----

**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, 2003.

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                                   (State or other jurisdiction of incorporation or organization) |               13-1950672                   (I.R.S. Employer  Identification No.)    
                   1801  Green Rd., Suite E, Pompano Beach, FL               (Address of principal executive offices)

                                    33064                                      (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 22, 2003,  5,759,441shares of Common Stock were outstanding.

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

1

 

 

 

 

**FORWARDINDUSTRIES, INC. AND SUBSIDIARIESFORM 10-QSBTHREEAND NINE MONTH PERIODS ENDED JUNE 30, 2003 CONTENTS**

PAGE

**PART  I**

** **

**FINANCIAL  INFORMATION**

** **

Item  1.

Financial  statements 

     Consolidated Balance Sheets as of June 30, 2003 (Unaudited)

     and September 30, 2002............................................................................................................  

3
   
     Unaudited Consolidated Statements of Income for the Three and Nine

     Months Ended June 30, 2003 and 2002.................................................................................  

4
   
     Unaudited Consolidated Statements of Cash Flows for the Nine

     Months Ended June 30, 2003 and 2002.................................................................................  

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.............................................................................................................  

20
   
**PART  II**

** **

**OTHER  INFORMATION**

** **
   
Item  1.

Legal  Proceedings........................................................................................................................  

21
   
Item  2.

Changes  in Securities...................................................................................................................  

21
   
Item  3.

Defaults  upon Senior Securities.................................................................................................  

21
   
Item  4.

Submission  of Matters to a Vote of Security Holders............................................................  

21
   
Item  5.

Other  Information.........................................................................................................................  

21

Item  6.

Exhibits  and Reports on Form 8-K.............................................................................................  

22
   
Signatures......................................................................................................................................  

23
   
Certifications.................................................................................................................................  

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 our whollyowned subsidiary Koszegi Industries Inc., an Indiana corporation; "Commission"refers to the United States Securities and Exchange Commission; and "ExchangeAct" refers to the United States Securities Exchange Act of 1934.

2

**PART I.   FINANCIAL INFORMATION**
ITEM 1.  FINANCIAL STATEMENTS
**FORWARD INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**

June 30,

September 30,

2003

2002

**ASSETS**

(Unaudited)

 

Current assets:

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

$    1,990,139

 $    1,207,311 

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

2,985,960

2,680,916 

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

648,910

718,986 

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

200,179

219,124 

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

15,500

15,500 

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

5,840,688

4,841,837

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

283,125

341,187

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

161,700

164,500 

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

41,337

41,337

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

$   6,326,850

 $    5,388,861 

**LIABILITIES AND STOCKHOLDERS' EQUITY**

Current liabilities:

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

$   1,118,389

 $    1,306,381 

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

667,485

291,984 

   Current portion of capital lease obligations................................................................  

--

27,814 

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

1,785,874

1,626,179 

Long term portion of capital lease obligations...............................................................  

--

58,751 

Commitments and contingencies

Stockholders' equity:

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

--

--

   Common stock, 40,000,000 authorized shares, par value $.01;  6,286,531

      shares issued (including 527,090 and 460,890 shares, respectively,  held in         treasury).........................................................................................................................  

62,865

  62,865 

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

8,251,780

8,251,780

   Accumulated deficit........................................................................................................  

(3,000,233)

(3,928,827)

5,314,412

4,385,818

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

(773,436)

(681,887)

      Total stockholders' equity...........................................................................................  

4,540,976

3,703,931 

**TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY**........................................  

$  6,326,850

 $    5,388,861 

The accompanying notes are an integral part of theconsolidated financial statements

3

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

** **

Three Months Ended

Nine Months Ended

June 30,  

June 30, 

2003

2002

2003

2002

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

$    4,758,073

$   4,051,225

$  14,353,273

$  12,279,901

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

3,273,658

2,492,811

9,829,338

7,969,936

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

1,484,415

1,558,414

4,523,935

4,309,965

Operating expenses:

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

736,533

704,067

1,988,542

2,160,367

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

581,768

704,081

1,701,126

1,741,119

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

1,318,301

1,408,148

3,689,668

3,901,486

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

166,114

150,266

834,267

408,479

Other income (expense):

Interest expense....................................................  

(4,759)

(12,122)

(7,448)

(47,998)

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

3,111

3,165

            7,949    

      14,419

Other income.........................................................  

11,248

88,002

107,626

63,104

Total other income  (expense).......................... 

9,600

79,045

108,127

29,525

Income before income taxes..........................................  

175,714

229,311

942,394

438,004

Provision (benefit) for  income taxes............................ 

(2,600)

(19,400)

13,800

--

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

$       178,314

$       248,711

$       928,594

$       438,004

Net income per common and  common equivalent      share

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

$             0.03

$             0.04

$             0.16

$             0.08

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

$             0.03

$             0.04

$             0.16

$             0.08

Weighted average number of  common and      common equivalent shares outstanding

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

5,773,441

5,825,641

5,790,374

5,825,641

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

5,954,442

5,825,641

5,907,426

5,825,641

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

4

 

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

** **

Nine Months Ended June 30,

     2003

2002

CASH FLOW FROM OPERATING  ACTIVITIES:

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

$        928,594

$        438,004

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

Loss  on sale of property, plant and equipment.................................................  

7,055

21,025

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

99,850

95,497

Deferred  taxes.........................................................................................................  

2,800

--

     Changes in operating assets and  liabilities:

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

(305,044)

(554,658)

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

70,076

(281,130)

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

18,945

99,693

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

--

(15,435)

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

(187,992)

202,725

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

375,501

146,188

NET CASH  PROVIDED BY OPERATING ACTIVITIES...............................................  

1,009,785

151,909

CASH FLOW FROM INVESTING  ACTIVITIES:

Proceeds from sale of  property, plant and equipment...............................................  

3,591

158,450

Proceeds from officer loan  repayments........................................................................  

--

18,864

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

(52,434)

(4,106)

NET CASH (USED IN) PROVIDED  BY INVESTING ACTIVITIES........................... 

(48,843)

173,208

CASH FLOW FROM FINANCING  ACTIVITIES:

Payments of short-term  borrowings.............................................................................  

--

(900,000)

Principal payments on  capital lease obligations.........................................................  

