Forward Industries, Inc.

INDEX
PART I.

FINANCIAL INFORMATION
Page No.
Item 1.
Financial Statements
- Consolidated Balance Sheets as of ~~March~~December 31, 2007 (unaudited)
and September 30, ~~2006~~2007
4
- Consolidated Statements of Operations (unaudited) for the Three ~~and Six~~ Months
Ended ~~March~~December 31, 2007 and 2006
5
- Consolidated Statements of Cash Flows (unaudited) for the ~~Six~~Three Months
Ended ~~March~~December 31, 2007 and 2006
6
- Notes to Consolidated Financial Statements (unaudited)
7
Item 2.
~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations
1516

Item 3.
Quantitative and Qualitative Disclosures About Market Risk
2725
Item 4.
Controls and Procedures
25

Item 4.4T.
Controls and Procedures
2826

PART II.

OTHER INFORMATION

Item 1.
Legal Proceedings
2927

Item 1A.
Risk Factors
2927

Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
3129

Item 3
Defaults Upon Senior Securities
3130

Item 4.
Submission of Matters to a Vote of Security Holders
3130

Item 5.
Other Information
3130

Item 6.
Exhibits
3130

Signatures
31
Certifications
32

~~Certifications~~
33
~~Explanatory Note~~
The registrant determined, as of September 30, 2006, its most recent fiscal year-end, that it no longer met the definition of a small business issuer, in accordance with Rule 228.10(a) under the Exchange Act. Accordingly, its Annual Report on Form 10-KSB for the fiscal year ended September 30, 2006, was its last annual report filing as a Small Business issuer in exiting the Small Business Disclosure System (until such time as its filing status may be reassessed). This Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2007, pursuant to the Exchange Act of Forward Industries, Inc. represents the registrant's second quarterly filing as a non-accelerated filer on Form 10-Q and in accordance with Regulation S-K.
2

2

Note Regarding Use of Certain Terms

In this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms "we", "our", and the "Company" refer to Forward Industries, Inc., a New York corporation, together with its consolidated subsidiaries; ~~"Forward"~~“Forward” or ~~"Forward Industries"~~“Forward Industries” refers to Forward Industries, Inc.; ~~"common stock"~~“common stock” refers to the common stock, $.01 par value per share, of Forward Industries, Inc.; "Koszegi" refers to Forward ~~Industries'~~Industries’ wholly owned subsidiary Koszegi Industries, Inc., an Indiana corporation; ~~"Koszegi Asia"~~“Koszegi Asia” refers to Forward ~~Industries'~~Industries’ wholly owned subsidiary Koszegi Asia Ltd., a Hong Kong corporation; ~~"Forward Innovations"~~“Forward Innovations” refers to Forward ~~Industries'~~Industries’ wholly owned subsidiary Forward Innovations GmbH, a Swiss corporation; ~~"GAAP"~~“GAAP” refers to accounting principles generally accepted in the United States; ~~"Commission"~~“Commission” refers to the United States Securities and Exchange Commission; ~~"Exchange Act"~~“Exchange Act” refers to the United States Securities Exchange Act of 1934; the ~~"2007 Quarter"~~“2008 Quarter” refers to the three months ended ~~March~~December 31, 2007; the ~~"2006 Quarter"~~“2007 Quarter” refers to the three months ended ~~March~~December 31, 2006; ~~the "2007 Period" refers to the six months ended March 31, 2007; the "2006 Period" refers to the six months ended March 31, 2006; "Fiscal 2007"~~“Fiscal 2008” refers to our fiscal year ending September 30, ~~2007; "Fiscal 2006"~~2008; “Fiscal 2007” refers to our fiscal year ended September 30, ~~2006; "EMEA Region"~~2007; “EMEA Region” means the geographic area encompassing Europe, the Middle East and Africa; APAC Region means the Asia Pacific Region, consisting of Australia, New Zealand, Hong Kong, Taiwan, China, South Korea, Japan, Singapore, Malaysia, Thailand, Indonesia, India, the Philippines and Vietnam; and ~~"Americas"~~“Americas” refers to the geographic area encompassing North, Central, and South America.

