1998 before restructuring
charges associated with the non-recurring costs of the shutdown of its South
Bend plant, and in the 1998 Quarter, excluding the non-recurring, non-cash
interest charge. However, to the extent that the Company's operations may not be
profitable in future periods, the Company would not be able to realize the
benefit of its deferred tax assets. Without such deferred tax assets, at
December 31, 1999, the Company's stockholder's equity at such date of $5,666,900
would have been reduced by $1,192,000 to a stockholder's equity of $4,474,900
and the Company's working capital at December 31, 1999 would have been reduced
by $502,600 from $4,108,500 to $3,605,900.


                                       16
<PAGE>

PART II.      OTHER INFORMATION

ITEM 1.       LEGAL PROCEEDINGS

              On July 15, 1998, Hollco International Limited ("Hollco"), a
       former Asian contractor which manufactured custom carrying cases for the
       Company, commenced a claim against the Company in an amount of $140,500
       which Hollco alleges that it is owed for cases which it manufactured
       under order from the Company. The Company believes that these charges
       were offset wholly by product defects and rejects as well as additional
       costs incurred by the Company, including air shipment of product to avoid
       loss of market share. The Company had charged Hollco by issuing its
       invoices for these expenses and may file a separate counter suit against
       Hollco for these and other charges to offset any claims of Hollco.

ITEM 2.       CHANGES IN SECURITIES

              During the Company's fiscal year ended September 30, 1997 and in
       December 1997, the Company consummated its 1997 Private Placement of
       units ("Units"), each unit comprised of (i) 30,000 shares of Common
       Stock, (ii) one warrant to purchase up to 30,000 shares of Common Stock
       at $4.00 per share (a "Private Placement Warrant") and (iii) one
       unsecured convertible promissory note in the principal amount of $10,000,
       bearing interest at a rate of 10% per annum (convertible at the sole
       option of the Company under certain circumstances, into 20,000 shares of
       Common Stock and one Private Placement Warrant) maturing on December 4,
       1998. An aggregate of 55.4 units were sold for $25,000 per Unit,
       aggregating gross proceeds of $1,385,000. Included in the Units sold was
       $554,000 aggregate principal amount of debt. A commission in the amount
       of $169,500 was paid by the Company in connection with such sales. The
       sales were made to accredited investors pursuant to Regulation D
       promulgated under the Securities Act of 1933, as amended. On December 4,
       1998, the Company exercised its option to convert all of such notes into
       a total of 1,108,000 shares of Common Stock and Private Placement
       Warrants to purchase 1,662,000 shares of Common Stock, and paid interest
       which had accrued on the Notes, of approximately $72,000.

ITEM 3.       DEFAULTS UPON SENIOR SECURITIES

       None.

ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

       None.

ITEM 5.       OTHER INFORMATION

       None.

ITEM 6.        EXHIBITS AND REPORTS ON FORM 8-K

       (a)      Exhibit 27:  Financial Data Schedule

       (b)      Reports on Form 8-K

                    None.


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<PAGE>

                                    SIGNATURE


In accordance with to the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.

Dated: February 1, 2000
                                            FORWARD SYSTEMS, INC.
                                                 (Registrant)


                                            By: /s/ Philip B. Kart
                                            ---------------------------
                                            PHILIP B. KART
                                            Principal Financial Officer


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