| **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			June  30, 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                                			                                                              13-1950672                                          			                 			(State or other jurisdiction of           			                                             (I.R.S.  Employer Identification No.)			                  incorporation or organization)

                  1801  Green Rd., Suite E, Pompano Beach, FL           			                      			                           33064                                       			                   (Address of principal executive  offices)                                                               (Zip  Code)

                                 (954) 419-9544                               (Issuer's Telephone Number, including Area Code)

                                                                                            			(Former name, former address and former fiscal year,  if changed since last report)

Check whether the issuer:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the  Securities Exchange Act of 1934 during the preceding 12 months (or for such  shorter period that the registrant was required to file such reports), and  (2) has been subject to such filing requirements for the past 90 days. Yes  [X] No [   ].

As  of July 21, 2004, 6,210,641 shares of Common Stock were outstanding.

Transitional  Small Business Disclosure Format:    Yes [   ]  No [X] |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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 1

 

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**FORWARDINDUSTRIES, INC. AND SUBSIDIARIESFORM 10-QSBTHREEMONTHS ENDED JUNE 30, 2004**

** TABLE OF CONTENTS**

|              |            |                                                                                          | PAGE       |
|--------------|------------|------------------------------------------------------------------------------------------|------------|
| **PART  I**  | ** ** | **FINANCIAL  INFORMATION**                                                               | ** ** |
|              |            |                                                                                     |            |
|              | Item  1.   | Financial  Statements                                                                    |            |
|              |            |      		Consolidated Balance Sheets as of June 30, 2004 (Unaudited)        |            |
|              |            |      and September 30, 2003                                               | 3          |
|              |            |                                                                                     |            |
|              |            |      		Unaudited Consolidated Statements of Income for the Three and Nine |            |
|              |            |      Months Ended June 30, 2004 and 2003                                  | 4          |
|              |            |                                                                                     |            |
|              |            |      		Unaudited Consolidated Statements of Cash Flows for the Nine       |            |
|              |            |      Months Ended June 30, 2004 and 2003                                  | 5          |
|              |            |                                                                                     |            |
|              |            |      		Notes to Consolidated Financial Statements                         | 6          |
|              |            |                                                                                     |            |
|              | Item  2.   | Management's  Discussion and Analysis of Financial Condition and Results of Operations   | 13         |
|              |            |                                                                                     |            |
|              | Item  3.   | Controls  and Procedures.                                                                | 22         |
|              |            |                                                                                     |            |
| **PART  II** | ** ** | **OTHER  INFORMATION**                                                                   | ** ** |
|              |            |                                                                                     |            |
|              | Item  4.   | Submission  of Matters to a Vote of Security Holders                                     | 23         |
|              |            |                                                                                     |            |
|              | Item  6.   | Exhibits  and Reports on Form 8-K                                                        | 23         |
|              |            |                                                                                     |            |
|              |            | Signatures                                                                               | 24         |
|              |            |                                                                                     |            |
|              |            |                                                                                     |            |

 

**Note RegardingUse of Certain Terms**

In this Quarterly Report on Form10-QSB, unless the context otherwise requires, the terms "we","our", "Company" and "Forward" refer to ForwardIndustries, Inc., a New York corporation, together with its consolidatedsubsidiaries; "common stock" refers to the common stock, $.01 par value pershare, of Forward Industries, Inc.; "Koszegi" refers to ForwardIndustries' wholly owned subsidiary Koszegi Industries Inc., an Indianacorporation; "Koszegi Asia" refers toForward Industries' wholly owned subsidiary Koszegi Asia Ltd., a Hong Kongcorporation; "Forward Innovations" refers to Forward Industries' wholly ownedsubsidiary Forward Innovations GmbH, a Swiss corporation;  "Commission" refers to the United States Securitiesand Exchange Commission; and "Exchange Act" refers to the United StatesSecurities Exchange Act of 1934.

2

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**PART I.   FINANCIAL INFORMATION**

ITEM 1.  FINANCIAL STATEMENTS

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

|                                                                                                                                                                                                                                            |                   |            |                         |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------|------------|-------------------------|
|                                                                                                                                                                                                                                            |                   |            |                         |
|                                                                                                                                                                                                                                            | **June 30,**      | ** ** | **September 30,**       |
|                                                                                                                                                                                                                                            | **2004**          | ** ** | **2003**                |
| **ASSETS**                                                                                                                                                                                                                                 | **(Unaudited)**   | ** ** | ** **              |
|                                                                                                                                                                                                                                       |                   |            |                         |
| Current assets:                                                                                                                                                                                                                            |                   |            |                         |
|    Cash and cash equivalents.............................................                                                                                                                                                        | $  3,512,224 |            |  $  2,125,300 |
|    Accounts		receivable - net ..............................................                                                                                                                                                     | 3,349,499         |            | 3,460,085               |
|    Inventories........................................................................                                                                                                                                           | 761,971           |            | 708,235                 |
|    Prepaid expenses and other current assets..................                                                                                                                                                                   | 223,153           |            | 197,476                 |
|    Deferred tax asset.............................................................                                                                                                                                               | 58,700            |            | 58,700                  |
|       Total current assets......................................................                                                                                                                                  | 7,905,547         |            | 6,549,796               |
|                                                                                                                                                                                                                                       |                   |            |                         |
| Property, plant, and equipment - net................................                                                                                                                                                                       | 283,620           |            | 258,323                 |
| Deferred tax asset................................................................                                                                                                                                                         | 331,300           |            | 331,300                 |
| Other assets.........................................................................                                                                                                                                                      | 45,519            |            | 40,607                  |
|     		**TOTAL ASSETS**...........................................................                                                                                                                                      | $  8,565,986 |            |  $  7,180,026 |
|                                                                                                                                                                                                                                       |                   |            |                         |
| **LIABILITIES AND SHAREHOLDERS' EQUITY**                                                                                                                                                                                                   |                   |            |                         |
|                                                                                                                                                                                                                                       |                   |            |                         |
| Current liabilities:                                                                                                                                                                                                                       |                   |            |                         |
|    Accounts payable............................................................                                                                                                                                                  | $  1,312,588 |            |  $  1,140,960 |
|    Accrued expenses and other current liabilities............                                                                                                                                                                    | 565,442           |            | 743,450                 |
|       Total current liabilities..................................................                                                                                                                                 | 1,878,030         |            | 1,884,410               |
|                                                                                                                                                                                                                                       |                   |            |                         |
| 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; 6,739,731 and 6,502,731 shares issued at  June 30, 2004 and September 30, 2003, respectively (including 529,090 and  527,090 held in treasury, respectively).... | 67,397            |            | 65,027                  |
|    Paid-in capital.....................................................................                                                                                                                                          | 8,854,464         |            | 8,487,438               |
|    Accumulated deficit...........................................................                                                                                                                                                | (1,456,084)       |            | (2,483,413)             |
|                                                                                                                                                                                                                                       | 7,465,777         |            | 6,069,052               |
|    Less: Cost of shares in treasury.......................................                                                                                                                                                       | (777,821)         |            | (773,436)               |
|       Total shareholders' equity..............................................                                                                                                                                    | 6,687,956         |            | 5,295,616               |
|                                                                                                                                                                                                                                       |                   |            |                         |
| **TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY**........                                                                                                                                                                                     | $  8,565,986 |            |  $  7,180,026 |

The accompanying notes are an integral part of the consolidatedfinancial statements.

