| **UNITED STATES  SECURITIES AND  EXCHANGE COMMISSION  Washington, D.C.  20549**

** **

**FORM 10-QSB**

**  **

(Mark One)

[X]          QUARTERLY REPORT UNDER SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934  for the quarterly period ended March  31, 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 April 21, 2004, 6,115,441 shares of Common Stock were outstanding.

Transitional  Small Business Disclosure Format:    Yes [   ]  No [X] |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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**FORWARDINDUSTRIES, INC. AND SUBSIDIARIESFORM 10-QSBTHREEMONTHS ENDED MARCH 31, 2004 CONTENTS**

|              |            |                                                                                                                                                                                                                             | PAGE       |
|--------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **PART  I**  | ** ** | **FINANCIAL  INFORMATION**                                                                                                                                                                                                  | ** ** |
|              |            |                                                                                                                                                                                                                        |            |
|              | Item  1.   | Financial  Statements                                                                                                                                                                                                       |            |
|              |            |      Consolidated Balance Sheets as of March 31, 2004 (Unaudited)                                                                                                                                            |            |
|              |            |      and September 30, 2003............................................................................................................                                                                      | 3          |
|              |            |                                                                                                                                                                                                                        |            |
|              |            |      Unaudited Consolidated Statements of Income for the Three and Six                                                                                                                                       |            |
|              |            |      Months Ended March 31, 2004 and 2003..............................................................................                                                                                      | 4          |
|              |            |                                                                                                                                                                                                                        |            |
|              |            |      Unaudited Consolidated Statements of Cash Flows for the Six                                                                                                                                             |            |
|              |            |      Months Ended March 31, 2004 and 2003..............................................................................                                                                                      | 5          |
|              |            |                                                                                                                                                                                                                        |            |
|              |            |      Notes to Consolidated Financial Statements.......................................................................                                                                                       | 6          |
|              |            |                                                                                                                                                                                                                        |            |
|              | Item  2.   | Management's  Discussion and Analysis of Financial Condition and Results of Operations..................................................................................................................................... | 12         |
|              |            |                                                                                                                                                                                                                        |            |
|              | Item  3.   | Controls  and Procedures.............................................................................................................                                                                                       | 20         |
|              |            |                                                                                                                                                                                                                        |            |
| **PART  II** | ** ** | **OTHER  INFORMATION**                                                                                                                                                                                                      | ** ** |
|              |            |                                                                                                                                                                                                                        |            |
|              | Item  2.   | Changes  in Securities and Issuer Purchases of Equity Securities........................................                                                                                                                    | 21         |
|              |            |                                                                                                                                                                                                                        |            |
|              | Item  6.   | Exhibits  and Reports on Form 8-K.............................................................................................                                                                                              | 21         |
|              |            |                                                                                                                                                                                                                        |            |
|              |            | Signatures......................................................................................................................................                                                                            | 22         |
|              |            |                                                                                                                                                                                                                        |            |

 

**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**

|                                                                                                                                                                                                                                                                     |                   |            |                         |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------|------------|-------------------------|
|                                                                                                                                                                                                                                                                     |                   |            |                         |
|                                                                                                                                                                                                                                                                     | **March 31,**     | ** ** | **September 30,**       |
|                                                                                                                                                                                                                                                                     | **2004**          | ** ** | **2003**                |
| **ASSETS**                                                                                                                                                                                                                                                          | **(Unaudited)**   | ** ** | ** **              |
|                                                                                                                                                                                                                                                                |                   |            |                         |
| Current assets:                                                                                                                                                                                                                                                     |                   |            |                         |
|    Cash and cash equivalents............................................................................................                                                                                                                                  | $  3,054,965 |            |  $  2,125,300 |
|    Accounts receivable - net ............................................................................................                                                                                                                                 | 2,941,585         |            | 3,460,085               |
|    Inventories........................................................................................................................                                                                                                                    | 854,628           |            | 708,235                 |
|    Prepaid expenses and other current assets.................................................................                                                                                                                                             | 228,752           |            | 197,476                 |
|    Deferred tax asset............................................................................................................                                                                                                                         | 58,700            |            | 58,700                  |
|       Total current assets......................................................................................................                                                                                                           | 7,138,630         |            | 6,549,796               |
|                                                                                                                                                                                                                                                                     |                   |            |                         |
| Property, plant, and equipment - net...............................................................................                                                                                                                                                 | 211,735           |            | 258,323                 |
| Deferred tax asset...............................................................................................................                                                                                                                                   | 331,300           |            | 331,300                 |
| Other assets.........................................................................................................................                                                                                                                               | 38,227            |            | 40,607                  |
|      **TOTAL ASSETS**...........................................................................................................                                                                                                                | $  7,719,892 |            |  $  7,180,026 |
|                                                                                                                                                                                                                                                                     |                   |            |                         |
| **LIABILITIES AND SHAREHOLDERS' EQUITY**                                                                                                                                                                                                                            |                   |            |                         |
|                                                                                                                                                                                                                                                                     |                   |            |                         |
| Current liabilities:                                                                                                                                                                                                                                                |                   |            |                         |
|    Accounts payable...........................................................................................................                                                                                                                            | $  1,303,955 |            |  $  1,140,960 |
|    Accrued expenses and other current liabilities...........................................................                                                                                                                                              | 253,660           |            | 743,450                 |
|       Total current liabilities.................................................................................................                                                                                                           | 1,557,615         |            | 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; 6,641,231 and 6,502,731 shares issued at  March 31, 2004 and September 30, 2003, respectively (including 529,090 and  527,090 held in treasury, respectively)............................ | 66,412            |            | 65,027                  |
|    Paid-in capital...................................................................................................................                                                                                                                     | 8,675,969         |            | 8,487,438               |
|    Accumulated deficit........................................................................................................                                                                                                                            | (1,802,283)       |            | (2,483,413)             |
|                                                                                                                                                                                                                                                                     | 6,940,098    |            | 6,069,052               |
|    Less: Cost of shares in treasury....................................................................................                                                                                                                                   | (777,821)         |            | (773,436)               |
|       Total shareholders' equity...........................................................................................                                                                                                                | 6,162,277         |            | 5,295,616               |
|                                                                                                                                                                                                                                                                     |                   |            |                         |
| **TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY**.........................................                                                                                                                                                                             | $  7,719,892 |            |  $  7,180,026 |