(86,565)

(19,360)

Purchase of treasury shares...........................................................................................  

(91,549)

--

NET CASH USED IN  FINANCING ACTIVITIES........................................................

(178,114)

(919,360)

NET INCREASE (DECREASE) IN  CASH AND CASH EQUIVALENTS

782,828

(594,243)

CASH AND CASH  EQUIVALENTS - beginning of period..........................................  

1,207,311

1,376,572

CASH  AND CASH EQUIVALENTS - end of period.................................................  

$    1,990,139

$        782,329

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

5

FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2003(UNAUDITED)

1.         BASIS OF PRESENTATION

The accompanying unaudited consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States for interim financial information, withthe Securities and Exchange Commission instructions to Form 10-QSB and Article10 of Regulation S-X.  Accordingly, they do not include all the information andfootnotes required by accounting principles generally accepted in the UnitedStates for complete financial statements.  In the opinion of management, alladjustments (consisting of normal recurring accruals) considered necessary fora fair presentation have been included.  Operating results for the three andnine-month periods ended June 30, 2003 are not necessarily indicative of theresults that may be expected for the fiscal year ending September 30, 2003.

The consolidated balance sheet at September 30, 2002has been derived from the audited consolidated financial statements at thatdate, but does not include all of the information and footnotes required byaccounting principles generally accepted in the United States for completefinancial 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, 2002 and should be read in conjunction with the disclosurespresented therein.  

Certain reclassifications of the prior periodfinancial statements have been made to conform to the current periodpresentation.

The Company did not have anymaterial components of other comprehensive income other than net income.

This quarterly reportcontains forward-looking statements that involve certain risks anduncertainties. Important factors could arise, including those discussed inManagement's Discussion and Analysis of Financial Condition and Results ofOperations set forth in this quarterly report on Form 10-QSB and thoseidentified in "Risk Factors" in the Company's annual report on Form 10-KSB forthe year ended September 30, 2002, which could cause the Company's futureoperating results to differ materially from those set forth in any forwardlooking statement.  
**RecentAccounting Pronouncements**
In August 2001, the Financial AccountingStandards Board (the "FASB") issued Statement of Financial Standards No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*(Statement). TheStatement supersedes FASB Statement No. 121, *Accounting for the Impairmentof Long-Lived Assets and for Long-Lived Assets to be Disposed Of*(FAS 121);however it retains the fundamental provisions of that statement related to therecognition and measurement of the impairment of long-lived assets to be"held and used." In addition, the Statement provides more guidance onestimating cash flows when performing a recoverability test, requires that along-lived asset (group) to be disposed of other than by sale (e.g., abandoned)be classified as "held and used" until it is disposed of, and establishesmore restrictive criteria to classify an asset (group) as "held forsale." 

The Statement also supersedes the accounting andreporting provisions of Accounting Principles Board Opinion No. 30, *Reportingthe Results of Operations-Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions* (APB 30), for the disposal of a segment of a business andwould extend the reporting of a discontinued operation to a "component ofan entity." Further, the Statement requires operating losses from a"component of an entity" to be recognized in the period(s) in whichthey occur (rather than as of the measurement date as previously required byAPB 30). The Company adopted SFAS 144 effective October 1, 2002, and it did nothave an impact on the Company's current financial position or results ofoperations.

 

6

FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2003(UNAUDITED)
**RecentAccounting Pronouncements  (continued)**
In July 2002, the FASB issued SFAS No. 145, *Rescissionof FASB Statements Nos. 4, 44 and 62, Amendment of SFAS No. 13 and TechnicalCorrections*. For most companies, SFAS 145 will require gains and losses onextinguishments of debt to be classified as income or loss from continuingoperations rather than as extraordinary items as previously required under SFAS4. Extraordinary treatment was required for certain extinguishments as providedin APB Opinion No. 30. The statement also amended SFAS 13 for certainsale-leasebacks and sublease accounting. We adopted the provisions of SFAS 145effective October 1, 2002and it did not have an impact on the Company's current financial position orresults of operations.

InJuly 2002, the FASB issued SFAS No. 146, *Accounting for Costs Associatedwith Exit or Disposal Activities*. This Statement addresses financial accountingand reporting for costs associated with exit or disposal activities andnullifies Emerging Issues Task Force (EITF) Issue No.94-3, *LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity* (including Certain Costs Incurred in a Restructuring). ThisStatement applies to costs associated with an exit activity that does notinvolve an entity newly acquired in a business combination or with a disposalactivity covered by SFAS No. 144, *Accounting for the Impairment or Disposalof Long-Lived Asse*ts. These costs include, but are not limited to:termination benefits provided to current employees that are involuntarilyterminated under the terms of a benefit arrangement that, in substance, is notan ongoing benefit arrangement or an individual deferred compensation contract,costs to terminate a contract that is not a capital lease and costs toconsolidate facilities or relocate employees. This Statement does not apply tocosts associated with the retirement of a long-lived asset covered by SFAS No.143, *Accounting for Asset Retirement Obligations*. This statement wasadopted effective January 1, 2003, and it did not have an impact on theCompany's current financial position or results of operations.

In November 2002, the FASB issued Interpretation No.45, *"Guarantor's Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others"* (*"FIN45"*). FIN 45 requires that certain guarantees be initially recorded atfair value, which is different from the general current practice of recording aliability only when a loss is probable and reasonably estimable. FIN 45 alsorequires a guarantor to make significant new disclosures for virtually allguarantees. The Company adopted the disclosure requirements under FIN 45 forthe quarter ended June 30, 2003 and will adopt the initial recognition andinitial measurement provisions for any guarantees issued or modified after June30, 2003. The adoption of FIN 45 did not, and is not, expected to have amaterial impact on the results of operations or financial position of theCompany.