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

**  **

|                                                                                | **Three Months Ended		June 30,**                             | ** ** | **Nine Months Ended		June 30,**                                    |
|--------------------------------------------------------------------------------|--------------------------------------------------------------|------------|--------------------------------------------------------------------|
|                                                                                | **2004**                                                     | ** ** | **2003**                                                           | ** ** | **2004** | ** ** | **2003** |
| Net  sales.................................................................... | $  5,245,886                                            |            | $  4,758,073                                                  |  | $ 14,739,854 |  | $ 14,353,273 |
| Cost of goods sold..................................................           | 3,447,207                                                    |            | 3,273,658                                                          |  | 9,786,723 |  | 9,829,338 |
| Gross profit...............................................................    | 1,798,679                                                    |            | 1,484,415                                                          |  | 4,953,131 |  | 4,523,935 |
|                                                                           |                                                              |            |                                                                    |  |  |  |  |
| Operating expenses:                                                            |                                                              |            |                                                                    |  |  |  |  |
| Selling...............................................................         | 800,630                                                      |            | 736,533                                                            |  | 2,209,963 |  | 1,988,542 |
| General and administrative............................                         | 617,920                                                      |            | 581,768                                                            |  | 1,635,575 |  | 1,701,126 |
| Total operating expenses.........................                              | 1,418,550                                                    |            | 1,318,301                                                          |  | 3,845,538 |  | 3,689,668 |
|                                                                           |                                                              |            |                                                                    |  |  |  |  |
| Income  from operations.........................................               | 380,129                                                      |            | 166,114                                                            |  | 1,107,593 |  | 834,267 |
|                                                                           |                                                              |            |                                                                    |  |  |  |  |
| Other income (expense):                                                        |                                                              |            |                                                                    |  |  |  |  |
| Interest expense.............................................                  | --                                                           |            | (4,759)                                                            |  | -- |  | (7,448) |
| Interest income...............................................                 | 4,762                                                        |            | 3,111                                                              |  | 8,955 |  | 7,949 |
| Other income (expense).................................                        | (10,092)                                                     |            | 11,248                                                             |  | 5,692 |  | 107,626 |
| Total other income  (expense) .................                                | (5,330)                                                      |            | 9,600                                                              |  | 14,647 |  | 108,127 |
|                                                                           |                                                              |            |                                                                    |  |  |  |  |
| Income before provision  (benefit) for income taxes....                        | 374,799                                                      |            | 175,714                                                            |  | 1,122,240 |  | 942,394 |
| Provision (benefit) for  income taxes....................                      | 28,600                                                       |            | (2,600)                                                            |  | 94,911 |  | 13,800 |
|                                                                           |                                                              |            |                                                                    |  |  |  |  |
| Net income ..............................................................      | $    346,199                                  |            | $     178,314                                  |  | $   1,027,329 |  | $      928,594 |
|                                                                           |                                                              |            |                                                                    |  |  |  |  |
| Net income per common and common equivalent share:                             |                                                              |            |                                                                    |  |  |  |  |
| Basic............................................................              | $          0.06 |            | $           0.03 |  | $            0.17 |  | $            0.16 |
| Diluted........................................................                | $          0.05 |            | $           0.03 |  | $            0.16 |  | $            0.16 |
|                                                                           |                                                              |            |                                                                    |  |  |  |  |
| Weighted average number of common and common  equivalent shares outstanding:   |                                                              |            |                                                                    |  |  |  |  |
| Basic............................................................              | 6,204,808                                                    |            | 5,773,441                                                          |  | 6,110,321 |  | 5,790,374 |
| Diluted.........................................................               | 6,599,780                                                    |            | 5,954,442                                                          |  | 6,447,131 |  | 5,907,426 |
|                                                                           |                                                              |            |                                                                    |  |  |  |  |
|                                                                                |                                                              |            |                                                                    |  |  |  |  |

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

 

4

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

** **

|                                                                                                                                  |  | **Nine Months Ended June 30,**    |
|----------------------------------------------------------------------------------------------------------------------------------|--|-----------------------------------|
|                                                                                                                                  |  | **     2004** | ** ** | **2003** |
| **OPERATING ACTIVITIES:**                                                                                                        |  |                                   |  |  |
| Net  income..................................................................................................................... |  | $ 1,027,329                       |  | $      928,594 |
| Adjustments to reconcile  net income to net cash provided        by operating activities:     |  |                                   |  |  |
| Loss  on sale of property, plant and equipment...............................................                                    |  | --                                |  | 7,055 |
| Depreciation  and amortization............................................................................                       |  | 90,326                            |  | 99,850 |
| Deferred  taxes.......................................................................................................           |  | --                                |  | 2,800 |
|      Provision for obsolete inventory.......................................................................      |  | 129,878                           |  | 96,823 |
|      Changes in operating assets and liabilities:                                                            |  |                                   |  |  |
| Accounts  receivable.....................................................................................                        |  | 110,586                           |  | (305,044) |
| Inventories.....................................................................................................                 |  | (183,614)                         |  | (26,747) |
| Prepaid  expenses and other current assets...............................................                                        |  | (25,677)                          |  | 18,945 |
| Other  assets...................................................................................................                 |  | (4,912)                           |  | -- |
| Accounts  payable.........................................................................................                       |  | 171,628                           |  | (187,992) |
| Accrued  expenses and other current liabilities.........................................                                         |  | (178,008)                         |  | 375,501 |
| **NET CASH  PROVIDED BY OPERATING ACTIVITIES**                                                                                   |  | **1,137,536**                     | ** ** | **1,009,785** |
|                                                                                                                             |  |                                   |  |  |
| **INVESTING ACTIVITIES:**                                                                                                        |  |                                   |  |  |
| Proceeds from sale of  property, plant, and equipment............................................                                |  | --                                |  | 3,591 |
| Purchases of property,  plant, and equipment...........................................................                          |  | (115,623)                         |  | (52,434) |
| **NET CASH USED BY  INVESTING ACTIVITIES**                                                                                       |  | **(115,623)**                     | ** ** | **(48,843)** |
|                                                                                                                             |  |                                   |  |  |
| **FINANCING ACTIVITIES:**                                                                                                        |  |                                   |  |  |
| Proceeds from exercise of  stock options...................................................................                      |  | 369,396                           |  | -- |
| Principal payments on  capital lease obligations......................................................                           |  | --                                |  | (86,565) |
| Purchase of treasury shares........................................................................................              |  | (4,385)                           |  | (91,549) |
| **NET CASH PROVIDED (USED)  BY FINANCING ACTIVITIES**                                                                            |  | **365,011**                       | ** ** | **(178,114)** |
|                                                                                                                                  |  |                                   |  |  |
| NET INCREASE IN CASH AND  CASH EQUIVALENTS                                                                                       |  | 1,386,924                         |  | 782,828 |
|                                                                                                                             |  |                                   |  |  |
| CASH AND CASH  EQUIVALENTS - beginning of period.......................................                                          |  | 2,125,300                         |  | 1,207,311 |
|                                                                                                                        |  |                                   |  |  |
| CASH  AND CASH EQUIVALENTS - end of period.................................................                                      |  | $ 3,512,224                       |  | $   1,990,139 |
|                                                                                                                             |  |                                   |  |  |
|                                                                                                                                  |  |                                   |  |  |
|                                                                                                                                  |  |                                   |  |  |
|                                                                                                                                  |  |                                   |  |  |
|                                                                                                                                  |  |                                   |  |  |

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

 

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**Forward Industries, Inc.Notes to Consolidated Financial StatementsThree- and Nine-Month Periods Ended June 30, 2004 and 2003(Unaudited)**

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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 completefinancial statements.  In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation have been included.  Operating results for the three andnine-month periods ended June 30, 2004 are not necessarily indicative of theresults that may be expected for the fiscal year ending September 30, 2004.

The consolidated balance sheet at September 30, 2003has 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 financial statements.

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, 2003 and should be read in conjunction with the disclosurespresented therein.  

            For the three and nine-months endedJune 30, 2004, the Company did not have any components of comprehensive incomeother than net income.