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

 

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

** **

** **

|                                                                                          | **Three Months Ended  March 31,**                      | ** ** | **Six Months Ended  March 31,**                              |
|------------------------------------------------------------------------------------------|--------------------------------------------------------|------------|--------------------------------------------------------------|
|                                                                                          | **2004**                                               | ** ** | **2003**                                                     | ** ** | **2004** | ** ** | **2003** |
| Net  sales.............................................................................. | $  5,000,995                                      |            | $  3,903,559                                            |  | $  9,493,968 |  | $  9,595,200 |
| Cost of goods sold.............................................................          | 3,316,224                                              |            | 2,704,059                                                    |  | 6,339,516 |  | 6,555,681 |
| Gross profit..........................................................................   | 1,684,771                                              |            | 1,199,500                                                    |  | 3,154,452 |  | 3,039,519 |
|                                                                                          |                                                        |            |                                                              |  |  |  |  |
| Operating expenses:                                                                      |                                                        |            |                                                              |  |  |  |  |
| Selling..........................................................................        | 681,111                                                |            | 577,589                                                      |  | 1,409,333 |  | 1,252,008 |
| General and administrative.......................................                        | 445,522                                                |            | 499,371                                                      |  | 1,017,655 |  | 1,119,359 |
| Total operating expenses....................................                             | 1,126,633                                              |            | 1,076,960                                                    |  | 2,426,988 |  | 2,371,367 |
|                                                                                          |                                                        |            |                                                              |  |  |  |  |
| Income  from operations.....................................................             | 558,138                                                |            | 122,540                                                      |  | 727,464 |  | 668,152 |
|                                                                                          |                                                        |            |                                                              |  |  |  |  |
| Other income (expense):                                                                  |                                                        |            |                                                              |  |  |  |  |
| Interest expense....................................................                     | --                                                     |            | (1,288)                                                      |  | -- |  | (2,689) |
| Interest income......................................................                    | 1,968                                                  |            | 1,702                                                        |  | 4,193 |  | 4,838 |
| Other income (expense).......................................                            | (25,813)                                               |            | 59,579                                                       |  | 15,784 |  | 96,376 |
| Total other income  (expense) .............................                              | (23,845)                                               |            | 59,993                                                       |  | 19,977 |  | 98,525 |
|                                                                                          |                                                        |            |                                                              |  |  |  |  |
| Income before provision (benefit)  for income taxes......                                | 534,293                                                |            | 182,533                                                      |  | 747,441 |  | 766,677 |
| Provision (benefit) for  income taxes................................                    | 44,700                                                 |            | (8,600)                                                      |  | 66,311 |  | 16,400 |
|                                                                                          |                                                        |            |                                                              |  |  |  |  |
| Net income ..........................................................................    | $   489,593                                  |            | $    191,133                                  |  | $   681,130 |  | $    750,277 |
|                                                                                          |                                                        |            |                                                              |  |  |  |  |
| Net income per common and  common equivalent share                                       |                                                        |            |                                                              |  |  |  |  |
| Basic...........................................................................         | $         0.08 |            | $          0.03 |  | $         0.11 |  | $          0.13 |
| Diluted.......................................................................           | $         0.08 |            | $          0.03 |  | $         0.11 |  | $          0.13 |
|                                                                                          |                                                        |            |                                                              |  |  |  |  |
| Weighted average number of  common and common equivalent shares outstanding              |                                                        |            |                                                              |  |  |  |  |
| Basic...........................................................................         | 6,101,108                                              |            | 5,783,774                                                    |  | 6,063,077 |  | 5,798,841 |
| Diluted.......................................................................           | 6,414,501                                              |            | 5,953,929                                                    |  | 6,370,807 |  | 5,883,918 |
|                                                                                          |                                                        |            |                                                              |  |  |  |  |
|                                                                                          |                                                        |            |                                                              |  |  |  |  |

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

 

 