PART I. FINANCIAL INFORMATION

~~Item~~

ITEM 1. Financial Statements
FINANCIAL STATEMENTS

Forward Industries, Inc.

CONSOLIDATED BALANCE SHEETS



	March 31,	September 30,	December 31,	September 30,
	2007	2006	2007	2007
Assets	(Unaudited)		(Unaudited)
Current assets:
Cash and cash equivalents	$20,799,128	$18,609,371	$21,298,124	$20,267,791
Accounts receivable, net	3,787,868	6,069,058	3,925,324	4,135,117
Inventories, net	2,148,821	2,449,065	1,355,400	1,072,360
Prepaid expenses and other current assets	621,797	329,461	626,604	628,786
Deferred tax asset	93,000	83,000	309,461	279,741
Total current assets	27,450,614	27,539,955	27,514,913	26,383,795

Property, plant, and equipment, net	160,490	190,084	162,956	160,644
Deferred tax asset			--	29,898
Other assets	50,412	51,932	77,409	57,538
Total Assets	$27,661,516	$27,781,971	$27,755,278	$26,631,875

Liabilities and shareholders' equity
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$2,121,406	$ 2,141,191	$ 3,176,938	$1,904,946
Accrued expenses and other current liabilities	251,752	690,413	427,264	303,185
Total current liabilities	2,373,158	2,831,604	3,604,202	2,208,131

Commitments and contingencies

Shareholders' equity:
Shareholders’ equity:
Preferred stock, par value $0.01 per share; 4,000,000 shares authorized; no shares issued	--	--	--	--
Common stock, par value $0.01 per share; 40,000,000 shares authorized, and 8,424,931 shares issued (including 563,493 held in treasury)	84,249	84,249
Common stock, par value $0.01 per share; 40,000,000 shares authorized, 8,488,932 shares issued (including 633,493 held in treasury)			84,889	84,889
Capital in excess of par value	15,287,952	15,287,952	15,560,442	15,546,046
Treasury stock, 563,493 shares at cost	(853,159)	(853,159)
Treasury stock, 633,493 shares at cost			(1,085,057)	(1,085,057)
Retained earnings	10,769,316	10,431,325	9,590,802	9,877,866
Total shareholders' equity	25,288,358	24,950,367	24,151,076	24,423,744
Total liabilities and shareholders' equity	$27,661,516	$27,781,971
Total liabilities and shareholders’ equity			$27,755,278	$26,631,875

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

	(Unaudited)		(Unaudited)
	Six Months Ended March 31,		Three Months Ended December 31,
	2007	2006	2007	2006
Operating activities:
Net income	$337,991	$838,005
Adjustments to reconcile net income to net cash provided by operating activities:
Net (loss) income			$(287,064)	$372,708
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Provision for obsolete inventory	159,861	79,647	129,524	54,000
Depreciation and amortization	45,051	55,645	16,580	22,210
Share-based compensation			14,396	--
Deferred income taxes	(10,000)	76,202	178	(5,000)
Tax benefit from exercise of stock options	--	479,405
Provision for bad debt expense			(20,033)	--
Changes in operating assets and liabilities:
Accounts receivable	2,281,190	7,327,227	229,826	917,221
Inventories	140,383	(1,573,304)	(412,564)	(70,994)
Prepaid expenses and other current assets	(292,336)	(259,887)	2,182	(54,257)
Other assets	1,520	--	(19,871)	1,520
Accounts payable	(19,785)	(1,550,953)	1,271,992	1,610,809
Accrued expenses and other current liabilities	(438,661)	(1,217,463)	124,079	(299,102)
Net cash provided by operating activities	2,205,214	4,254,524	1,049,225	2,549,115

Investing activities:
Proceeds from sale of marketable equity securities	--	75,034
Purchases of property, plant, and equipment	(15,457)	(10,497)	(18,892)	(5,190)
Net cash (used) provided by investing activities	(15,457)	64,537
Net cash used by investing activities			(18,892)	(5,190)

Financing activities:
Proceeds from exercise of stock options	--	87,653
Net cash provided by financing activities	--	87,653
Net cash (used) provided by financing activities			--	--