** **

**RecentAccounting Pronouncements**

In May 2003, the FASB issued Statement of FinancialAccounting Standard (SFAS) No. 150, *Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity*. SFAS No.150 establishes standards for how companies classify and measure certainfinancial instruments with characteristics of both liabilities and equity. Itrequires companies to classify a financial instrument that is within its scopeas a liability (or an asset in some circumstances). SFAS No. 150 was effectivebeginning with the second quarter of fiscal 2004, and the adoption of SFAS No.150 did not have an impact on the Company's current financial position orresults of operations.

In January 2003, the FASB issued FASB InterpretationNo. 46, *Consolidation of Variable Interest Entities, an Interpretation ofAccounting Research Bulletin (ARB) No. 51*, (the Interpretation). TheInterpretation provides clarification on the consolidation of certain entitiesin which equity investors do not have sufficient equity at risk for the entityto finance its activities without additional subordinated financial supportfrom other parties. Such entities are defined as variable interest entities ("VIEs").FIN No. 46 requires that VIEs be consolidated by the entity considered to bethe primary beneficiary of the VIE. In December 2003, the FASB issued FIN No.46 (revised December 2003), which effectively modified and clarified certainprovisions of FIN No. 46, as originally issued, and modified the effective datefor certain entities. Public companies will apply the provisions of FIN No. 46,as revised, no later than the first reporting period that ends after March 15,2004. The adoption of FIN No. 46 did not have a material impact on theCompany's consolidated financial statements.

 

 

6

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Forward Industries, Inc.Notes to Consolidated Financial StatementsThree- and Nine-Month Periods Ended June 30, 2004 and 2003(Unaudited) 

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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 plan 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- and nine- month periods ended June30, 2004 and 2003, for the stock options granted based on the fair value at thedate of grant consistent with the method prescribed by SFAS No. 123, unauditednet income and income per share would have been changed to the pro formaamounts indicated below:

|                                                                                                                                                      | **Three Months Ended		June 30,**           | ** ** | **Nine Months Ended		June 30,**                  |
|------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------|------------|--------------------------------------------------|
|                                                                                                                                                      | **2004**                                   | ** ** | **2003**                                         | ** ** | **2004** | ** ** | **2003** |
| Net income, as		reported.........                                                                                                                    | $ 346,199                                  |            | $ 178,314                                        |  | $1,027,329 |  | $ 928,594 |
| Less: Stock-based employee compensation costs determined under fair		value based method for all awards, net of related tax		effects................. | 29,112                                     |            | 78,017                                           |  | 91,347 |  | 138,785 |
| Pro forma net		income............                                                                                                                    | $ 317,087                                  |            | $ 100,297                                        |  | $  935,982 |  | $ 789,809 |
|                                                                                                                                                      |                                            |            |                                                  |  |  |  |  |
| Earnings per share:                                                                                                                                  |                                            |            |                                                  |  |  |  |  |
| Basic - as reported............                                                                                                                      | $       0.06 |            |  $       0.03 |  | $        0.17 |  | $       0.16 |
| Basic - pro forma..............                                                                                                                      | $       0.05 |            | $       0.02       |  | $        0.15 |  | $       0.14 |
|                                                                                                                                                      |                                            |            |                                                  |  |  |  |  |
| Diluted - as reported.........                                                                                                                       | $       0.05 |            | $       0.03       |  | $        0.16 |  | $       0.16 |
| Diluted - pro forma...........                                                                                                                       | $       0.05 |            | $       0.02       |  | $        0.15 |  | $       0.13 |

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

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Forward Industries, Inc.Notes to Consolidated Financial StatementsThree- and Nine-Month Periods Ended June 30, 2004 and 2003(Unaudited) 

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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 daysduring the term of the facility and is required to maintain operatingperformance that is acceptable to the bank.  Amounts drawn under the creditfacility bear interest at the bank's prime rate (4.25% as of June 30, 2004) ineffect from time-to-time plus one half of one percent and are secured bysubstantially all of Koszegi's assets. There are no fees with respect toundrawn balances. At June 30, 2004, there were no outstanding borrowings orletter of credit obligations under this facility. 

In February 2003, Forward Innovations established acredit facility with a Swiss bank that provides for an uncommitted line ofcredit in the maximum amount of $400,000.  Amounts borrowed under the facilitymay be structured as a term loan or loans, with a maximum repayment period of12 months, or as a guarantee facility, or any combination of the foregoing. Either party may terminate the facility at any time; however, such terminationwould not affect the stated maturity of term loans outstanding.  Amounts borrowedother than as a term loan must be settled quarterly or converted into termloans.  In connection with this facility, Forward Innovations has agreed tocertain covenants, and an intercompany balance owed by Forward Innovations tothe Company secures Forward Innovations' obligations under the facility. Amounts drawn under this credit facility bear interest at variable ratesestablished by the bank (6.125% as of June 30, 2004).  Additionally, theCompany pays a credit commission of 0.25% of the maximum amount of credit usedduring a quarter. At June 30, 2004, Forward Innovations is contingently liableto the bank under a letter of credit, issued on its behalf in the amount of €168,000 (approximately $205,000 as of June 30, 2004), in connection with itslogistics operations in The Netherlands (Refer to Note 6).

3.        BUSINESS SEGMENT INFORMATION

The Company operates in a single segment providingcarrying solutions for portable electronic devices. The Company designs andmarkets its products primarily to original equipment manufacturers of portable,personal electronic devices such as wireless telecommunications devices andmedical equipment.  Geographic locations are determined based primarily on thelocation of the customer.   Information as to revenue source by geographiclocation is as follows:

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

|                 | **Three Months Ended		June 30,**             | ** ** | **Nine Months Ended		June 30,** |
|-----------------|----------------------------------------------|------------|---------------------------------|
|                 | **2004**                                     |            | **2003**                        | ** ** | **2004** | ** ** | **2003** |
| United States   |    $     1,813 |            | $     2,940 |  | $     5,947 |  | $      8,610 |
| Europe          | 2,330                                        |            | 1,800                           |  | 6,957 |  | 5,320 |
| Other           | 1,103                                        |            | 20                              |  | 1,836 |  | 420 |
| Total net sales | $     5,246              |            | $    4,760       |  | $   14,740 |  | $    14,350 |

 

8

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**Forward Industries, Inc.Notes to Consolidated Financial StatementsThree- and Nine-Month Periods Ended June 30, 2004 and 2003(Unaudited) **

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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). The average quoted market pricesfor the Company's common stock for the three and nine-month periods ended June30, 2004 were $2.60 and $2.46, respectively. The average quoted market pricesfor the Company's common stock for the three and nine-month periods ended June30, 2003 were $0.84 and $0.93, respectively. Calculation of diluted earningsper share is as follows:

|                             |  | **Three Months Ended		June 30,** | ** ** | **Nine Months Ended		June 30,** |
|-----------------------------|--|----------------------------------|------------|---------------------------------|
|                             |  | **2004**                         | ** ** | **2003**                        | ** ** | **2004** | ** ** | **2003** |
| Numerator:                  |  |                                  |            |                                 |  |  |  |  |
| Net  income................ |  | $  346,199                  |            |  $  178,314           |  | $ 1,027,329 |  | $   928,594 |
|                             |  |                                  |            |                                 |  |  |  |  |

| Denominator:                                                                                           |  |           |  |           |  |           |  |           |
|--------------------------------------------------------------------------------------------------------|--|-----------|--|-----------|--|-----------|--|-----------|
| Denominator for basic		earnings per share - weighted average		shares.................................. |  | 6,204,808 |  | 5,773,441 |  | 6,110,321 |  | 5,790,374 |
| Dilutive stock options		and warrants - treasury stock method..............................             |  | 394,972   |  | 181,001   |  | 336,810   |  | 117,052   |
| Denominator for		diluted earnings per share - weighted average		shares.....................            |  | 6,599,780 |  | 5,954,442 |  | 6,447,131 |  | 5,907,426 |

| Net  income per common share         |  |                                            |  |                                                                     |  |                                                  |  |                                                  |
|--------------------------------------|--|--------------------------------------------|--|---------------------------------------------------------------------|--|--------------------------------------------------|--|--------------------------------------------------|
| Basic............................... |  | $       0.06 |  | $        0.03                    |  | $        0.17 |  | $        0.16 |
| Diluted............................. |  | $       0.05 |  |     $        0.03 |  | $        0.16 |  | $        0.16 |
| Shares excluded due to antidilution  |  | 266,250                                    |  | 1,588,750                                                           |  | 266,250                                          |  | 1,588,750                                        |