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

** **

|                                                                                                                                     |  | **Six Months Ended March 31,**    |
|-------------------------------------------------------------------------------------------------------------------------------------|--|-----------------------------------|
|                                                                                                                                     |  | **     2004** | ** ** | **2003** |
| **OPERATING ACTIVITIES:**                                                                                                           |  |                                   |  |  |
| Net  income........................................................................................................................ |  | $     681,130 |  | $     750,277 |
| Adjustments to reconcile  net income to net cash provided           by operating activities:     |  |                                   |  |  |
| Loss  on sale of property, plant and equipment.................................................                                     |  | --                                |  | 7,057 |
| Depreciation  and amortization..............................................................................                        |  | 59,381                            |  | 65,681 |
| Deferred  taxes.........................................................................................................            |  | --                                |  | 2,800 |
|      Provision for obsolete inventory.........................................................................       |  | 129,867                           |  | 51,550 |
|      Changes in operating assets and  liabilities:                                                              |  |                                   |  |  |
| Accounts  receivable........................................................................................                        |  | 518,500                           |  | 274,695 |
| Inventories........................................................................................................                 |  | (276,260)                         |  | (443,692) |
| Prepaid  expenses and other current assets..................................................                                        |  | (31,276)                          |  | (19,911) |
| Other  assets......................................................................................................                 |  | 2,380                             |  | -- |
| Accounts  payable............................................................................................                       |  | 162,995                           |  | (379,578) |
| Accrued  expenses and other current liabilities...........................................                                          |  | (489,790)                         |  | 163,206 |
| **NET CASH  PROVIDED BY OPERATING ACTIVITIES**                                                                                      |  | **756,927**                       | ** ** | **472,085** |
|                                                                                                                                     |  |                                   |  |  |
| **INVESTING ACTIVITIES:**                                                                                                           |  |                                   |  |  |
| Proceeds from sale of  property, plant, and equipment..............................................                                 |  | --                                |  | 3,591 |
| Purchases of property,  plant, and equipment.............................................................                           |  | (12,793)                          |  | (50,198) |
| **NET CASH USED BY  INVESTING ACTIVITIES**                                                                                          |  | **(12,793)**                      | ** ** | **(46,607)** |
|                                                                                                                                     |  |                                   |  |  |
| **FINANCING ACTIVITIES:**                                                                                                           |  |                                   |  |  |
| Proceeds from exercise of  stock options......................................................................                      |  | 189,916                           |  | -- |
| Principal payments on  capital lease obligations.........................................................                           |  | --                                |  | (13,677) |
| Purchase of treasury shares...........................................................................................              |  | (4,385)                           |  | (54,326) |
| **NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES**                                                                                |  | **185,531**                       | ** ** | **(68,003)** |
|                                                                                                                                     |  |                                   |  |  |
| NET INCREASE IN CASH AND  CASH EQUIVALENTS                                                                                          |  | 929,665                           |  | 357,475 |
|                                                                                                                                     |  |                                   |  |  |
| CASH AND CASH  EQUIVALENTS - beginning of period..........................................                                          |  | 2,125,300                         |  | 1,207,311 |
|                                                                                                                                     |  |                                   |  |  |
| CASH  AND CASH EQUIVALENTS - end of period.....................................................                                     |  | $  3,054,965                 |  | $  1,564,786 |
|                                                                                                                                     |  |                                   |  |  |
|                                                                                                                                     |  |                                   |  |  |
|                                                                                                                                     |  |                                   |  |  |
|                                                                                                                                     |  |                                   |  |  |
|                                                                                                                                     |  |                                   |  |  |

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

 

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**Forward Industries, Inc.Notes to Consolidated Financial StatementsThree- and Six-Month Periods Ended March 31, 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 fair presentationhave been included.  Operating results for the three and six-month periodsended March 31, 2004 are not necessarily indicative of the results that may beexpected 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 financialstatements.

The accounting policies used in the preparation ofthe financial statements included in this Form 10-QSB are the same as those setforth in the Company's annual report on Form 10-KSB for the fiscal year endedSeptember 30, 2003 and should be read in conjunction with the disclosurespresented therein.  

For the three and six-months endedMarch 31, 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 is effectivebeginning with the second quarter of fiscal 2004, and the Company does notbelieve the adoption of SFAS No. 150 will have an impact on its currentfinancial position or its results 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 entityconsidered to be the primary beneficiary of the VIE. In December 2003, the FASBissued FIN No. 46 (revised December 2003), which effectively modified andclarified certain provisions of FIN No. 46, as originally issued, and modifiedthe effective date for certain entities. Public companies will apply theprovisions of FIN No. 46, as revised, no later than the first reporting periodthat ends after March 15, 2004. The Company does not expect the adoption of FINNo. 46 to have a material impact on the Company's consolidated financial statements.

 

6

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**Forward Industries, Inc.Notes to Consolidated Financial StatementsThree- and Six-Month Periods Ended March 31, 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 six- month periods ended March31, 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  March 31,**          | ** ** | **Six Months Ended  March 31,**                  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------|------------|--------------------------------------------------|
|                                                                                                                                                                                                | **2004**                                   | ** ** | **2003**                                         | ** ** | **2004** | ** ** | **2003** |
| Net income, as reported.............................                                                                                                                                           | $  489,593                            |            | $  191,133                                  |  | $  681,130 |  | $  750,277 |
| Less: Stock-based employee  compensation costs determined under fair value based method for all awards,  net of related tax effects........................................................... | 29,112                                     |            | 37,884                                           |  | 62,235 |  | 75,768 |
| Pro forma net income..................................                                                                                                                                         | $  460,481                            |            | $  153,249                                  |  | $  618,895 |  | $  674,509 |
|                                                                                                                                                                                                |                                            |            |                                                  |  |  |  |  |
| Earnings per share:                                                                                                                                                                            |                                            |            |                                                  |  |  |  |  |
| Basic  - as reported.................................                                                                                                                                          | $       0.08 |            | $        0.03 |  | $       0.11 |  | $       0.13 |
| Basic  - pro forma....................................                                                                                                                                         | $       0.08 |            | $        0.03 |  | $       0.10 |  | $       0.12 |
|                                                                                                                                                                                                |                                            |            |                                                  |  |  |  |  |
| Diluted  - as reported..............................                                                                                                                                           | $       0.08 |            | $        0.03 |  | $       0.11 |  | $       0.13 |
| Diluted  - pro forma.................................                                                                                                                                          | $       0.07 |            | $        0.03 |  | $       0.10 |  | $       0.12 |

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 Six-Month Periods Ended March 31, 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 (4.00% as of March 31, 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 March 31, 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.  Amountsborrowed other than as a term loan must be settled quarterly or converted intoterm loans.  In connection with this facility Forward Innovations has agreed tocertain covenants and an intercompany balance owed by Forward Innovations tothe Company secures the facility.  Amounts drawn under this credit facilitybear interest at variable rates established by the bank (5.0% as of March 31,2004).  Additionally, the Company pays a credit commission of 0.25% of the maximumamount of credit used during a quarter. At March 31, 2004, Forward Innovations iscontingently liable to the bank under a letter of credit, issued in its behalfin the amount of  €168,000 (approximately $205,000 as of March 31, 2004), inconnection with its logistics 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 ofelectronic devices such as wireless telecommunications devices and medicalequipment.  Geographic locations are determined based primarily on the locationof the customer.   Information as to revenue source by geographic location isas follows:

**Revenues from external customers (all amounts in thousandsof dollars):**

|                 | **Three Months Ended  March 31,** | ** ** | **Six Months Ended  March 31,** |
|-----------------|-----------------------------------|------------|---------------------------------|
|                 | **2004**                          |            | **2003**                        | ** ** | **2004** | ** ** | **2003** |
| United States   |    $ 2,095              |            | $ 2,596                         |  | $ 4,134 |  | $ 5,676 |
| Europe          | 2,473                             |            | 1,195                           |  | 4,627 |  | 3,520 |
| Other           | 433                               |            | 113                             |  | 733 |  | 399 |
| Total net sales | $ 5,001                           |            | $ 3,904                         |  | $ 9,494 |  | $ 9,595 |

 

 

8

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**Forward Industries, Inc.Notes to Consolidated Financial StatementsThree- and Six-Month Periods Ended March 31, 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 six-month periods ended March31, 2003 were $1.84 and $1.37, respectively. The average quoted market pricesfor the Company's common stock for the three and six-month periods ended March31, 2004 were $2.42 and $2.39, respectively. Calculation of diluted earningsper share is as follows:

|                                                |  | **Three Months Ended  March 31,** | ** ** | **Six Months Ended  March 31,** |
|------------------------------------------------|--|-----------------------------------|------------|---------------------------------|
|                                                |  | **2004**                          | ** ** | **2003**                        | ** ** | **2004** | ** ** | **2003** |
| Numerator:                                     |  |                                   |            |                                 |  |  |  |  |
| Net  income................................... |  | $  489,593                   |            |  $   191,133     |  | $  681,130 |  | $   750,277 |
|                                                |  |                                   |            |                                 |  |  |  |  |

| Denominator:                                                                                                     |  |           |  |           |  |           |  |           |
|------------------------------------------------------------------------------------------------------------------|--|-----------|--|-----------|--|-----------|--|-----------|
| Denominator for basic earnings per share - weighted  average shares.........................................     |  | 6,101,108 |  | 5,783,774 |  | 6,063,077 |  | 5,798,841 |
| Dilutive stock options and warrants - treasury stock  method.........................................            |  | 313,393   |  | 170,155   |  | 307,730   |  | 85,077    |
| Denominator for diluted earnings per share -  weighted average shares........................................... |  | 6,414,501 |  | 5,953,929 |  | 6,370,807 |  | 5,883,918 |

| Net  income per common share                |  |                                                  |  |                                                                           |  |                                                  |  |                                                  |
|---------------------------------------------|--|--------------------------------------------------|--|---------------------------------------------------------------------------|--|--------------------------------------------------|--|--------------------------------------------------|
| Basic...................................... |  | $        0.08 |  | $         0.03                    |  | $        0.11 |  | $        0.13 |
| Diluted...................................  |  | $        0.08 |  |     $         0.03 |  | $        0.11 |  | $        0.13 |
| Shares excluded due to antidilution         |  | 616,250                                          |  | 1,594,625                                                                 |  | 616,250                                          |  | 1,594,625                                        |

 

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**Forward Industries, Inc.Notes to Consolidated Financial StatementsThree- and Six-Month Periods Ended March 31, 2004 and 2003(Unaudited)**

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5.            INCOME TAXES

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

|                                                | **Three Months Ended  March 31,**                                                             |  | **Six Months Ended  March 31,**                                  |
|------------------------------------------------|-----------------------------------------------------------------------------------------------|--|------------------------------------------------------------------|
| U.S.  Federal and State                        | **2004**                                                                                      |  | **2003**                                                         |  | **2004** |  | **2003** |
|     Current......................... | $   44,700                                                                          |  | $           -- |  | $   66,311 |  | $           -- |
|     Deferred.......................  | --                                                                                            |  | --                                                               |  | -- |  | -- |
|                                                |                                                                                               |  |                                                                  |  |  |  |  |
| Foreign:                                       |                                                                                               |  |                                                                  |  |  |  |  |
|     Current......................... |                 -- |  | (8,600)                                                          |  |               -- |  | 19,200 |
|     Deferred.......................  | --                                                                                            |  | --                                                               |  | -- |  | (2,800) |
| Income  tax provision (benefit)                | $   44,700                                                                          |  | $  (8,600)                                                  |  | $  66,311 |  | $  16,400 |

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 March 31, 2004, the subsidiary had cumulative undistributed earningsof approximately $127,000.  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. The license agreement requires the Company tomake a minimum guaranteed royalty payment to Motorola of $408,000, payable inquarterly installments, for the contract period of October 1, 2003 to September30, 2004.

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.

Royalty commitments arerecognized as expense over the applicable contract period.  The Companyrecorded royalty expense of $102,000 and $69,000 for the three-month periodsended March 31, 2004 and 2003, respectively, and $204,000 and $166,000 for thesix-month periods ended March 31, 2004 and 2003, respectively, which areincluded in selling expenses in the accompanying consolidated statements ofincome.

 

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Forward Industries, Inc.Notes to Consolidated Financial StatementsThree- and Six-Month Periods Ended March 31, 2004 and 2003(Unaudited)

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6.            COMMITMENTS AND CONTINGENCIES (CONTINUED)****

**Legal Proceedings**

In October 2001, theCompany initiated an action against Royal Industries Inc. ("Royal"),in the Supreme Court of the State of New York, Kings County, asserting causesof action for conversion and unjust enrichment. The Company alleges that,without consent or authority, and with full knowledge of the Company's rightsunder a security agreement, Royal wrongfully took possession of certain assetsin which the Company had a properly perfected security interest. The Companyseeks compensatory damages of $1 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 possiblethat Royal's counterclaims will result in material losses and therefore, atMarch 31, 2004, no provision for losses related to this action has beenrecorded in the accompanying consolidated financial statements.