Net increase in cash and cash equivalents	2,189,757	4,406,714	1,030,333	2,543,925

Cash and cash equivalents at beginning of period	18,609,371	15,291,739	20,267,791	18,609,371

Cash and cash equivalents at end of period	$20,799,128	$19,698,453	$21,298,124	$21,153,296

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

Forward Industries, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 OVERVIEW

Forward Industries, Inc. was incorporated under the laws of the State of New York and began operations in 1961. The Company is engaged in the design, marketing, and distribution of custom-designed, soft-sided carrying cases and other carry solutions products made from leather, nylon, vinyl, and other synthetic fabrics. The cases and other products are used primarily for the protection and transport of portable electronic devices such as cellular phones and medical devices. The Company markets products as a direct seller to original-equipment-manufacturers in the EMEA Region (meaning the geographic area encompassing Europe, the Middle East and Africa), the APAC Region (meaning the Asia Pacific Region, encompassing Australia, New Zealand, Hong Kong, Taiwan, China, South Korea, Japan, Singapore, Malaysia, Thailand, Indonesia, India, the Philippines and Vietnam) and the Americas (meaning the geographic area, encompassing North, Central, and South America) and as a seller to retailers and wholesalers in Europe, the Middle East and Africa under non-exclusive licenses for certain trademarks. This license expired December 31, 2007. See Note 9.

In the opinion of management, the accompanying consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position and results of operations and cash flows for the interim periods presented herein, but are not necessarily indicative of the results of operations for the full fiscal year ending September 30, ~~2007.~~2008. These financial statements should be read in conjunction with the Company's audited consolidated financial statements included in its annual report on Form ~~10-KSB~~10-K for the fiscal year ended September 30, ~~2006,~~2007, and with the disclosures and risk factors presented therein.

NOTE 2 ACCOUNTING POLICIES

Accounting estimates:

Preparing the Company's financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Basis of ~~presentation:~~ presentation

The accompanying consolidated financial statements include the accounts of Forward Industries, Inc. ("Forward") and its wholly owned subsidiaries (together, the "Company"). All significant intercompany transactions and balances have been eliminated in consolidation.

Revenue ~~Recognition:~~ Recognition

In accordance with the requirements of Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition in Financial Statements,, the Company recognizes revenue from product sales to customers when: products that do not require further services by the Company are shipped, there are no uncertainties surrounding customer acceptance, and collectibility is reasonably assured.

Supplier ~~Rebates:~~ Rebates

Emerging Issues Task Force (EITF) Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor,, permits recognition of a rebate or refund of a specified amount of cash consideration that is payable if the customer completes a specified cumulative level of purchases. The Company has entered into agreements with several of its suppliers that grant the Company a rebate based on its level of purchases made during each quarter. In lieu of a cash payment from these suppliers the Company generally receives a credit memo. The Company reduces accounts payable to the supplier and cost of goods sold each quarter as the Company earns the rebates. For the three-month periods ended ~~March~~December 31, 2007 and 2006, the cumulative amounts of such quarterly rebates were approximately ~~$135,000 in each period. For the six-month periods ended March 31, 2007~~$102,000 and ~~2006, the cumulative amounts of such quarterly rebates were approximately $328,000 and $321,000,~~$193,000, respectively. The quarterly rebates are net of amounts allocated to unsold inventories and are reflected in the accompanying consolidated statements of operations as a reduction of cost of goods sold.

Forward Industries, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 2 ACCOUNTING POLICIES (CONTINUED)

Foreign Currency ~~Transactions:~~ Transactions

The functional currency of the Company's wholly owned foreign subsidiaries is the U.S. dollar. Foreign currency transactions may generate receivables or payables that are fixed in terms of the amount of foreign currency that will be received or paid. Fluctuations in exchange rates between the functional currency and the currency in which a transaction is denominated increases or decreases the expected amount of functional currency cash flows upon settlement of the transaction. These increases or decreases in expected functional currency cash flows are foreign currency transaction gains or losses that are included in ~~"other~~“other income, ~~net"~~net” in the accompanying unaudited consolidated statements of operations. The net ~~gain (loss)~~gains from foreign currency transactions ~~was~~were approximately ~~$(5,000)~~$10,000 and ~~$4,000~~$11,000 for the three-month periods ended ~~March~~December 31, 2007 and 2006, respectively. ~~The net gain (loss) from foreign currency transactions was approximately $6,000 and $(11,857) for~~