 

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**Forward Industries, Inc.Notes to Consolidated Financial StatementsThree- and Nine-Month Periods Ended June 30, 2004 and 2003(Unaudited) **

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5.            INCOME TAXES

                The Company's incometax provision (benefit) consists of the following:

|                                                | **Three Months Ended		June 30,**                                    |  | **Nine Months Ended		June 30,**                                        |
|------------------------------------------------|---------------------------------------------------------------------|--|------------------------------------------------------------------------|
| U.S.  Federal and State                        | **2004**                                                            |  | **2003**                                                               |  | **2004** |  | **2003** |
|     Current......................... | $  26,400                                                      |  | $            -- |  | $  92,711 |  | $           -- |
|     Deferred.......................  | --                                                                  |  | --                                                                     |  | -- |  | -- |
|                                                |                                                                     |  |                                                                        |  |  |  |  |
| Foreign:                                       |                                                                     |  |                                                                        |  |  |  |  |
|     Current......................... |             2,200 |  | (2,600)                                                                |  |          2,200 |  | 16,600 |
|     Deferred.......................  | --                                                                  |  | --                                                                     |  | -- |  | (2,800) |
| Income  tax provision (benefit)                | $  28,600                                                      |  | $ (2,600)                                                              |  | $  94,911 |  | $   13,800 |

The Company has notrecorded a current provision for U.S. income taxes, other than for state taxesand federal alternative minimum tax, on its U.S. sourced income because it has,as a component of its deferred tax assets, sufficient net operating tax losscarryforwards available to offset its federal income tax on current U.S.taxable income.  The Company has recorded a valuation allowance to reduce itsdeferred tax assets to their net realizable value. The Company will continue tomonitor the likelihood of realization of the benefits of its deferred taxassets and may adjust the valuation allowance in future periods as the benefitof the asset becomes more certain. 

In June 2001, theCompany established a wholly owned foreign subsidiary in Switzerland to engagein marketing and distribution activities throughout Europe, the Middle East andAfrica. At June 30, 2004, the subsidiary had cumulative undistributed earningsof approximately $188,000.  The Company considers its investment in thesubsidiary to be permanent.   Accordingly, no provision has been made for U.S.federal income taxes on such undistributed foreign earnings.  

6.         COMMITMENTSAND CONTINGENCIES

**Royalty Commitments**

Effective January 1, 2001, theCompany obtained a license for the use of certain trademarks of Motorola, Inc.("Motorola") for products to be sold throughout Europe, the MiddleEast and Africa (the "EMEA Region").  Under the terms of the licenseagreement, as amended, the Company is required to pay Motorola a royalty basedupon a percentage of the Company's net sales to third parties of licensedproducts within the EMEA Region, subject to payment of minimum royalties. Thelicense agreement requires the Company to make a minimum guaranteed royaltypayment to Motorola of $408,000, payable in quarterly installments, for thecontract period October 1, 2003 to September 30, 2004.

Royalty commitments arerecognized as expense over the applicable contract period.  The Companyrecorded royalty expense of $102,000 and $83,000 for the three-month periodsended June 30, 2004 and 2003, respectively, and $306,000 and $249,000 for thenine-month periods ended June 30, 2004 and 2003, respectively, which areincluded in selling expenses in the accompanying consolidated statements ofincome. Net sales to third parties under the Motorola license agreement were$542,000 and $275,000 for the three-month periods ended June 30, 2004 and 2003,respectively, and $1,537,000 and $1,325,000 for the nine-month periods endedJune 30, 2004 and 2003, respectively.

 

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**Forward Industries, Inc.Notes to Consolidated Financial StatementsThree- and Nine-Month Periods Ended June 30, 2004 and 2003(Unaudited) **

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6.         COMMITMENTS ANDCONTINGENCIES (CONTINUED)

**Royalty Commitments(continued)**

If the Company electsto terminate the license before September 30, 2004, when the license is toexpire by its terms, the Company would be required to pay the balance, if any,of the minimum guarantee for the contract period in effect at the date ofcancellation.

We have entered intopreliminary discussions with Motorola regarding the terms of a proposed renewalof this agreement, and, while there can be no assurance as to the outcome ofsuch discussions, we believe that such discussions have been constructive.  Anyfailure to renew the license agreement or enter into a different agreement uponterms acceptable to us could have a material adverse affect on our results ofoperations and financial condition. In addition, while we believe that ourcommercial relationship with Motorola is good, if we are unable to renew thelicense agreement or enter into a different agreement upon terms acceptable tous, we cannot predict how this would affect OEM sales to Motorola****

**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 million. Royal has filed a counterclaimagainst the Company alleging abuse of process and harassment and is seeking anaward of punitive damages in the amount of $1 million.  Although the partieshave made discovery demands, neither has complied, having each interposedobjections to the nature and scope of the discovery sought, and the action hasremained essentially dormant since service of the answer on November 5, 2001. No depositions have been held, no judicial intervention in the discoverydispute has been sought, and no trial has been scheduled or is likely to bescheduled in 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, managementbelieves the case is without merit and it does not appear reasonably possible thatRoyal's counterclaims will result in material losses and therefore, at June 30,2004, no provision for losses related to this action has been recorded in theaccompanying consolidated financial statements.

**Bank Guarantee**

In July 2002, theCompany and its European logistics provider (freight forwarding and customsagent) entered into a Representation Agreement whereby, among other things, theEuropean logistics provider agreed to act as the Company's fiscalrepresentative in The Netherlands for the purpose of providing services inconnection with any value added tax matters. As part of this agreement, theCompany agreed to provide a bank guarantee to the logistics provider withrespect to any value added tax liability arising in The Netherlands that the logisticsprovider paid on the Company's behalf, and in February 2004, the Companyentered into a guarantee agreement with a Swiss bank relating to the repaymentof any amount up to €168,000 (approximately $205,000 as of June 30, 2004) paidby such bank to the logistics provider pursuant to a guarantee issued by thebank in favor of the logistics provider. The amount payable pursuant to theguarantee reduces the amount available under the Company's credit facilityreferred to in Note 2 above.  The Company would be required to perform underthe 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 Company fails or refuses toremit the amount of value added tax due to the logistics provider. On December31, 2004 and on every anniversary thereafter, the bank guarantee will berenewed automatically for one-year periods until December 31, 2009. The Companyhas agreed to keep a guarantee in place for five years following the date itsrelationship terminates with the logistics provider. As of June 30, 2004, theCompany has not recorded a liability in connection with this guarantee.

 

11

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**Forward Industries, Inc.Notes to Consolidated Financial StatementsThree- and Nine-Month Periods Ended June 30, 2004 and 2003(Unaudited) **

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7.        EQUITY****

**Stock OptionExercises**

During the three and nine-month periods ended June 30, 2004, 98,500shares of common stock and 237,000 shares of common stock, respectively, wereissued due to the exercise of stock options at an average price of $1.82 and$1.56, respectively.