On December 31, 2002, the FASB issuedSFAS No. 148, *Accounting for Stock-Based Compensation - Transition andDisclosure*.  SFAS 148 amends FASB Statement No. 123, *Accounting forStock-Based Compensation*, to provide alternative methods of transition toSFAS 123's fair value method of accounting for stock-based employeecompensation.  SFAS 148 also amends the disclosure provisions of SFAS 123 andAPB Opinion No. 28, *Interim Financial Reporting*, to require disclosurein the summary of significant accounting policies of the effects of an entity'saccounting policy with respect to stock-based employee compensation on reportednet income and earnings per share in annual and interim financial statements. While SFAS 148 does not amend SFAS 123 to require companies to account foremployee stock options using the fair value method, the disclosure provisionsof SFAS 148 are applicable to all companies with stock-based employee compensation,regardless of whether they account for that compensation using the fair valuemethod of SFAS 123 or the intrinsic value method of APB Opinion 25.  TheCompany adopted the required disclosure provisions of SFAS No. 148 effectiveJanuary 1, 2003, and its application did not have an impact on the Company'scurrent financial position or results of operations.  See Note 7.

 

7

FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2003(UNAUDITED)
**Recent AccountingPronouncements  (continued)**
In January 2003, the FASB issuedInterpretation No. 46, *"Consolidation of Variable Interest Entities -an Interpretation of ARB No. 51"* (*"FIN 46"*), whichaddresses consolidation of variable interest entities. FIN 46 expands thecriteria for consideration in determining whether a variable interest entityshould be consolidated by a business entity, and requires existingunconsolidated variable interest entities (which include, but are not limitedto, Special Purpose Entities, or SPEs) to be consolidated by their primarybeneficiaries if the entities do not effectively disperse risks among partiesinvolved. This interpretation applies immediately to variable interest entitiescreated after January 31, 2003, and to variable interest entities in which anenterprise obtains an interest after that date. It applies in the first fiscalyear or interim period beginning after June 15, 2003, to variable interestentities in which an enterprise holds a variable interest that it acquiredbefore February 1, 2003. The adoption of FIN 46 is not expected to have amaterial impact on the results of operations or financial position of theCompany.

In May 2003, the FASB issued SFAS No. 149, "*Amendmentof Statement 133 on Derivative Instruments and Hedging Activities*."SFAS No. 149 amends and clarifies accounting for derivative instruments,including certain derivative instruments embedded in other contracts, and forhedging activities under SFAS No. 133. SFAS No. 149 is effective for contractsentered into or modified after June 30, 2003 and for hedging relationshipsdesignated after June 30, 2003. The Company does not believe that the adoptionof SFAS No. 149 will have a material impact on its consolidated financialstatements.

In May 2003, the FASB issued SFAS No. 150, "*Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity*." SFAS No. 150 establishes standards for how companies classifyand measures certain financial instruments with characteristics of bothliabilities and equity. It requires companies to classify a financialinstrument that is within its scope as a liability (or an asset in somecircumstances). SFAS No. 150 is effective beginning with the second quarter offiscal 2004; the Company does not believe the adoption of SFAS No. 150 willhave a material impact on its consolidated financial statements.

               

2.             CREDIT FACILITIES

In September 2002, the Company renewed its creditfacility with a bank that provides for a maximum uncommitted line of credit of$1.5 million, including $500,000 for letters of credit. The line is renewableannually at the discretion of the bank and expires March 31, 2004. The Companyis required to eliminate borrowings for thirty consecutive days during the termof the facility and is required to maintain operating performance that isacceptable to the bank.  The Company completed its thirty-day period with noborrowings in October 2002. Amounts drawn under the credit facility bearinterest at the bank's prime rate (4.00% as of June 30, 2003) in effect fromtime-to-time plus one half of one percent and are secured by a portion of a subsidiary'sassets. There are no fees with respect to undrawn balances. There have been nodrawings or payments during the nine months ended June 30, 2003 and at June 30,2003, there were no outstanding borrowings or letters of credit obligationsunder this facility.

In February 2003, theCompany, through a foreign subsidiary, established an additional creditfacility with a bank that provides for a maximum uncommitted line of credit of$400,000.  Amounts borrowed under the facility may be structured as either termloans, with a maximum repayment period of 12 months, or as a guaranteefacility, or any combination of the foregoing.  The bank or the Company mayterminate the facility at any time; however, such termination would not affectthe stated maturity of term loans outstanding.  Amounts borrowed as a revolvingline of credit must be settled quarterly or converted into term loans.  Anintercompany balance owed by the subsidiary to the Company secures borrowingsunder the line and the subsidiary has agreed to certain covenants.  Amountsdrawn under this credit facility bear interest at variable rates established bythe bank (5.1% as of June 30, 2003).  Additionally, the Company pays a creditcommission of 0.25% of the maximum amount of credit used during a quarter. Thiscredit facility has not been used. Therefore, at June 30, 2003, there were nooutstanding borrowings under this credit facility.

8

FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2003(UNAUDITED)

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 manufacturers of these electronic devicessuch as wireless telecommunications handsets and medical equipment.  Geographiclocations are determined based primarily on the location of the customer.  Information by geographic location is as follows:

**Revenues from external customers (allamounts in millions):**

Three Months Ended

Nine Months Ended

June 30,

June 30,

2003

2002

2003

2002

United  States...................... 

$   2.94

$   1.81

$    8.61

$   4.72

Europe.................................  

1.80

1.81

5.32

6.87

Other....................................  

0.02

0.43

0.42

0.69

Total  net sales................ 

$   4.76  

$  4.05

$   14.35

$   12.28

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, 2002 were $0.84 and $0.93, respectively, which were below the exerciseprice of any options outstanding. Accordingly, no exercise or dilution ispresumed to have occurred in those periods.  In the three and nine monthperiods ended June 30, 2003, the average quoted market prices of the Company'scommon stock were $1.87 and $1.54, respectively.  Calculation of dilutedearnings per share is as follows:

Three Months Ended June 30,

Nine Months Ended June 30,

2003

2002

2003

2002

Numerator:

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

$        178,314

$           248,711

$      928,594

$        438,004

Denominator:

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

5,773,441

5,825,641

 5,790,374

5,825,641

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

181,001

**

117,052

**

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

5,954,442

5,825,641

5,907,426

5,825,641

Net income per common share

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

$               0.03

$                0.04

$               0.16

$                0.08

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

$               0.03

$                0.04

$               0.16

$                0.08

Shares excluded due to antidilution

1,588,750

2,374,625

1,588,750

2,374,625

       

9    

FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2003(UNAUDITED)

 EARNINGS PER SHARE (CONTINUED)

** No dilutive common equivalent shareswere outstanding because the average price of our common stock, as quoted onthe NASDAQ SmallCap Market, was below the exercise price of all outstandingoptions and warrants in this period. 