Comprehensive (Loss) Income

For the ~~six-month~~three-month periods ended ~~March 31, 2007 and 2006, respectively.~~

~~Comprehensive (Loss) Income:~~ ~~For the three and six-month periods ended March~~December 31, 2007 and 2006, the Company did not have any components of comprehensive (loss) income other than net (loss) income.

Recent Accounting Pronouncements

On July 13, 2006 the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, as amended by FASB Interpretation No. 48-1, Definition of Settlement in FASB Interpretation No. 48 on May 2, 2007 (FIN 48). FIN 48, clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition, and clarifies that income taxes are outside the scope of FASB Statement No. 5, Accounting for Contingencies.

FIN 48 applies to all tax positions related to income taxes subject to FASB Statement No. 109, Accounting for Income Taxes, (FAS 109). This includes tax positions considered to be ~~"routine"~~“routine” as well as those with a high degree of uncertainty.

FIN 48 is effective for fiscal years beginning after December 15, 2006. Differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts recognized after adoption should be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The cumulative effect adjustment would not apply to those items that would not have been recognized in earnings, such as the effect of adopting FIN 48 on tax positions related to business combinations. The Company ~~will adopt~~adopted FIN 48 effective October 1, 2007. The ~~Company has not completed its evaluation~~adoption of FIN ~~48. However, it does~~48 did not ~~expect the adoption will~~ have a material impact on its consolidated financial statements.

NOTE 3 ~~INVENTORY~~INVENTORIES

Inventories consist primarily of finished goods and are stated at the lower of cost (determined by the first-in, first-out method) or market. Provision has been made to reduce excess, obsolete, or otherwise un-saleable inventories to net realizable value. Changes in this provision are reflected in the cost of goods sold line of the Company’s consolidated statements of operations.

NOTE 4 DEBT

In February 2007, Forward and its wholly-owned U.S. subsidiary, Koszegi Industries, Inc. renewed their credit facility with a U.S. bank that provides for a committed line of credit in the maximum amount of $3$3.0 million, including a $1.5 million sub-limit for letters of credit. This credit ~~expiring February~~facility expires March 30, 2008. Forward and Koszegi are required to eliminate borrowings for thirty consecutive days during the term of the facility and are required to comply with certain financial covenants, including the maintenance of current and tangible net worth ratios, as defined. Amounts drawn under the credit facility bear interest at LIBOR plus 2.5% and are secured by substantially all of ~~Koszegi's~~Koszegi’s assets and certain assets of Forward. There were no borrowings or letter of credit obligations outstanding under this facility during the ~~three or six-month~~three-month period ended ~~March~~December 31, 2007.

Forward Industries, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 4 DEBT (CONTINUED)

In 2003, ~~Forward's~~Forward’s wholly-owned Swiss subsidiary, Forward Innovations GmbH (Forward Innovations), established a credit facility with a Swiss bank that provides for an uncommitted line of credit in the maximum amount of $400,000. Amounts borrowed under the facility may be structured as a term loan or loans, with a maximum repayment period of 12 months, as a letter of credit facility, or as a guarantee facility, or any combination of the foregoing. Either party may terminate the facility at any time; however, such termination would not affect the stated maturity of any term loans outstanding. Amounts borrowed other than as a term loan must be settled quarterly or converted into term loans. In connection with this facility, Forward Innovations agreed to certain covenants. Amounts drawn under this credit facility bear interest at variable rates established by the bank (5.5% as ~~March~~December 31, 2007). At ~~March~~December 31, 2007, Forward Innovations is contingently liable to the bank in respect of a letter of credit issued on its behalf in the amount of €224,000 ~~(approximately $300,000)~~(equal to approximately $327,000 as at December 31, 2007) in favor of Forward ~~Innovations'~~Innovations’ freight forwarder and customs agent in connection with its logistics operations in The Netherlands. The effect of the issuance of the letter of credit is to reduce the availability of the credit line in an amount equal to the face amount of the letter of credit.