**Treasury Share Purchases**

During the nine-month period ended June 30, 2004, the Company purchased2,000 shares of its common stock in the open market pursuant to its stockbuyback program at a cost of approximately $4,000. The Company did not purchaseany shares of its common stock during the three-month period ended June 30,2004

 

 

 

 

 

 

 

 

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ITEM 2:   MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This quarterly reportcontains forward-looking statements that involve certain risks anduncertainties.  Contingencies and developments, including those discussed inthis Management's Discussion and Analysis of Financial Condition and Results ofOperations and those identified in "Risk Factors" in our annual report on Form10-KSB for the fiscal year ended September 30, 2003, could cause our futureoperating results to differ materially from those set forth in any forwardlooking statement.  Such developments can be identified by the use offorward-looking terminology such as "may", "will", "should", "expect","anticipate", estimate", "intend",  "continue", or "believe" or the negativesor other variations of these terms or comparable terminology.  We also mayprovide projections, forecasts or estimates of future performance. Projections, forecasts and estimates are forward-looking statements and will bebased upon a number of assumptions that we believe to be reasonable at the timesuch projections, forecasts or estimates are made.  Whether those assumptionswill be realized will be determined by future events, which are difficult topredict and may be beyond our control.  Actual events may differ materiallyfrom those assumed.  Accordingly, there can be no assurance that any estimated results,projections, forecasts or estimates can be realized or that actual returns orresults will not be materially lower than those that may be estimated.

The following discussion and analysis should be read in conjunction with our UnauditedConsolidated Financial Statements and the notes thereto appearing elsewhere inthis Report.  Such discussion and analysiscompares our consolidated results ofoperations for the three months ended June 30, 2004 (the "2004 Quarter"), withthe three months ended June 30, 2003 (the "2003 Quarter"), and the nine monthsended June 30, 2004 (the "2004 Period"), with the nine months ended June 30,2003 (the "2003 Period"), and is based on or derived from the UnauditedConsolidated Financial Statements included elsewhere in this Report. There havebeen no material changes in critical accounting estimates since September 30,2003.  All figures in the following discussion are presented on a consolidatedbasis. All dollar amounts and percentages presented herein have been rounded toapproximate values.

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

Netincome in the 2004 Quarter was $346,000 compared to net income of $178,000 inthe 2003 Quarter, an increase of approximately $168,000 or 94%. The increasewas due to higher gross profit primarily as a result of an increase in sales ofcell phone carrying case products. Basic and diluted earnings per share were$0.06 and $0.05, respectively, for the 2004 Quarter, compared to $0.03 basicand diluted earnings per share for the 2003 Quarter. 

**Net Sales**

Net sales increased $488,000, or 10%, to $5,246,000in the 2004 Quarter compared to $4,758,000 in the 2003 Quarter.  Net salesbenefited from increases in original equipment manufacturer, or "OEM", unitsales of cell phone cases and accessories, sales of cases under the Motorolalicense agreement and sales of cases for other products. In addition, astronger Euro compared to the U.S. Dollar contributed to the sales increase.These increases were offset in part by lower sales of diabetes case products.The tables below set forth sales by product line and geographic location of ourcustomers for the periods indicated:

 

 

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| **Net  Sales for 2004 Quarter		3  Months ended June 30, 2004		(millions  of dollars)** |
|----------------------------------------------------------------------------------------|
| ** **                                                                             | **US** | **Europe** | **Other** | Total |
| Diabetic  Products                                                                     | $0.75 | $1.13 | $0.48 | $2.36 |
| Cell Phone  Products                                                                   | 0.45 | 1.17 | 0.61 | 2.23 |
| Other Product Sales                                                                    | 0.62 | 0.03 | 0.02 | 0.67 |
| **Total***                                                                             | **$1.81** | **$2.33** | **$1.11** | **$5.25** |

                               

| **Net  Sales for 2003 Quarter 		3  Months ended June 30, 2003		(millions  of dollars)** |
|-----------------------------------------------------------------------------------------|
| ** **                                                                              | **US** | **Europe** | **Other** | Total |
| Diabetic  Products                                                                      | $1.84 | $1.05 | $     --   | $2.89 |
| Cell Phone  Products                                                                    | 0.56 | 0.75 | -- | $1.31 |
| Other Product Sales                                                                     | 0.54 | -- | 0.02 | $0.56 |
| **Total***                                                                              | **$2.94** | **$1.80** | **$0.02** | **$4.76** |

* Tablesmay not total due to rounding.

** **

With respect to net sales for the 2004 Quartercompared to the 2003 Quarter, the table discloses some relatively significantshifts in the geographic origin of revenues for both diabetic products and cellphone products, indicating lower US sales and higher Other sales.  While these shiftsare not necessarily permanent, they do indicate an operational trend on thepart of certain of our OEM customers in our two major product markets to sourcemore of their products in Asia and less in the United States.  To the extent ofthis shift, this necessitates delivery of our carrying case and accessoryproducts to Asia where they are packaged in the box with the phones and bloodglucose kits, rather than shipment to the US.  Insofar as we source most of ourcases in Asia for shipment or delivery from Hong Kong, this may also have theeffect of reducing our freight and certain other handling costs at our HongKong facility.

**Diabetic Product Sales:**

We design to the order of, and sell directly to,OEMs carrying cases used by diabetics to carry their electronic monitoring kitsthat measure blood glucose levels. OEM customers for these carrying casesinclude Abbott Labs, Bayer, Lifescan (a subsidiary of Johnson & Johnson), TheraSenseand Roche.  Our cases are packaged with the monitoring kits that are soldby our OEM customers.

Sales of these cases decreased $537,000 or 19% to$2,353,000 in the 2004 Quarter compared to sales of $2,890,000 in the 2003Quarter due to lower sales to a number of customers.  We believe that thedeclines represent routine fluctuations in our customers order flow to us, aswell as variations in our product mix. We continue to experience strong demandfor our carrying cases for OEM diabetic monitoring kits in that sales ofdiabetes products in the 2004 Quarter represented 45% of our overall salescompared to 61% in the 2003 Quarter, in part due to the increase in cell phoneproduct sales revenues in the 2004 Quarter.

In April 2004, Abbot Laboratories announced that itcompleted its acquisition of TheraSense, which Abbott has indicated would bemaintained as a separate division when it originally announced the transactionin January 2004. While the consequences of an acquisition are unpredictable andthere can be no assurance that the acquisition will not result in changes in thetwo companies' product procurement, we believe that Abbott intends to grow thisportion of its business and that the acquisition will not adversely affect ourrelationships with the two customers. The combined sales of Abbot Laboratoriesand TheraSense accounted for approximately 13% and 18% of our net revenue inthe 2004 Quarter and 2003 Quarter, respectively.

** **

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**Cell Phone Product Sales:**Our cell phone products include carrying cases forhandsets and camera attachments, plastic belt clips, carrying case straps andbags, decorative faceplates and other attachments used to carry or enhance theappearance of cellular telephone handsets.  We sell these products directly tocell phone handset OEMs, including Motorola and Nokia.  Under the Motorolalicense agreement we also distribute our products directly to third partywholesalers and retailers in the EMEA Region.

Sales of cell phone carrying case products increased$919,000 or 70% to $2,229,000 in the 2004 Quarter from $1,310,000 in the 2003Quarter.  The increase was primarily attributable to the impact of sales toNokia in the 2004 Quarter, stronger sales under our Motorola license agreement,and a strong quarter generally in the worldwide market for cellular handsetsand accessories. Sales to Nokia in the U.S., Europe, and Asia in the 2004Quarter were $484,000, compared to the 2003 Quarter when there were no sales toNokia. In addition, sales to wholesalers and retailers under our Motorolalicense agreement increased $267,000 or 97% to $542,000 in the 2004 Quarterfrom $275,000 in the 2003 Quarter and direct sales to Motorola (including itssubsidiaries and affiliates) increased $157,000 or 15% to $1,190,000 in the2004 Quarter from $1,033,000 in the 2003 Quarter, bringing the total increasein sales of Motorola-related products (OEM and under the license) to $424,000. 

**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 customized products canvary from period to period without necessarily reflecting a significant trendin overall demand for these items. Sales of these products increased $105,000or 19% to $665,000 in the 2004 Quarter compared to sales of $560,000 in the2003 Quarter.