5.            INCOME TAXES

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

Three Months Ended

Nine Months Ended

June 30,

June 30,

U.S. Federal  and State:

2003

2002

2003

2002

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

$             --

$                --

$            --

$            --

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

--

--

--

--

Foreign:

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

(2,600)

(19,400)

16,600

--

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

--

--

(2,800)

--

Income tax provision (benefit) 

  $(2,600)  

$ (19,400)

$   13,800

--

In June 2001, theCompany established a wholly owned subsidiary in Switzerland to engage inmarketing and distribution activities throughout Europe, the Middle East andAfrica. At June 30, 2003, the subsidiary had cumulative undistributed earningsof $115,000.  The Company considers its investment in the subsidiary to be permanent.  Accordingly, no provision has been made for U.S. federal income taxes onundistributed foreign earnings.  

The Company also has not recorded a provision forU.S. income taxes on its U.S. source income because it has, as a component ofits deferred tax assets, sufficient net operating tax loss carryforwardsavailable to offset its current U.S. taxable income. The Company has recorded avaluation allowance to reduce its deferred tax assets to their net realizablevalue. The Company will continue to monitor the likelihood of realization ofthe benefits of its deferred tax assets and may adjust the valuation allowancein future periods as the benefit of the asset becomes more certain. 

10

FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2003(UNAUDITED)

6.            COMMITMENTS ANDCONTINGENCIES
Royalty Commitments
TheCompany has licensed the use of certain trademarks of Motorola, Inc.("Motorola") for products to be sold throughout Europe, the MiddleEast and Africa (the "EMEA Region") effective January 1, 2001.  Underthe terms 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. The license provides forminimum guaranteed royalty payments by the Company to Motorola over three contractperiods as follows:
-  $665,000 for the contract periodJuly 1, 2001 to September 30, 2002 
-  $332,000 for the contract periodOctober 1, 2002 to September 30, 2003 
-  $408,000 for the contract periodOctober 1, 2003 to September 30, 2004 

If the Company electsto terminate the license before September 30, 2004, the Company would berequired to pay the balance, if any, of the minimum guarantee for the contractperiod in effect at the date of cancellation.

The minimum royaltycommitments are recognized as an expense over the applicable contract period. The Company recorded royalty expense of $83,000 and $170,000 for thethree-month periods ended June 30, 2003 and 2002, respectively, and $249,000and $510,000 for the nine-month periods ended June 30, 2003 and 2002,respectively, which are included as a component of selling expense in theaccompanying consolidated statements of income.
Legal Proceedings
In October 2001, theCompany initiated an action against Royal Industries, Inc. (Royal) in the KingsCounty Supreme Court of New York, asserting causes of action for conversion andunjust enrichment.  The Company alleges that, without consent or authority ofthe Company, and with full knowledge of the Company's rights under a securityagreement, Royal wrongfully took possession of certain assets in which theCompany had a properly perfected security interest.  The Company seekscompensatory damages of $1 million.  Royal has filed a counterclaim against theCompany alleging abuse of process and harassment, and is seeking an award ofpunitive damages in the amount of $1 million.  Although the parties have madediscovery demands, neither has complied, having each interposed objections tothe nature and scope of the discovery sought, and the action has remainedessentially dormant since service of the answer on November 5, 2001.  Nodepositions have been held, no judicial intervention in the discovery disputehas been sought, and no trial has been scheduled or is likely to be scheduledin the foreseeable future. To date, efforts to resolve the matter bynegotiation have not borne fruit, yet Royal declines to prosecute itscounterclaims.  After consultation with the Company's legal counsel, managementbelieves the case is without merit and it does not appear reasonably possiblethat Royal's counterclaims will result in material losses. As such, the Companyhas not recorded any amounts due from or payable to Royal in connection withthis matter. 

7.            ACCOUNTING FORSTOCK-BASED COMPENSATION
 
In December 2002, the FASB issued SFAS No. 148, *Accountingfor Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS123*, which provides alternative methods for a voluntary change to the fairvalue method of accounting for stock-based employee compensation and amends thedisclosure requirements of SFAS 123. The Company has elected to continue toaccount for its stock-based employee compensation plans under APB Opinion 25, *Accountingfor Stock Issued to Employees*, and related interpretations. The followingdisclosures are provided in accordance with SFAS 148.

 

11

 

FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2003(UNAUDITED)

 

 

ACCOUNTING FOR STOCKBASED COMPENSATION (CONTINUED) 

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 June 30,2003 and 2002, 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

Nine Months Ended

June 30,

June 30,

2003

2002

2003

2002

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

$   178,314  

$   248,711

$   928,594  

$   438,004  

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

78,017

72,426

138,785

226,880

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

$  100,297

$ 176,285

$  789,809

$  211,124

Earnings per share:

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

$       0.03

$        0.04

$       0.16

$        0.08

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

$       0.02

$        0.03

$       0.14

$        0.04

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

$       0.03

$        0.04

$       0.16

$        0.08

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

$       0.02

$        0.03

$       0.13

$        0.04

The fair value of theabove stock-based compensation costs was determined using the Black-Scholesoption valuation model.  The Black-Scholes option valuation model was developedfor use in estimating the fair value of traded options, which have no vestingrestrictions, are fully transferable and does not include a discount for largeblock trades.  In addition, option valuation models require the input of highlysubjective assumptions including the expected stock price volatility, expectedlife of the option and other estimates.  Because the Company's employee stockoptions have characteristics significantly different from those of tradedoptions, and because changes in the subjective input assumptions can materiallyaffect the fair value estimate, in management's opinion, the existing models donot necessarily provide a reliable single measure of the fair value of itsemployee stock options.

 

 

 

12

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

Thefollowing discussion and analysis should be read in conjunction with theCompany's Unaudited Consolidated Financial Statements and the notes theretoappearing elsewhere in this Report.  This Report contains statements thatconstitute forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995.  The Company cautions thatforward-looking statements are not guarantees of future performance and involverisks and uncertainties (including those identified in "Risk Factors" in theCompany's Form 10-KSB for the year ended September 30, 2002) and that actualresults may differ materially from the estimates or forecasts set forth in thestatements that constitute forward-looking statements as a result of variousfactors.