NOTE 5 OPERATING SEGMENT INFORMATION

The Company operates in a single segment that provides carrying solutions for portable electronic devices. This carrying-solution segment designs, markets, and distributes products to its customers that include manufacturers of consumer hand held wireless telecommunications and medical monitoring devices. The carrying solution segment operates in geographic regions that include primarily the Americas, EMEA, and APAC regions. Geographic regions are defined based primarily on the location of the customer. The following table presents net sales related to these geographic segments:

~~(all amounts in thousands of dollars)~~

					(all amounts in thousands of dollars)
	Three Months Ended March 31,		Six Months Ended March 31,		Three Months Ended December 31,
	2007	2006	2007	2006	2007	2006
APAC	$2,765	$2,431	$6,120	$6,053	$2,295	$3,356
Americas	1,815	2,417	4,277	5,816	1,524	2,462
EMEA	1,296	1,609	2,913	3,259	1,134	1,617
Total net sales	$5,876	$6,457	$13,310	$15,128	$4,953	$7,435

The ~~Company's~~Company’s income tax (benefit) provision ~~(benefit)~~ consists of the following United States and foreign ~~components:~~components.

For the ~~three and six-month~~three-month periods ended ~~March~~December 31, 2007 and 2006, the Company recorded a (benefit) provision for income taxes of approximately ~~$(7,000)~~$(57,000) and ~~$83,000,~~$90,000, respectively. The ~~Company's~~Company’s effective tax rate does not approximate the statutory United States federal income tax rate primarily due to tax rate differentials in respect of United States state and foreign taxes.

Effective June 2001, undistributed earnings of the ~~Company's~~Company’s Swiss subsidiary are considered to be permanently invested; therefore, in accordance with SFAS No. 109, no provision for U.S. Federal and state income taxes on those earnings has been provided. At ~~March~~December 31, 2007, the ~~Company's~~Company’s Swiss subsidiary had approximately ~~$5,129,000~~$4,708,000 of accumulated undistributed earnings.

Basic ~~(loss) earnings~~ per share data for each period presented is computed using the weighted-average number of shares of common stock outstanding during each period. Diluted ~~(loss) earnings~~ per share data is computed using the weighted-average number of common and dilutive common-equivalent shares outstanding during the period. Dilutive common-equivalent shares consist of shares that would be issued upon the exercise of stock options, ~~and warrants,~~ computed using the treasury stock method. For this purpose, the average quoted market prices on the NASDAQ SmallCap Market for the Company's common stock for the three-month periods ended ~~March~~December 31, 2007 and 2006, were ~~$4.33~~$2.66 and ~~$9.66,~~$4.88, respectively.

ALoss per share data for the three-month period ended December 31, 2007, excludes all outstanding options as inclusion of such shares would be anti-dilutive. Income per share data for the three-month period ended December 31, 2006, excludes options to purchase a total of ~~320,000 and~~ 70,000 shares of common stock ~~equivalents have been~~from the computation of diluted earnings per share because the exercise prices were greater than the average quoted market price of the Company’s common stock, and therefore, their effect would be anti-dilutive as calculated under the treasury method promulgated by the Statement of Financial Accounting Standard No. 128, Earnings per Share (“SFAS 128”).

In accordance with the contingently issuable shares provision of SFAS 128, 21,999 shares of service-based common stock awards (“restricted stock”) were excluded from the calculation of ~~earnings~~diluted loss per share for the ~~three and six-month periods~~three-month period ended ~~March~~December 31, ~~2007, respectively, because their inclusion would be anti-dilutive. No common stock equivalents were excluded for the three and six-month periods ended March 31, 2006.~~2007.