**Gross Profit**

Gross profit increased $315,000 or 21%, to $1,799,000in the 2004 Quarter from $1,484,000 in the 2003 Quarter as a result of thehigher sales volume and improved gross profit percentages. Our gross profitpercentage in the 2004 Quarter improved to 34% compared to 31% in the 2003Quarter, due to lower materials and shipping costs as a result of certaincustomers relocating their operations closer to our inspection facility. 

**Selling, General, and Administrative Expenses**

Selling expenses increased $64,000, or 9%, to$801,000 in the 2004 Quarter from $737,000 in the 2003 Quarter due to anincrease in selling personnel expense and royalty expense offset in part byreductions in other selling expense components. Selling personnel expensesincreased $94,000 in the 2004 Quarter compared to the 2003 Quarter primarilydue to the impact of the hire in October 2003 of a sales executive to pursueopportunities in the computer carrying case market and adjustments to sellingpersonnel salaries. Royalty expenses increased $13,000 in the 2004 Quartercompared to the 2003 Quarter primarily due to an increase in the minimumMotorola royalty commitment as provided in the license agreement, as amended.These increases were partially offset by lower advertising, travel, auto, andother expenses of $43,000 in the 2004 Quarter compared to the 2003 Quarter. Theratio of selling expenses to net sales of 15% in the 2004 Quarter remainedconsistent with the 2003 Quarter.

General and administrative expenses increased$36,000, or 6%, to $618,000 in the 2004 Quarter from $582,000 in the 2003Quarter due to an increase in personnel expenses of $48,000 due to personnelchanges and salary adjustments, offset in part by reductions in professionalfees and other general and administrative expenses. 

 

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**Income from Operations******

Income from operations increased $214,000 or 129% to$380,000 in the 2004 Quarter from $166,000 in the 2003 Quarter as a result ofimproved gross profit due to higher sales volumes and restraint in increases incost of sales components.

**Other Income (Expense)**

Total other income (expense) decreased $15,000 to$5,000 of expense in the 2004 Quarter from $10,000 of income in the 2003Quarter. The "Other income-net" component in the 2004 Quarter consisted of a$10,000 foreign currency loss and in the 2003 Quarter consisted of a $10,000 foreigncurrency gain and a $1,000 bad debt recovery. Because we had no borrowingsunder our bank lines of credit at any time during the 2004 Quarter, we incurredno interest expense during the 2004 Quarter, compared to $5,000 of interestexpense in the 2003 Quarter.

**IncomeTaxes**

Our provision for income taxes increased $32,000 inthe 2004 Quarter to $29,000, from a benefit of $3,000 in the 2003 Quarter.  Theprovision in the 2004 Quarter consists of estimated federal alternative minimumtax (AMT) and state income taxes. Other than federal AMT and state taxes, wedid not record a current provision for U.S. income taxes in the 2004 Quarter orthe 2003 Quarter as we have sufficient net operating tax loss carryforwardsavailable to offset our current U.S. taxable income. We have recorded avaluation allowance in respect of our deferred tax assets, and we will continueto monitor the likelihood of realization of the benefits of our deferred taxassets and may adjust the allowance in future periods as the benefit of theasset becomes more certain.

**Resultsof Operations for the 2004 Period compared to the 2003 Period**

Netincome in the 2004 Period was $1,027,000 compared to net income of $929,000 inthe 2003 Period, an increase of approximately $98,000 or 11% due primarily toan increase in gross profit and lower general and administrative expenses.Basic and diluted earnings per share were $0.17 and $0.16, respectively, forthe 2004 Period, compared to basic and diluted earnings per share of $0.16 inthe 2003 Period. Earnings per share were affected by the higher number ofweighted average number of shares outstanding in the 2004 Period: approximately6% basic and 9% diluted.

 

 

 

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**Net Sales**

Net sales increased $387,000 or 3% to $14,740,000 inthe 2004 Period compared to $14,353,000 in the 2003 Period.  The sales increasewas largely due to a stronger Euro compared to the U.S. Dollar in the 2004Period. The tables below set forth sales by product line and geographiclocation of our customers for the periods indicated:

| **Net  Sales for 2004 Period		9  Months ended June 30, 2004		(millions  of dollars)** |
|---------------------------------------------------------------------------------------|
| ** **                                                                            | **US** | **Europe** | **Other** | Total |
| Diabetic  Products                                                                    | $2.63 | $3.25 | $0.93 | $6.81 |
| Cell Phone  Products                                                                  | 1.79 | 3.64 | 0.87 | 6.30 |
| Other Product Sales                                                                   | 1.53 | 0.06 | 0.04 | 1.63 |
| **Total***                                                                            | **$5.95** | **$6.96** | **$1.83** | **$14.74** |

                               

| **Net  Sales for 2003 Period		9  Months ended June 30, 2003		(millions  of dollars)** |
|---------------------------------------------------------------------------------------|
| ** **                                                                            | **US** | **Europe** | **Other** | Total |
| Diabetic  Products                                                                    | $4.53 | $2.70 | $     -- | $7.23 |
| Cell Phone  Products                                                                  | 2.57 | 2.61 | 0.25 | 5.43 |
| Other Product Sales                                                                   | 1.52 | 0.01 | 0.17 | 1.70 |
| **Total***                                                                            | **$8.62** | **$5.32** | **$0.42** | **$14.36** |

* Tablesmay not total due to rounding.

Asindicated in the corresponding table for the 2004 Quarter, the table abovereveals a shift in some of our major customers, in both the diabetic products andcell phone products markets, of their sourcing from the United States to"Other"-mainly Asia, and a resultant shift in the geographic designation of theorigin of our customer revenues in the 2004 Period compared to the 2003Period.  As indicated above, this shift may not be permanent, but we believethat it represents a trend that we are seeing.  The improvement in results inEurope is the result of new orders from a cell phone customer in that area inthe 2004 Period as well as the currency impact of the weak US dollar relativeto the Euro.

**Diabetic Product Sales:**Sales of cases for blood glucose monitoring kitsdecreased $420,000 or 6% to $6,810,000 in the 2004 Period from $7,230,000 inthe 2003 Period. The results in this product area for the 2004 Period occurredduring a period of change for certain of our customers, as one customer shiftedproduction to Asia from the United States and the management of two other majorcustomers combined as a result of an acquisition. We continue to experiencestrong demand for our carrying cases for OEM diabetic monitoring kits as salesof diabetes products in the 2004 Period represented 46% and 50% of our overallsales in the 2004 and 2003 Periods, respectively.

The combined sales to Abbott Laboratories and TheraSense,the acquisition of which by Abbott was consummated in April 2004, accounted forapproximately 16% of our net revenue in the 2004 Period and 2003 Period.

**Cell Phone Product Sales:**Sales of cell phone carrying case products increased$871,000 or 16% to $6,303,000 in the 2004 Period from $5,432,000 in the 2003Period. The increase was due to higher sales to Nokia, particularly in Europe,where our overall net sales benefited from the strong Euro relative to the U.S.dollar, and higher sales to third parties under our Motorola license agreementthat were partially offset by lower OEM sales to Motorola. Nokia salesincreased $1,270,000 to $1,600,000 in the 2004 Period from $330,000 in the 2003Period, as our vendor relationship with Nokia improved. Sales to third partiesunder our Motorola license agreement increased $212,000 to $1,537,000 in the2004 Period from $1,325,000 in the 2003 Period. OEM sales to Motorola(including its subsidiaries and affiliates) of 3,154,000 were lower by $629,000in the 2004 Period from $3,783,000 in the 2003 Period, bringing the netdecrease in sales of Motorola-related products (OEM and under the license) to$417,000 in the 2004 Period.

** **

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**Other Product Sales:**Sales of other products decreased by $74,000, or 4%,to $1,626,000 in the 2004 Period compared to sales of $1,700,000 in the 2003Period. 