**Bank Guarantee**

In July 2002, the Companyand its European logistics provider (freight forwarding and customs agent)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. The Company agreed to guaranteepayment to the logistics provider with respect to any value added tax liabilitythat the logistics provider paid on the Company's behalf.  In February 2004,the Company entered into a guarantee agreement with a Swiss bank relating tothe repayment of any amount up to €168,000 (approximately $205,000 as of March31, 2004) paid by such bank to the logistics provider pursuant to a guaranteeissued by the bank in favor of the logistics provider. The amount payablepursuant to the guarantee reduces the amount available under the Company'scredit facility referred to in note 2 above.  The Company would be required toperform under the guarantee only in the event that a value added tax liabilityis imposed, and the logistics provider states in writing that it has beencalled upon in its capacity as surety by the Dutch Receiver of Taxes to paysuch taxes, and the Company refuses to remit the amount of value added tax dueto the logistics provider. On December 31, 2004 and on every anniversarythereafter, the bank guarantee will be renewed automatically for one-yearperiods until December 31, 2009. The Company has agreed to keep a guarantee inplace for five years following the date its relationship terminates with thelogistics provider. As of March 31, 2004, the Company has not recorded aliability in connection with this guarantee.

7.            EQUITY****

**Stock OptionExercises**

During the three and six-month periods ended March 31, 2004, 54,200shares of common stock and 138,500 shares of common stock were issued due tothe exercise of stock options at an average price of $1.65 and $1.37,respectively.

**Treasury Share Purchases**

During the three and six-month periods ended March 31, 2004, the Companypurchased 2,000 shares of its common stock in the open market pursuant to itsstock buyback program at a cost of approximately $4,000.

 

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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.  Whether those assumptions will be realizedwill be determined by future events, which are difficult to predict and may bebeyond our control.  Actual events may differ materially from those assumed. Accordingly, there can be no assurance that any estimated results, projections,forecasts or estimates can be realized or that actual returns or results willnot 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 March 31, 2004 (the "2004 Quarter"), withthe three months ended March 31, 2003 (the "2003 Quarter"), and the six monthsended March 31, 2004 (the "2004 Period"), with the six months ended March 31,2003 (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 $490,000 compared to net income of $191,000 inthe 2003 Quarter, an increase of approximately $299,000 or 157%.  The increasewas due to an increase in gross profit primarily as a result of higher Europeansales of cell phone carrying products to a large customer and, to a lesserextent, higher sales of carrying cases for diabetic monitoring kits, as morefully discussed below. Basic and diluted earnings per share were $0.08 for the2004 Quarter, compared to $0.03 per share in the 2003 Quarter. 

**Net Sales**

Net sales increased $1,097,000, or 28%, to$5,001,000 in the 2004 Quarter compared to $3,904,000 in the 2003 Quarter.  Netsales benefited from an increase in unit sales and, to a lesser extent, astronger Euro compared to the U.S. Dollar. The tables below set forth sales byproduct line and geographic location of our customers for the periodsindicated:

 

 

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| **Net  Sales for 2004 Quarter  3  Months ended March 31, 2004  (millions  of dollars)** |
|-----------------------------------------------------------------------------------------|
| ** **                                                                              | **US** | **Europe** | **Other** | Total |
| Diabetic  Products                                                                      | $1.02 | $1.27 | $0.24 | $2.53 |
| Cell Phone  Products                                                                    | 0.64 | 1.18 | 0.18 | 2.00 |
| Other Product Sales                                                                     | 0.44 | 0.02 | 0.01 | 0.47 |
| **Total***                                                                              | **$2.10** | **$2.47** | **$0.43** | **$5.00** |

                               

| **Net  Sales for 2003 Quarter   3  Months ended March 31, 2003  (millions  of dollars)** |
|------------------------------------------------------------------------------------------|
| ** **                                                                               | **US** | **Europe** | **Other** | Total |
| Diabetic  Products                                                                       | $1.48 | $0.75 | $     --   | $2.23 |
| Cell Phone  Products                                                                     | 0.64 | 0.45 | 0.08 | $1.17 |
| Other Product Sales                                                                      | 0.48 | -- | 0.03 | $0.50 |
| **Total***                                                                               | **$2.60** | **$1.20** | **$0.11** | **$3.90** |

* Tablesmay not total due to rounding.

** **

**Diabetic Product Sales:**We design to the order of, and sell directly to,original equipment manufacturers, or "OEMs", carrying cases used by diabeticsto carry their electronic monitoring kits that measure blood glucose levels.OEM customers for these carrying cases include Abbott Labs, Bayer, Lifescan (asubsidiary of Johnson & Johnson), TheraSense and Roche.  Our cases arepackaged with the monitoring kits that are sold by our OEM customers.

Sales of these cases increased $300,000 or 13% to$2,530,000 in the 2004 Quarter compared to sales of $2,230,000 in the 2003Quarter.  The increase was due to our resumption of shipments to one of ourcustomers during the 2004 Quarter after experiencing a temporary disruption inthat customer's order flow to us. The disruption was the result of the customershifting a part of the manufacture of its blood glucose monitoring kits toChina.  We continue to experience strong demand for our carrying cases for OEMdiabetic monitoring kits. Sales of diabetes products in the 2004 Quarterrepresented 51% of our overall sales compared to 57% in the 2003 Quarter, inpart due to the increase in cell phone product sales revenues in the 2004Quarter.

In April 2004, one of our customers, AbbotLaboratories, announced that it completed its acquisition of TheraSense,another of our customers.  The parties to the transaction stated that the twobusinesses would continue to operate as separate divisions. We believe thatAbbott intends to grow this portion of its business and that the acquisitionwill not adversely affect our relationships with the two companies. However,the consequences of an acquisition are unpredictable and there can be noassurance that the acquisition will not result in changes in the two companies'product procurement. The combined sales of Abbot Laboratories and TheraSense,including their subsidiaries and affiliates, comprised approximately 18% of ournet revenue in the 2004 Quarter and 2003 Quarter.