The following discussion and analysis compares ourconsolidated results of operations for the three months ended June 30, 2003(the "2003 Quarter"), with the three months ended June 30, 2002 (the "2002Quarter"), and the nine months ended June 30, 2003 (the "2003 Period"), and thenine months ended June 30, 2002 (the"2002 Period"), and is based on or derivedfrom the Unaudited Consolidated Financial Statements included elsewhere in thisReport. There have been no material changes in critical accounting estimatessince September 30, 2002.  All figures in the following discussion arepresented on a consolidated basis. All dollar amounts and percentages presentedherein have been rounded to approximate values.

**Results of Operations for the 2003Quarter compared to the 2002 Quarter**

Our net income in the 2003 Quarter was$178,000 compared to net income of  $249,000 in the 2002 Quarter, a decrease of$71,000 or 29%.  Basic and diluted earnings per share were $0.03 for the 2003Quarter compared to $0.04 per share in the 2002 Quarter.

**Sales**

Net sales increased by $707,000 or 17% to $4.76million in the 2003 Quarter compared to $4.05 million in the 2002 Quarter.  Thetables below set forth approximate sales by product line and geographiclocation of our customers for the 2003 and 2002 Quarters.

**Sales  for 2003 Quarter  3  Months ended June 30, 2003  (millions  of dollars)**

** **

**US**

**Europe**

**Other**

Total

Cell Phone Products

$0.56

$0.75

--

$1.31

Diabetic  Products

1.84

1.05

--

2.89

Other Product Sales

0.54

--

0.02

0.56

**Total***

**$2.94**

**$1.80**

**$0.02**

**$4.76**

**Sales  for 2002 Quarter   3  Months ended June 30, 2002  (millions  of dollars)**

** **

**US**

**Europe**

**Other**

Total

Cell Phone Products

$0.29

$1.19

$0.37

$1.85

Diabetic  Products

0.82

0.61

--

1.43

Other Product Sales

0.70

0.01

0.06

0.77

**Total***

**$1.81**

**$1.81**

**$0.43**

**$4.05**

* Tables may not total due to rounding.

13

 

**Cell Phone Product Sales:**Our cell phone products include carryingcases, carrying straps, faceplates and other decorative attachments used tocarry or enhance the appearance of various cellular telephones.  We sell theseproducts directly to cell phone original equipment manufacturers ("OEM") suchas Motorola and Nokia and also distribute our products directly to wholesalersand retailers in the Europe, Middle East and Africa ("EMEA") region under alicense agreement with Motorola. 

The 2003 Quarter's cell phone product salesconsisted entirely of Motorola products that were sold directly to Motorola foruse in their marketing efforts, or were sold to wholesalers and retailers underour Motorola license agreement.  We expect shipments to Nokia, our other maincell phone customer, to resume in our next fiscal quarter.

Overall sales of our cell phone products declined$540,000 from $1.85 million in the 2002 Quarter, to $1.31 million in the 2003Quarter. The majority of the sales decrease is attributed to soft demand forour Motorola licensed products.  Sales to wholesalers and retailers under ourMotorola license agreement declined $410,000 from $685,000 in the 2002 Quarterto $275,000 in the 2003 Quarter.  Direct sales to Motorola, including theirsubsidiaries and affiliates, partially offset the decline in licensed productsales and increased $220,000 to $1.03 million in the 2003 Quarter from $810,000in the 2002 Quarter.  The remaining decrease is a result of shipments made byus to Nokia in the 2002 Quarter to meet demand for a new product launch.  Nosuch sales were made in the 2003 Quarter. 

**Diabetic Product Sales:**We design and sell a line of carrying cases used bypeople with diabetes to carry their insulin and other diabetic monitoringequipment such as blood glucose monitors. We sell these cases directly tomanufacturers of this equipment such as Abbott Labs, Bayer, Lifescan (asubsidiary of Johnson & Johnson), Therasense and Roche.  Thesemanufacturers include our cases with their product shipments.

Sales of these cases increased $1.46 million to$2.93 million in the 2003 Quarter compared to sales of $1.43 million in the2002 Quarter. We are experiencing strong demand for our diabetic cases frommost of our OEM customers and it is the reason for our overall increase inrevenues.  Sales of diabetes products in the 2003 Quarter represented 61% ofour overall sales compared to 35% in the 2002 Quarter, in part due to thedecrease in cell phone product sales revenues in the 2003 Quarter.

**Other Product Sales:**We design and sell a number of other carryingsolutions such as camera bags, sporting goods and other carrying solutions foran assortment of products on a made-to-order basis that are customized to meetthe individual needs of our customers.  By their nature, sales of ourcustomized products can vary from period to period without reflecting asignificant trend in the overall demand for these items.  Sales of theseproducts declined by $210,000 to $560,000 in the 2003 Quarter compared to salesof $770,000 in the 2002 Quarter.

**Gross Profit**

 Our gross profit decreased $74,000, or 5% to $1.48million in the 2003 Quarter from $1.56 million in the 2002 Quarter, despite anapproximate 17% increase in our sales.  Our gross profit as a percentage ofsales fell to 31% in the 2003 Quarter from 38% in the 2002 Quarter.  Theproduct mix of our sales affects our gross profit margin, as we generallyreceive a lower margin on diabetic products than on cell phone products.Diabetic products comprised the majority of our 2003 Quarter's sales and, whencombined with the lower sales of licensed cell phone products, resulted in anoverall lower gross profit for the quarter.  In addition, product mix withinour cell phone product line affects our gross profit margin because sales underour Motorola license agreement generally command a higher gross profit thanlarge bulk sales to OEM customers.  Additionally, freight expense in the 2003Quarter was higher than in the 2002 Quarter due in part to higher levels ofshipments in the 2003 Quarter and to the fact that such expenses in the 2002Quarter were reduced by $114,000 due to import duties and United States customsrefunds we received that served to reduce our cost of sales in that period,contributing to a higher gross profit percentage than otherwise would have beenreported in Fiscal 2002. 