**Gross Profit**

Gross profit on sales increased $429,000 or 9%, to$4,953,000 in the 2004 Period from $4,524,000 in the 2003 Period as a result ofour higher sales volume. Our gross profit percentages were 34% and 32% in the2004 Period and the 2003 Period, respectively.  The improvement in the grossprofit percentage in the 2004 Period was due primarily to lower materials andshipping costs as a result of certain customers relocating their operationscloser to our inspection and sourcing facility.

**Selling, General, and Administrative Expenses**

Selling expenses increased $221,000, or 11%, to$2,210,000 in the 2004 Period from $1,989,000 in the 2003 Period due to anincrease in selling personnel expense and royalty expense, offset in part byreductions in other selling expense components. Selling personnel expensesincreased $253,000 in the 2004 Period compared to the 2003 Period primarily dueto the salary impact of the hire in October 2003 of a sales executive to pursuethe computer carrying case market, the employment of an additional salesrepresentative in our Swiss office, and adjustments to selling personnelsalaries. Royalty expenses increased $61,000 in the 2004 Period compared to the2003 Period due to an increase in the minimum Motorola royalty commitment asprovided in the license agreement, as amended. These increases were partiallyoffset by lower travel, advertising, auto, and other expenses of $93,000between the 2004 Period and the 2003 Period. The ratio of selling expenses tonet sales increased slightly to 15% in the 2004 Period from 14% in the 2003Period.

General and administrative expenses decreased$65,000, or 4%, to $1,636,000 in the 2004 Period from $1,701,000 in the 2003Period primarily due to a decline of $70,000 in wage, salary and consultingexpenses in the 2004 Period compared to the 2003 Period resulting from theDecember 2003 expiration of a consulting contract with our former chiefexecutive officer and staffing changes in our accounting department. Thedecrease in personnel expenses was partially offset by a net increase in othergeneral and administrative expenses of $5,000 between the 2004 Period and the2003 Period.

**Income from Operations******

Pretax income from operations increased $274,000 or33% to $1,108,000 in the 2004 Period from $834,000 in the 2003 Period as aresult of increased gross profit of $429,000 in the 2004 Period compared to the2003 Period and partially offset by $156,000 in higher selling, general andadministrative expenses, as more fully discussed above.

 

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**Other Income (Expense)**

Total other income (expense) decreased $93,000, or86%, to $15,000 of income in the 2004 Period from $108,000 of income in the2003 Period. The "Other income-net" component in the 2004 Period consisted of a$4,000 foreign currency gain and a $2,000 bad debt recovery, and in the 2003Period consisted of a $83,000 foreign currency gain and a $25,000 bad debtrecovery. Because the Company had no borrowings under its bank lines or anyother interest bearing debt, at any time during the 2004 Period, it incurred nointerest expense during the 2004 Period, compared to $7,000 of interest expensein the 2003 Period incurred in connection with a capital lease.

**IncomeTaxes**

Ourprovision for income taxes increased $81,000 in the 2004 Period to $95,000,from 14,000 in the 2003 Period.  The provision in the 2004 Period consistsentirely of estimated federal alternative minimum tax (AMT) and state incometaxes. Other than for federal AMT and state taxes, we did not record a currentprovision for U.S. income taxes in either period as we have sufficient netoperating tax loss carryforwards available to offset our current U.S. taxableincome. We have recorded a valuation allowance, and we will continue to monitorthe likelihood of realization of the benefits of our deferred tax assets andmay adjust the allowance in future periods as the benefit of the asset becomesmore certain.

**Liquidity and Capital Resources**

We generated $1,138,000 of cash from operations in the2004 Period, compared to $1,010,000 in the 2003 Period.  Operating cash flowsin the 2004 Period resulted primarily from net income of $1,027,000, adjustedfor non-cash items including a provision for obsolete inventory of $130,000 anddepreciation expense of $90,000, plus changes in our working capital accounts. The 2003 Period's operating cash flows included net income of $929,000 adjustedfor non-cash items including depreciation of $100,000, a provision for obsoleteinventory of $97,000, a loss on the sale of property, plant and equipment of$7,000 and deferred taxes of $3,000, plus changes in our working capitalaccounts. Improved collection time on accounts receivable resulted in adecrease in our accounts receivable balance of $111,000 in the 2004 Period. Theinventory balance increased $184,000 to meet demand for our products based onexisting sales orders, which accounted for the increase in the accounts payablebalance of $172,000 in the 2004 Period. Accrued liabilities decreased $178,000in the 2004 Period primarily as a result of performance bonuses that wereaccrued as of September 30, 2003, and paid in the 2004 Period. 

Investing activities used $116,000 in the 2004 Periodin connection with the purchase of computer equipment and software in additionto leasehold improvements to our Hong Kong office.  In the 2003 Period,investing activities used $52,000 for purchases of computer equipment andsoftware and generated $4,000 from the sale of property, plant, and equipment.

Financing activities generated $369,000 of proceeds inthe 2004 Period from the exercise of stock options and used $4,000 to purchase2,000 shares of our common stock in the open market pursuant to the stockbuyback program described below.  In the 2003 Period, financing activities used$92,000 to purchase 66,200 shares of our common stock in the open marketpursuant to the stock buyback program described below and $87,000 to makeprincipal payments on our capital lease obligations.

At June 30, 2004, our current ratio (current assetsdivided by current liabilities) was 4.2 and our quick ratio (current assetsless inventories divided by current liabilities) was 3.8. Our working capital(current assets less current liabilities) at June 30, 2004 was $6,028,000 andwe had no long-term debt. At September 30, 2003, our current ratio was 3.5 andour quick ratio was 3.1. Our working capital at September 30, 2003 was$4,665,000 and we had no long-term debt.

Our primary sources of liquidity are our operatingcash flow and our bank credit facilities. The primary demands on our workingcapital are: our accounts payable arising in the ordinary course of business,the most significant of which arise when our customers place orders and we, asa consequence thereof, order from our suppliers; and our commitments under ourlicense agreement with Motorola. Historically, our sources of liquidity havebeen adequate to satisfy working capital requirements arising in the ordinarycourse of business. However, it is possible that if one of our significantoriginal equipment manufacturer customers placed an unusually large order withus at a time when our credit facility could not accommodate the increaseddemands on our working capital, we might have to seek additional sources ofliquidity. Although there can be no assurance, we believe that, under suchcircumstances, we could obtain an increase in our credit facility or obtainnecessary funds under an additional facility.

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In March 2004, werenewed our bank credit facility that provides for an uncommitted line ofcredit in a maximum amount of $1.5 million, including a $1.0 million sublimitfor direct borrowings and bankers acceptances and a $500,000 sublimit forletters of credit.  The credit line is renewable annually at the discretion ofthe bank and expires on March 31, 2005. There are no financial ratios or otherrestrictive covenants associated with the credit facility. We are, however,required to maintain a consecutive 30-day period during the term of the creditfacility with zero borrowings, submit to periodic bank examinations andmaintain operating performance acceptable to the bank.  The credit line issecured by substantially all of Koszegi's assets. Amounts borrowed under thecredit facility bear interest at the bank's prime rate in effect fromtime-to-time (4.25% at June 30, 2004) plus one half of one percent. There areno fees payable in respect of undrawn balances under the credit facility. Thisis an uncommitted line of credit and there is no guarantee the bank will grantadditional cash advances under the line of credit to us if required, or thatour performance will remain satisfactory to the bank, or that the bank willrenew the credit facility. Although we believe that we could obtain alternatefinancing in the event of a loss of our current facility, there can be noassurance that such financing could be obtained and the failure to do so couldhave a material adverse affect on our liquidity and financial condition.  AtJune 30, 2004 and for the 18 months preceding, we had no borrowings under thecredit facility and no commitments for letters of credit and the entire creditline was available for our use. 