**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.

 

 

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Sales of cell phone carrying case products increased$831,000 or 71% to $2,001,000 in the 2004 Quarter from $1,170,000 in the 2003Quarter.  The increase was primarily the result of higher sales to Nokia, whichincreased $470,000 to $550,000 in the 2004 Quarter from $80,000 in the 2003Quarter. In addition, direct sales to Motorola (including its subsidiaries andaffiliates) increased $161,000 or 23% to $851,000 in the 2004 Quarter from$690,000 in the 2003 Quarter and sales to wholesalers and retailers under ourMotorola license agreement increased $200,000 or 50% to $600,000 in the 2004Quarter from $400,000 in the 2003 Quarter, bringing the total increase in salesof Motorola-related products (OEM and under the license) to $361,000. 

**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 decreased $30,000 or4% to $470,000 in the 2004 Quarter compared to sales of $500,000 in the 2003Quarter.

**Gross Profit**

Gross profit increased $485,000 or 40%, to $1,685,000in the 2004 Quarter from $1,200,000 in the 2003 Quarter as a result of thehigher sales volume. Our gross profit percentages were 34% and 31% in the 2004Quarter and the 2003 Quarter, respectively.  The higher sales volume in the2004 Quarter resulted in the cost of our Hong Kong operation, which is acomponent of cost of goods sold and a relatively fixed cost, comprising a loweroverall percentage of our sales.

**Selling, General, and Administrative Expenses**

Selling expenses increased $103,000, or 18%, to$681,000 in the 2004 Quarter from $578,000 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 $87,000 in the 2004 Quarter compared to the 2003 Quarter primarilydue to the recruitment and employment of a sales executive to pursueopportunities in the computer carrying case markets, and the hiring of anadditional sales representative in our Swiss office. Royalty expenses increased$33,000 in the 2004 Quarter compared to the 2003 Quarter due to an increase inthe minimum Motorola royalty commitment as provided in the license agreement, asamended. These increases were partially offset by lower auto, office, and otherexpenses of $17,000 in the 2004 Quarter compared to the 2003 Quarter. The ratioof selling expenses to net sales of 14% in the 2004 Quarter decreased slightlyfrom 15% in the 2003 Quarter due to the proportionally greater increase in netsales.

General and administrative expenses decreased$53,000, or 11%, to $446,000 in the 2004 Quarter from $499,000 in the 2003Quarter due to lower personnel expenses of $73,000 in the 2004 Quarter comparedto the 2003 Quarter primarily resulting from the expiration of a consultingcontract with our former chief executive officer and staffing changes in ouraccounting department.

**Income from Operations**

Income from operations increased $435,000 or 354% to$558,000 in the 2004 Quarter from $123,000 in the 2003 Quarter as a result ofimproved gross profit due to higher sales volumes.

**Other Income (Expense)**

Total other income (expense) decreased $84,000 to$24,000 of expense in the 2004 Quarter from $60,000 of income in the 2003Quarter. The "Other income-net" component in the 2004 Quarter consisted of a$26,000 foreign currency loss and in the 2003 Quarter consisted of a $24,000bad debt recovery and a $36,000 foreign currency gain. Because we had noborrowings under our bank lines of credit at any time during the 2004 Quarter,we incurred no interest expense during the 2004 Quarter, compared to $1,000 ofinterest expense in the 2003 Quarter.

14

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**IncomeTaxes**

Our provision (benefit) for income taxes increased$54,000 in the 2004 Quarter to $45,000 of expense, compared to a benefit of$9,000 in the 2003 Quarter.  The provision in the 2004 Quarter consists ofestimated federal alternative minimum tax (AMT) taxes and state taxes payable.Other than for federal AMT and state taxes, we did not record a currentprovision for U.S. income taxes in either quarter as we have sufficient netoperating tax loss carryforwards available to offset our current U.S. taxableincome. We have recorded a valuation allowance in respect of our deferred taxassets, and we will continue to monitor the likelihood of realization of thebenefits of our deferred tax assets and may adjust the allowance in futureperiods as the benefit of the asset becomes more certain.

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

Netincome in the 2004 Period was $681,000 compared to net income of $750,000 inthe 2003 Period, a decrease of approximately $69,000 or 9%.  Basic and dilutedearnings per share were $0.11 for the 2004 Period, compared to $0.13 per sharein the 2003 Period. 

**Net Sales**

Net sales decreased $101,000 or 1% to $9,494,000 inthe 2004 Period compared to $9,595,000 in the 2003 Period.  The extent of thesales decrease was partially offset by a stronger Euro compared to the U.S.Dollar in the 2004 Period. The tables below set forth sales by product line andgeographic location of our customers for the periods indicated:

| **Net  Sales for 2004 Period  6  Months ended March 31, 2004  (millions  of dollars)** |
|----------------------------------------------------------------------------------------|
| ** **                                                                             | **US** | **Europe** | **Other** | Total |
| Diabetic  Products                                                                     | $1.88 | $2.12 | $0.46 | $4.46 |
| Cell Phone  Products                                                                   | 1.34 | 2.47 | 0.26 | 4.07 |
| Other Product Sales                                                                    | 0.90 | 0.04 | 0.02 | 0.96 |
| **Total***                                                                             | **$4.12** | **$4.63** | **$0.74** | **$9.49** |

                               

| **Net  Sales for 2003 Period  6  Months ended March 31, 2003  (millions  of dollars)** |
|----------------------------------------------------------------------------------------|
| ** **                                                                             | **US** | **Europe** | **Other** | Total |
| Diabetic  Products                                                                     | $2.68 | $1.65 | $     -- | $4.33 |
| Cell Phone  Products                                                                   | 2.01 | 1.87 | 0.25 | 4.13 |
| Other Product Sales                                                                    | 1.00 | -- | 0.15 | 1.15 |
| **Total***                                                                             | **$5.69** | **$3.52** | **$0.40** | **$9.60** |

* Tablesmay not total due to rounding.