 

14

 

**Selling, General and Administrative Expenses**

Sellingexpenses increased $32,000, or 5%, to $737,000 in the 2003 Quarter, from$704,000 in the 2002 Quarter.  Higher personnel expenses including salesbonuses associated with the higher sales volumes and slight increases in otherselling accounts, increased $114,000 in the 2003 Quarter compared to the 2002Quarter.  This increase was partially offset by a decrease of $87,000 inroyalty expense paid to Motorola in the 2003 Quarter compared to the 2002Quarter due to the amendment, which as previously reported, became effective inAugust 2002.  The ratio of selling expenses to net sales decreased to 15% inthe 2003 Quarter, from 17% in the 2002 

General and administrative expenses decreased$122,000, or 17%, to $582,000 in the 2003 Quarter, from $704,000 in the 2002Quarter.  The primary reason for the decrease is that the 2002 Quarter includeda $100,000 payment made by us as reimbursement of legal fees in connection witha settlement agreement entered into between the Company and a shareholder.

Our overall operating expenses decreased $90,000, or6%, to $1.32 million in the 2003 Quarter, from $1.41 million in the 2002Quarter.  Operating expenses declined as a percentage of net sales to 28% inthe 2003 Quarter compared to 35% in the 2002 Quarter as a result of theincrease in revenues relative to operating expenses and, to a lesser extent, tothe decline in operating expenses.

**Income from Operations**

Pretaxincome from operations increased $16,000 or 11% to $166,000 in the 2003Quarter, compared to $150,000 in the 2002 Quarter, as a result of the declinein operating expenses, partially offset by the reduction in gross profit asdescribed above.

**Other Income (Expense)**

TotalOther Income (Expense) decreased $69,000 to $11,000 in the 2003 Quartercompared to the 2002 Quarter of $79,000 as a result of the following factors. The Other income (expense) component decreased $77,000 to $11,000 of income inthe 2003 Quarter and consisted of a $10,000 foreign currency gain and a $1,000bad debt recovery.  The Other income component of $88,000 in the 2002 Quarterconsisted of a $77,000 foreign currency gain and $11,000 of income from a baddebt recovery.  Because we had no borrowings under our bank lines of credit atany time during the 2003 Quarter, our interest expense declined $7,000 to$5,000, compared to $12,000 in the 2002 Quarter.

**IncomeTaxes**

In the 2003 Quarter, our provision for income taxesdecreased by $16,000 to a benefit of $3,000 compared to a benefit of $19,000 inthe 2002 Quarter.  The decrease was a result of a quarterly loss generated byour subsidiary in Switzerland.  We did not record a provision for U.S. incometaxes in either quarter as we have sufficient net operating tax losscarryforwards available to offset our current U.S. taxable income for which wehave recorded a valuation allowance.  We will continue to monitor thelikelihood of realization of the benefits of our deferred tax assets and mayadjust the allowance in future periods as the benefit of the asset becomes morecertain.

The following discussion and analysis compares ourresults of operations for the nine months ended June 30, 2003, and the ninemonths ended June 30, 2002. 

15

  

**Results of Operations for the 2003 PeriodCompared to the 2002 Period**

Our net income in the 2003 Period more than doubledto $929,000 compared to net income of $438,000 in the 2002 Period, an increaseof $491,000.  Basic and diluted earnings per share were $0.16 for the 2003Period compared to $0.08 per share in the 2002 Period. 

**Sales**

** **Net sales increased $2.07 million, or 17%, to $14.35million in the 2003 Period compared to $12.28 million in the 2002 Period.

The tables below set forth our sales by product lineand geographic location for the 2003 and 2002 Periods.

**Sales  for 2003 Period  9  Months ended June 30, 2003  (millions  of dollars)**

** **

**US**

**Europe**

**Other**

Total

Cell Phone Products

$2.57

$2.61

0.25

$5.43

Diabetic  Products

4.53

2.70

--

7.23

Other Product Sales

1.52

0.01

0.17

1.70

**Total***

**$8.62**

**$5.32**

**$0.42**

**$14.36**

**Sales  for 2002 Period   9  Months ended June 30, 2002  (millions  of dollars)**

** **

**US**

**Europe**

**Other**

Total

Cell Phone Products 

$0.70

$4.69

$0.63

$6.02

Diabetic  Products 

2.49

2.15

--

4.64

Other Product Sales

1.53

0.03

0.06

1.62

**Total***

**$4.72**

**$6.87**

**$0.69**

**$12.28**

* Tables may not total due to rounding.

**Cell Phone Product Sales:**Sales of our cell phone products declined 10%, or$590,000, to $5.43 million in the 2003 Period compared to $6.02 million in the2002 Period.  The decline in European sales, primarily from lower sales toMotorola both under our license agreement to third parties and directly toMotorola entities, was partially offset by orders from other Motorolaactivities located in the United States.  Despite this shift, Motorola productsremain a significant portion of our overall revenues and were $5.17 million and$5.35 million in the 2003 and 2002 Periods, respectively (including sales tothird parties of Motorola branded products under our licensing agreement of$1.32 million and $1.61 million in the 2003 and 2002 Periods, respectively).

**Diabetic Product Sales:**Sales of these cases increased $2.59 million to $7.23million in the 2003 Period compared to sales of $4.64 million in the 2002Period. Due to strong demand, these cases have surpassed cell phone products asour leading revenue generator and comprised 50% of our overall sales in the2003 Period compared to 38% in the 2002 Period. 

**Other Product Sales:**Sales of these products have remained relativelystable with $1.70 million and $1.62 million in the 2003 Period and 2002 Period,respectively.

16

 

**GrossProfit**

Gross profit on sales increased $214,000, or 5%, to $4.52 million in the 2003Period from $4.31 million in the 2002 as a result of our higher sales volume. Our gross profit percentage declined to 32% in the 2003 Period from 35% in the2002 Period as a result of the relatively higher contribution of product salesfrom our diabetic line of products which, as discussed above, generally carrylower margins than our cell phone products.. Additionally, freight expense inthe 2002 Period was reduced by $114,000 due to import duties and United Statescustoms refunds we received that served to reduce our freight expenses therebycontributing to a higher gross profit percentage in the 2002 Period compared tothe 2003 Period.