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 the facilitymay be structured as a term loan or loans, with a maximum repayment period of12 months, or as a guarantee facility, or any combination of the foregoing. Either party may terminate the facility at any time; however, such terminationwould not affect the stated maturity of term loans outstanding.  Amountsborrowed other than as a term loan must be settled quarterly or converted intoterm loans.  An intercompany balance owed by Forward Innovations to the Companysecures borrowings under the line, and the subsidiary has agreed to certaincovenants.  Amounts drawn under this credit facility bear interest at variablerates established by the bank (6.125% as of June 30, 2004).  Additionally, theCompany pays a credit commission of 0.25% of the maximum amount of credit usedduring a quarter. 

In July 2002, the Company and its European logisticsprovider (freight forwarding and customs agent) entered into a RepresentationAgreement whereby, among other things, the European logistics provider agreedto act as the Company'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 Company agreed to provide a bank guarantee tothe logistics provider with respect to any value added tax liability arising inThe Netherlands that the logistics provider paid on the Company's behalf, andin February 2004, the Company entered into a guarantee agreement with a Swissbank relating to the repayment of any amount up to €168,000 (approximately$205,000 as of June 30, 2004) paid by such bank to the logistics providerpursuant to a guarantee issued by the bank in favor of the logistics provider.The amount payable pursuant to the guarantee reduces the amount available underthe Company's credit facility.  The Company would be required to perform underthe guarantee only in the event that: (i) a value added tax liability isimposed in The Netherlands, (ii) the logistics provider asserts that it hasbeen called upon in its capacity as surety by the Dutch Receiver of Taxes topay such taxes, and (iii) the Company fails or refuses to remit the amount ofvalue added tax due to the logistics provider. On December 31, 2004 and onevery anniversary thereafter, the bank guarantee will be renewed automaticallyfor one-year periods until December 31, 2009. The Company has agreed to keep aguarantee in place for five years following the date its relationshipterminates with the logistics provider.

 

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Effective January 1,2001, the Company obtained a license for the use of certain trademarks ofMotorola, Inc. ("Motorola") for products to be sold throughoutEurope, the Middle East and Africa (the "EMEA Region").  Under theterms of the license agreement, as amended, the Company is required to payMotorola a royalty based upon a percentage of the Company's net sales to thirdparties of licensed products within the EMEA Region, subject to payment ofminimum royalties. The license requires the Company to make a minimumguaranteed royalty payment to Motorola of $408,000 for the contract periodOctober 1, 2003 to September 30, 2004.  If the Company elects to terminate thelicense before September 30, 2004, the Company would be required to pay thebalance, if any, of the minimum guarantee for the contract period in effect atthe date of cancellation. Net sales to third parties under the Motorola licenseagreement were $1,537,000 and $1,325,000 for the nine-month periods ended June30, 2004 and 2003, respectively.

The license agreementexpires on September 30, 2004.  We have entered into preliminary discussionswith Motorola regarding the terms of a proposed renewal of this agreement, and,while there can be no assurance as to the outcome of such discussions, webelieve that such discussions have been constructive.  Any failure to renew thelicense agreement or enter into a different agreement upon terms acceptable tous could have a material adverse affect on our results of operations andfinancial condition. In addition, while we believe that our commercialrelationship with Motorola is good, if we are unable to renew the licenseagreement or enter into a different agreement upon terms acceptable to us, wecannot predict how this would affect OEM sales to Motorola.  See "Item 6.Management's Discussion and Analysis-Risk Factors" in our Annual Report on Form10-KSB for the fiscal year ended September 30, 2003. 

TheCompany did not incur any long-term debt in the 2004 Period and at June 30,2004 we had no long-term debt.

OnSeptember 27, 2002, our Board of Directors authorized the repurchase of up to400,000 shares of our outstanding common stock, or approximately 7% of thenumber of shares then outstanding. On January 21, 2004, our Board increased theamount of shares authorized for repurchase to 486,200. As of June 30, 2004, wehave repurchased an aggregate of 68,200 shares at a cost of approximately$96,000, including 2,000 shares during the 2004 Period at a cost ofapproximately $4,000.

**Contractual Obligations andCommercial 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 June 30,2004:

| **Contractual  Obligation or Commitment** | **Jul 04 - June 05**        | **Jul 05- June 07**                                | **Jul 07 - June 09**                                                                      | **Thereafter**                                                                |
|-------------------------------------------|-----------------------------|----------------------------------------------------|-------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------|
| Employment & Consulting Agreements    | $    680,000 | $    340,000                        | $              		-- | $            		-- |
| Operating Leases                          | 196,000                     |         176,000 | --                                                                                        | --                                                                            |
| License Agreement**                       | 102,000                     | --                                                 | --                                                                                        | --                                                                            |
| Totals                                    | $    978,000 | $   516,000                              | $              --             | $             --  |

**The amounts shown as license agreement obligations represent the minimum amountthe Company will incur as a royalty expense for the period shown under theexisting license, which expires on September 30, 2004.  If the Motorola licenseagreement is renewed or extended, the contractual obligation for the periodsshown will change, and the amounts to be disclosed in the table will depend onthe terms of such 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**.  

Inaccordance with Exchange Act Rules 13a-15 and 15d-15, our management, withthe participation of our Chief Executive Officer and Chief Financial Officer,performed an evaluation of the effectiveness of the Company's disclosurecontrols and procedures as of the end of the period covered by this QuarterlyReport. Based on that evaluation, the Company's Chief Executive Officer andChief Financial Officer concluded that the Company's disclosure controls andprocedures were effective, as of the end of the period covered by thisQuarterly Report, to provide reasonable assurance that information required tobe disclosed in the Company's reports filed or submitted under the Exchange Actis recorded, processed, summarized and reported within the time periodsspecified in the Commission's rules and forms. 

**Changes in internal controls**.  

Our management, with the participation our Chief Executive Officer and Chief Financial Officer, performed an evaluation as to whether any change in our internal controls over financial reporting (as defined in Rule 13a-15 and 15d-15 under the Exchange Act) occurred during the 2004 Period.  Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that no change occurred in the Company's internal controls over financial reporting during the 2004 Period 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 4.        SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS

The Company held its Annual Meeting of Shareholderson April 21, 2004. The following matters were voted upon at the Annual Meetingof Shareholders:

1.       Election of a Board of Directors

|                   |  | Number of Shares                  |
|-------------------|--|-----------------------------------|
| Name              |  | For      |  | Withheld      |
| Jerome Ball       |  | 5,700,460                         |  | 13,332 |
| Bruce Galloway    |  | 5,602,260                         |  | 111,532 |
| Edwin Levy        |  | 5,602,260                         |  | 111,532 |
| Norman Ricken     |  | 5,602,260                         |  | 111,532 |
| Michael Schiffman |  | 5,700,460                         |  | 13,332 |

 

The directors named abovecomprise all of the sitting directors of the Company.

2.   Ratification of the appointment of Ernst & Young LLP as theindependent auditors and accountants for the Company for the Fiscal Year endingSeptember 30, 2004.

|                                                                                                                |  | Number of Shares |
|----------------------------------------------------------------------------------------------------------------|--|------------------|
| Name                                                                                                           |  | For              |  | Against |  | Abstain |
| Ratify Ernst &  Young LLP as the Company's Auditor for the Fiscal Year ending September 30,  2004......... |  | 5,604,355        |  | 105,825 |  | 3,612 |

ITEM 6.       EXHIBITS AND REPORTS 

(a) Exhibits filed herewith:

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

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

32.1 Certifications of the ChiefExecutive Officer and Chief Financial Officer under Section 906 of theSarbanes-Oxley Act of 2002

(b) Reports on Form 8-K 

               1. Form 8-K, (Items 5, 7and 12), press release announcing the Registrant's results of operations forthe three month period ended March 31, 2004, filed on April 21, 2004.

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**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, hereuntoduly authorized.

Dated:  July 21, 2004

FORWARDINDUSTRIES, INC.                 (Registrant)

 

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

 

 

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

 

 

 

 

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