 

 

15

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**Diabetic Product Sales:**Sales of cases for blood glucose monitoring kitsincreased $127,000, or 3%, to $4,457,000 in the 2004 Period compared to salesof $4,330,000 in the 2003 Period.  We continue to experience strong demand forour carrying cases for OEM diabetic monitoring kits. Sales of diabetes productsin the 2004 Period represented 47% of our overall sales compared to 45% in the2003 Period.

In April 2004, one of our largest customers, AbbotLaboratories, announced that it completed its acquisition of TheraSense,another of our customers.  The parties to the transaction stated that the twobusinesses would continue to operate as separate divisions. We believe thatAbbott intends to grow this portion of its business and that the acquisitionwill not adversely affect our relationships with the two companies. However,the consequences of an acquisition are unpredictable and there can be noassurance that the acquisition will not result in changes in the two companies'product procurement.  The combined sales of Abbot Laboratories and TheraSense,including their subsidiaries and affiliates, comprised approximately 16% of ournet revenue in the 2004 Period and 2003 Period.

**Cell Phone Product Sales:**Sales of cell phone carrying case products decreased$56,000 or 1% to $4,074,000 in the 2004 Period from $4,130,000 in the 2003Period as decreased sales to Motorola and under the Motorola license werelargely offset by increased sales to Nokia.  Direct sales to Motorola(including its subsidiaries and affiliates) declined $786,000 to $1,964,000 inthe 2004 Period from $2,750,000 in the 2003 Period.  The Company's 2004 Perioddid not benefit from a large order related to specific new handset introductioncomparable to the 2003 Period, when Motorola launched a camera attachment forone of its cell phones, which incorporated our camera case. The decline inMotorola OEM sales was largely offset by higher sales to Nokia, which increased$785,000 to $1,115,000 in the 2004 Period from $330,000 in the 2003 Period.

Sales to wholesalers and retailers under ourMotorola license agreement decreased $55,000 to $995,000 in the 2004 Periodfrom $1,050,000 in the 2003 Period, bringing the total decrease in sales ofMotorola-related products (OEM and under the license) to $841,000.  We believethat the decrease was in part also due to a reduction in new product launches,which we believe reduces the visibility of licensed products offered bywholesale and retail distributors.  We believe that the decline in sales ofproducts to Motorola and under the license is related to factors that areshort-term in nature, including the relationship between timing of productlaunches and our ability to obtain orders relating thereto.  See "Liquidity andCapital Resources" for further discussion relating to the expiration of thelicense agreement with Motorola. 

**Other Product Sales:** Sales of these products decreased by $187,000, or16%, to $963,000 in the 2004 Period compared to sales of $1,150,000 in the 2003Period.

**Gross Profit**

Gross profit on sales increased $114,000 or 4%, to$3,154,000 in the 2004 Period from $3,040,000 in the 2003 Period as a result ofour higher sales volume. Our gross profit percentages were 33% and 32% in the2004 Period and the 2003 Period, respectively.

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**Selling, General, and Administrative Expenses**

Selling expenses increased $157,000, or 13%, to$1,409,000 in the 2004 Period from $1,252,000 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 $159,000 in the 2004 Period compared to the 2003 Period primarily dueto the recruitment and employment of a sales executive to pursue additionalproduct markets, such as computer carrying cases, and hiring of an additionalsales representative in our Swiss office. Royalty expenses increased $38,000 inthe 2004 Period compared to the 2003 Period due to an increase in the minimumMotorola royalty commitment as provided in the license agreement, as amended.These increases were partially offset by lower travel, auto, and officeexpenses of $40,000 between the 2004 Period and the 2003 Period. The ratio ofselling expenses to net sales increased slightly to 15% in the 2004 Period from13% in the 2003 Period.

General and administrative expenses decreased$101,000, or 9%, to $1,018,000 in the 2004 Period from $1,119,000 in the 2003Period primarily due to lower personnel expenses of $118,000 in the 2004 Periodcompared to the 2003 Period resulting from the expiration of a consultingcontract with our former chief executive officer and staffing changes in ouraccounting department. The decrease in personnel expenses was partially offsetby increases in other general and administrative expenses of $17,000 between the2004 Period and the 2003 Period.

**Income from Operations**

Pretax income from operations increased $59,000 or9% to $727,000 in the 2004 Period from $668,000 in the 2003 Period as a resultof increased gross profit of $114,000 in the 2004 Period compared to the 2003Period and partially offset by $55,000 in higher operating expenses, as morefully discussed above.

**Other Income (Expense)**

Total other income (expense) decreased $79,000 or80% to $20,000 of income in the 2004 Period from $99,000 of income in the 2003Period. The "Other income-net" component in the 2004 Period consisted of a$14,000 foreign currency gain and a $2,000 bad debt recovery, and in the 2003Period consisted of a $73,000 foreign currency gain and a $23,000 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 $3,000 of interest expensein the 2003 Period incurred in connection with a capital lease.

**IncomeTaxes**

Ourprovision for income taxes increased by $50,000 in the 2004 Period to $66,000,compared to $16,000 in the 2003 Period.  The provision in the 2004 Periodconsists of estimated federal alternative minimum tax (AMT) taxes and statetaxes payable. Other than for federal AMT and state taxes, we did not record acurrent provision for U.S. income taxes in either quarter as we have sufficientnet operating 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 $757,000 of cash from operations in the2004 Period, compared to $472,000 in the 2003 Period.  Operating cash flows inthe 2004 Period resulted primarily from net income of $681,000, adjusted fornon-cash items including depreciation expense of $59,000 and a provision forobsolete inventory of $130,000, plus changes in our working capital accounts. The 2003 Period's operating cash flows included net income of $750,000 adjustedfor non-cash items including depreciation of $66,000, a provision for obsoleteinventory of $52,000, 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 cash collections resulted in a decrease in our accountsreceivable balance of $519,000. The inventory balance increased $276,000 tomeet demand for our products based on existing sales orders. The increase inthe inventory balance accounts for the increase in the accounts payable balanceof $163,000. Accrued liabilities decreased $490,000 primarily as a result ofperformance bonuses that were accrued as of September 30, 2003, and paid in the2004 Period. There were no such bonuses accrued for during the 2004 Period.