**Selling, General and AdministrativeExpenses**

Sellingexpenses decreased $172,000, or 8%, to $1.99 million in the 2003 Period, from$2.16 million in the 2002 Period.  The decrease is due primarily to lowerroyalty expenses of $261,000 due to the amendment of our Motorola licenseagreement and $28,000 in lower travel expenses, offset, in part, by $118,000 inhigher personnel expenses, among other factors.  The ratio of selling expensesto net sales decreased to 14% in the 2003 Period, from 18% in the 2002 Period,as a result of the higher sales volume in the 2003 Period and lower sellingexpenses.

General and administrative expenses decreased 2% or$40,000, to $1.70 million in the 2003 Period, from $1.74 million in the 2002Period. 

Our overall operating expenses decreased $212,000,or 5%, to $3.69 million in the 2003 Period from $3.90 million in the 2002Period.  Operating expenses declined as a percentage of sales to 26% in the2003 Period compared to 32% in the 2002 Period as a result of higher salesvolume and lower operating expenses.

**IncomeFrom Operations**

Pretaxincome from operations more than doubled, increasing $426,000 to $834,000 inthe 2003 Period, compared to $408,000 in the 2002 Period as a result of theincreased gross profit and the decrease in operating expenses, as describedabove.

**OtherIncome (Expense)**

Totalother income (expense) increased $45,000 to $108,000 of income in the 2003Period compared to income of $63,000 in the 2002 Period.  The 2003 Periodincludes $83,000 of realized and unrealized foreign currency transaction gainsand $25,000 of income from a bad debt recovery. The 2002 Period includes$60,000 of realized and unrealized foreign currency transaction gains and$3,000 net gains on the disposal of certain assets and the recovery of baddebts. Because we had no borrowings under our bank lines of credit at any timeduring the 2003 Period, our interest expense declined $41,000 to $7,000,compared to $48,000 in the 2002 Period. 

**IncomeTaxes**

In the 2003 Period, our provision for income taxesincreased by $14,000 to $14,000 compared from zero in the 2002 Period.  Theincrease relates to foreign taxes due as a result of income generated by oursubsidiary in Switzerland.  We did not record a provision for our U.S. incometaxes in either Period as we have sufficient net operating tax losscarryforwards available to offset our current U.S. taxable income for which wehave recorded a valuation allowance.  We will continue to monitor the likelihoodof realization of the benefits of our deferred tax assets and may adjust theallowance in future periods as the benefit of the asset becomes more certain.

  

17

  

**Liquidity and Capital Resources**

We generated $1.01 million of cash from operations inthe 2003 Period, compared to $152,000 in the 2002 Period.  The 2003 Period'soperating cash flows resulted primarily from net income of $929,000, adjustedfor non-cash items including depreciation expense of $100,000, loss on the saleof property, plant and equipment of $7,000, and deferred taxes of $3,000 pluschanges in our working capital accounts.  The 2002 Period's operating cashflows included net income of $438,000 adjusted for non-cash items includingdepreciation of $95,000 and loss on the sale of property, plant and equipmentof $21,000 plus changes in working capital accounts.

Investing activities used $49,000 in the 2003 Periodto purchase $52,000 of additional computer equipment and software, which wasoffset by $3,000 proceeds from the sale of other equipment.  In the 2002Period, investing activities provided $173,000. including $158,000 from thesale of our building in South Bend Indiana, and the collection of $18,000 ofofficer's loans, offset by $4,000 of equipment purchases.

Financing activities used $178,000 in the 2003 Period,including $92,000 used to purchase 66,200 shares of our common stock in theopen market pursuant to our previously announced stock buyback program, $87,000to retire our capital lease obligations and take title to the equipment.  Inthe 2002 Period, financing activities used $919,000 when we repaid $900,000 ofour credit line and made $19,000 in capital lease principal payments. 

At June 30, 2003, our current ratio (current assetsdivided by current liabilities) was 3.27 and our quick ratio (current assetsless inventories divided by current liabilities) was 2.91. Our working capital(current assets less current liabilities) was $4.05 million and we had no longterm debt. 

Our primarysources of liquidity are our operating cash flow and our bank creditfacilities. The primary demands on our working capital are: our accountspayable arising in the ordinary course of business, the most significant ofwhich arise when our customers place orders and we order from our suppliers;and our commitments under our license agreement with Motorola. Historically,our sources of liquidity have been adequate to satisfy working capitalrequirements arising in the ordinary course of business. However, it ispossible that if one of our significant original equipment manufacturercustomers placed an unusually large order with us at a time when our creditfacility could not accommodate the increased demands on our working capital, wemight have to seek additional sources of liquidity. Although there can be noassurance, we believe that, under such circumstances, we could obtain anincrease in our credit facility or obtain necessary funds under an additionalfacility.

We renewed our creditfacility with a bank effective September 30, 2002 until September 30, 2003. InApril 2003, the bank informed us the credit facility had been extended untilMarch 30, 2004. The credit facility provides for a maximum uncommitted line ofcredit totaling $1.5 million, including a $1.0 million sublimit for direct borrowingsand bankers acceptances and a $500,000 sublimit for letters of credit.  Thecredit line is renewable at the discretion of the bank and is secured by aportion of our assets. There are no financial ratios or other restrictivecovenants associated with the credit facility. We are, however, required tohave a consecutive 30-day period during the term of the credit facility withzero borrowings, submit to periodic bank examinations and maintain performanceacceptable to the bank.  Amounts borrowed under the credit facility bearinterest at the bank's prime rate in effect from time-to-time plus one half ofone percent. There are no fees payable in respect of undrawn balances under thecredit facility. This is an uncommitted line of credit and there is noguarantee the bank will grant additional cash advances under the line of creditto us if required, or that our performance will remain satisfactory to thebank, or that the bank will renew the credit facility. Although we believe thatwe could obtain alternate financing in the event of a loss of our currentfacility, there can be no assurance that such financing could be obtained andthe failure to do so could have a material adverse affect on our liquidity andfinancial condition. We completed the 30-day period with zero borrowings inOctober 2002. At June 30, 2003, we had no borrowings under the credit facilityand no commitments for letters of credit and the entire credit line wasavailable for our use.

18

  

In February 2003, weestablished, through a foreign subsidiary, a separate credit facility with abank that provides for a maximum uncommitted line of credit of $400,000. Amounts borrowed under the facility may be structured as either term loans,with a maximum repayment period of 12 months, or as a guarantee facility, orany combination of the foregoing.  The bank or the Company may terminate thefacility at any time; however, such termination would not affect the statedmaturity of term loans outstanding.  Amounts borrowed as a revolving line ofcredit must be settled quarterly or converted into term loans.  An intercompanybalance owed by the subsidiary to the Company secures borrowings under the lineand the subsidiary has agreed to certain covenants.  Amounts drawn under thiscredit facility bear interest at variable rates established by the bank (5.1%as of June 30, 2003).  Additionally, we pay a credit commission of 0.25% of themaximum amount of credit used during a quarter. At June 30, 2003, there were nooutstanding borrowings under this credit facility and we were in compliancewith all terms of the agreement.

OnSeptember 27, 2002, our Board of Directors authorized the repurchase of up to400,000 shares of our common stock, or seven percent of the shares outstanding.In the 2003 Period, we purchased 66,200 shares of common stock for an aggregatepurchase price of $92,000 in the open market.

We have licensed the use ofcertain trademarks of Motorola, which permits us to sell carrying cases bearingthose marks throughout the EMEA Region. Under the terms of the licenseagreement, effective January 1, 2001, we are required to pay Motorola a royaltybased upon specified percentages of our net sales to third parties of licensedproducts within the EMEA Region. The license, as it has been amended, providesfor minimum royalty payments by the Company to Motorola over three contractperiods as follows:
-  $665,000 for the contract periodof July 1, 2001 to September 30, 2002 
-  $332,000 for the contract periodof October 1, 2002 to September 30, 2003 
-  $408,000 for the contract periodof October 1, 2003 to September 30, 2004 

Ifwe elect to terminate the license before September 30, 2004, we would berequired to pay the royalty due for the contract period in effect at the dateof cancellation. Motorola has not guaranteed us a minimum amount of revenuesfrom the sale of the licensed products and we cannot guarantee that we willgenerate sufficient revenues to recoup the minimum royalty payments that we areobligated to pay to Motorola. The failure to generate such revenues could havea material adverse effect on our results of operations.  In the 2003 Period, wegenerated $1.32 million of sales to third parties under this license agreementfor which we are obligated to pay Motorola a royalty equal to the minimum quarterlyinstallment payable under the agreement.

TheCompany did not incur any long-term debt in the 2003 Period and at June 30,2003, we had no long-term debt.

**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 obligations as of June 30, 2003:

**Contractual  Obligation or Commitment**

**Jul 03 - Jun 04**

**Jul 04- Jun 05**

**Jul 06 - Jun 07**

Employment & Consulting Agreements

$   490,000

$   115,000

$             0

Operating Leases

   199,000  

                  245,000

114,000

License Agreements**

389,000

102,000

0

Totals

$1,078,000

$462,000

$   114,000

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

19

 

 

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

ITEM 3.          CONTROLS AND PROCEDURES

**Evaluation ofdisclosure controls and procedures**.  

Ourchief executive officer and chief financial officer have reviewed and evaluatedthe effectiveness of our disclosure controls and procedures (as defined inRules 13a-14 and 15d-14 under the Securities Exchange Act of 1934 (the"Exchange Act"), as of a date within ninety days before the filing of thisquarterly report. Based on that evaluation, the chief executive officer andchief financial officer have concluded that our current disclosure controls andprocedures are effective to ensure that information required to be disclosed byus in reports that we file or submit under the Exchange Act is recorded,processed, summarized, and reported within the time periods specified in theCommission's rules and forms.

**Changes in internal controls**.  

Therehave not been any significant changes in our internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof their evaluation. There were no significant deficiencies or materialweakness in the internal controls, and therefore no corrective actions weretaken.

 

 

 

20

**PART II.   OTHER INFORMATION**

ITEM 1.      LEGAL PROCEEDINGS

        None.

ITEM 2.      CHANGES IN SECURITIES

        None.

ITEM 3.      DEFAULTS UPON SENIOR SECURITIES

        None.

ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS

TheCompany held its Annual Meeting of Shareholders on April 25, 2003.  Thefollowing matters were voted upon at the Annual Meeting of Shareholders:

1.       Election of a Board of Directors

Number of Shares

Name

For

Withheld

 
Jerome E. Ball.................. 

5,178,636

6,402

 
Bruce Galloway...............  

5,178,636

6,402

 
Jeffrey Kuhr.....................  

5,178,636

6,402

 
Edwin Levy......................  

5,178,636

6,402

 
Norman Ricken................  

5,178,636

6,402

 
Michael Schiffman..........  

5,177,976

7,062

 
2.       Ratification of the appointment ofErnst & Young LLP as the independent auditors and accountants for theCompany    for the Fiscal Year ending September 30, 2003.

 
Number of Shares

Name

For

Against

Abstain

 
Ratify Ernst & Young LLP as  the Company's Auditor for the Fiscal Year ending September 30, 2003.............................  

5,136,116

7,230

41,692

ITEM 5.      OTHERINFORMATION

None.

21

 

 

ITEM 6.       EXHIBITS AND REPORTS 

(a) Exhibits filed herewith:

99.1 Press release announcing theregistrant's results of operations. 

99.2 Certification of the Chief ExecutiveOfficer under Section 302 of the Sarbanes-Oxley Act of 2002

99.3 Certification of the Chief FinancialOfficer under Section 302 of the Sarbanes-Oxley Act of 2002

99.4 Certification of the Chief ExecutiveOfficer under Section 906 of the Sarbanes-Oxley Act of 2002

99.5 Certification of the Chief FinancialOfficer under Section 906 of the Sarbanes-Oxley Act of 2002

 

(b) Reports on Form 8-K 

        None

 

22
**SIGNATURES**
Inaccordance with the requirements of the Securities Exchange Act of 1934, theregistrant caused this report to be signed on its behalf by the undersigned,hereunto duly authorized.

Dated:  July 22, 2003 

                           FORWARDINDUSTRIES, INC.                (Registrant)

                                                                        

                          By: /s/  Jerome E. Ball                                                                    Jerome E.Ball                Chairman andChief Executive Officer

                          

                           By:/s/  Douglas W. Sabra                                                                    Douglas W. Sabra               VicePresident, Chief Financial Officer and               PrincipalAccounting Officer

                          

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