17

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Investing activities used $13,000 in the 2004 Periodin connection with the purchase of additional computer equipment and software. In the 2003 Period, investing activities used $50,000 for purchases of computerequipment and software and generated $4,000 from the sale of property, plant,and equipment.

Financing activities generated $190,000 in the 2004Period in proceeds from the exercise of stock options and used $4,000 topurchase 2,000 shares of our common stock in the open market pursuant to thestock buyback program described below.  In the 2003 Period, financingactivities used $54,000 to purchase 45,200 shares of our common stock in theopen market pursuant to the stock buyback program described below and $14,000to make principal payments on our capital lease obligations.

At March 31, 2004, our current ratio (current assetsdivided by current liabilities) was 4.58 and our quick ratio (current assetsless inventories divided by current liabilities) was 4.03. Our working capital(current assets less current liabilities) at March 31, 2004 was $5,581,000 andwe had no long-term debt. At September 30, 2003, our current ratio (currentassets divided by current liabilities) was 3.48 and our quick ratio (currentassets less inventories divided by current liabilities) was 3.10. Our workingcapital (current assets less current liabilities) 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 such circumstances,we could obtain an increase in our credit facility or obtain necessary fundsunder an additional facility.

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 (4.00% at March 31, 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.  AtMarch 31, 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. 

 

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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 (5.0% as of March 31, 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 logistics provider(freight forwarding and customs agent) entered into a Representation Agreementwhereby, among other things, the European logistics provider agreed to act asthe Company's fiscal representative in The Netherlands for the purpose ofproviding services in connection with any value added tax matters. The Companyagreed to guarantee payment to the logistics provider with respect to any valueadded tax liability that the logistics provider paid on the Company's behalf. In 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 March 31, 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 a value added tax liability is imposed,and the logistics provider states in writing that it has been called upon inits capacity as surety by the Dutch Receiver of Taxes to pay such taxes, andthe Company refuses to remit the amount of value added tax due to the logisticsprovider. On December 31, 2004 and on every anniversary thereafter, the bankguarantee will be renewed automatically for one-year periods until December 31,2009. The Company has agreed to keep a guarantee in place for five yearsfollowing the date its relationship terminates with the logistics provider.

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. The license requires theCompany to make a minimum guaranteed royalty payment to Motorola of $408,000for the contract period of October 1, 2003 to September 30, 2004.  If theCompany elects to terminate the license before September 30, 2004, the Companywould be required to pay the balance, if any, of the minimum guarantee for thecontract period in effect at the date of cancellation.

The license agreementexpires on September 30, 2004.  We have entered into preliminary discussionswith Motorola regarding the terms of a proposed renewal of this agreement. Although there can be no assurance, we believe that such discussions have beenconstructive.  Any failure to renew the license agreement or enter into a differentagreement upon terms acceptable to us could have a material adverse affect onour results of operations and financial condition. In addition, while webelieve that our commercial relationship with Motorola is good, if we areunable to renew the license agreement or enter into a different agreement uponterms acceptable to us, we cannot predict how this would affect OEM sales toMotorola.  See "Item 6. Management's Discussion and Analysis-Risk Factors" inour Annual Report on Form 10-KSB for the fiscal year ended September 30, 2003.

TheCompany did not incur any long-term debt in the 2004 Period and at March 31,2004 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 March 31, 2004, wehave repurchased an aggregate of 68,200 shares at a cost of $96,000, including2,000 shares during the 2004 Period at a cost of approximately $4,000.

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**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 March 31,2004:

| **Contractual  Obligation or Commitment** | **Apr 04 - Mar 05**         | **Apr 05- Mar 07**                                 | **Apr 07 - Mar 09**                                                                      | **Thereafter**                                                               |
|-------------------------------------------|-----------------------------|----------------------------------------------------|------------------------------------------------------------------------------------------|------------------------------------------------------------------------------|
| Employment & Consulting Agreements    | $    680,000 | $    510,000                        | $               -- | $             -- |
| Operating Leases                          | 142,000                     |         234,000 | 28,000                                                                                   | --                                                                           |
| License Agreement**                       | 204,000                     | --                                                 | --                                                                                       | --                                                                           |
| Totals                                    | $ 1,026,000                 | $   744,000                              | $       28,000                                             | $             -- |

**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. 

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**.  

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 2.                  CHANGES IN SECURITIES AND ISSUERPURCHASES OF EQUITY SECURITIES

      Under ourpreviously announced stock buyback program we made the following repurchases inthe open market in the three month period ended March 31, 2004:
Period                   
Total Number of Shares Purchased

Average Price Paid  per Share

Total number of    Shares Purchased as Part of Publicly Announced  Plans or Programs

Maximum Number    of Shares that May Yet Be Purchased Under the Plans or Programs

January  1, 2004 to January 31, 2004

--

--

--

420,000

February 1, 2004 to February 29, 2004

--

--

--

420,000

March 1, 2004, to March 31, 2004

2,000

$2.19

2,000

418,000

       

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

                32.1Certifications of the Chief Executive Officer and Chief Financial Officer underSection 906 of the Sarbanes-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 December 31, 2003, and an increase in the numberof shares authorized for repurchase under its stock buyback program, filed onJanuary 23, 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,hereunto duly authorized.

 

Dated:  April 21, 2004

FORWARD INDUSTRIES,INC.(Registrant)

 

By:/s/Jerome E. Ball                                            

Jerome E. Ball Chairman and Chief Executive Officer

                                                                               

By:/s/Douglas W. Sabra                                    

DouglasW. SabraVice President, Chief Financial Officer andPrincipal Accounting Officer

 

 

 

 

 

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