In ~~November 1996,~~May 2007, shareholders of the ~~Company's Board of Directors adopted~~Company approved the ~~1996 Stock~~2007 Equity Incentive Plan (the 2007 Plan), pursuant to which up to ~~4,000,000~~400,000 shares of common stock can be issued to officers, employees and non-employee directors of the Company upon the grant of restricted common stock and the exercise of ~~incentive~~ stock options ~~and nonqualified stock options.~~granted to such persons. This plan was ~~approved~~adopted by ~~shareholders~~the Board of Directors in ~~1997.~~February 2007. The price at which restricted common stock may be granted and the exercise price of ~~the incentive~~stock options granted may not be less than the fair market value of the common stock at the date ~~the option is granted.~~of grant. The ~~Company's~~Company’s Compensation Committee ~~establishes~~administers the plan. Options generally expire ten years after the date of grant and restricted stock grants generally vest in equal proportions over three years.

The Company’s 1996 Stock Incentive Plan (the 1996 Plan) expired in accordance with its terms in November 2006. The exercise price of incentive options granted under the ~~nonqualified options.~~1996 Plan to officers, employees and non-employee directors of the Company were required by its provisions to be equal at least to the fair market value of the common stock at the date of grant. Options expire ten years after the date of grant and generally vest in equal proportions over three years. ~~In November, 2006,~~Unexercised options granted pursuant to the 1996 ~~Stock Incentive~~ Plan expired in accordance with the terms thereof. Expiration of the Plan does not affect the term or exercisability of previously granted options, of which there were 245,000 outstanding and unexercised as of March 31, 2007.

Prior to October 1, 2006, the Company accounted for its stock-based compensation plan (expired November 2006) under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, ~~Accounting for Stock Issued to Employees~~~~, and related interpretations, or APB No. 25, as permitted by FASB Statement No. 123,~~ ~~Accounting for Stock-Based Compensation,~~ or SFAS No. 123. Under APB No. 25, when the exercise price of our employee stock options equaled or exceeded the market price of the underlying stock on the date of grant, no compensation cost was recognized.

~~Effective October 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123R,~~ ~~Share-Based Payments~~, and related interpretations, or SFAS No. 123R, which is a revision of SFAS No. 123, using the modified-prospective transition method. Under that method, for the six-month period ended March 31, 2007, the Company recognized (a) compensation cost for all share-based payments granted prior to ~~but not yet vested as of, October 1, 2006, based on the grant date fair value estimated~~expiration remain outstanding in accordance with the original ~~provisions~~terms of ~~SFAS No. 123~~the grants.

All stock option awards granted under the 1996 Plan and ~~(b)~~the 2007 plan are fully vested. During the three-month period ended December 31, 2007, the Company did not grant any stock option awards under the 2007 Plan. Accordingly, the Company did not recognize any compensation cost related to stock option awards in its consolidated statements of operations for ~~all share-based payments granted on or subsequent to October 1, 2006, based on~~ the ~~grant-date fair value estimated in accordance with~~three-month period ended December 31, 2007.

A summary of the ~~provisions of SFAS No. 123R.~~stock option activity under the 2007 Plan and the 1996 Plan during the three-month period ended December 31, 2007 is presented below:

The table below provides additional information regarding stock option awards that were outstanding and exercisable at December 31, 2007.

Under the 2007 Plan as of December 31, 2007, the Compensation Committee had approved awards of 56,000 shares of restricted stock (including 23,000 shares of restricted stock the grant date for which is January 2, 2008), in the aggregate, to certain key employees, one of whom also serves as a director, pursuant to the ~~adoption~~2007 Plan. Vesting of ~~SFAS No. 123R,~~ the ~~Company presented~~restricted stock is generally subject to a continued service condition with one-third of the ~~tax benefit of deductions arising from~~awards vesting each year on the ~~exercise of stock options as operating cash flows in~~anniversary date the ~~Condensed Consolidated Statement of Cash Flows. SFAS No. 123R requires that~~awards were granted commencing on the Company classify the cash flows resulting from the tax benefit that arises when the tax deductions exceed the compensation cost recognized for those options (excess tax benefits) as financing cash flows. As all share-based payments granted in prior periods were fully vested as of October 1, 2006, and as the Company did not grant any share-based payments during the six-month period ended March 31, 2007, there were no excess tax benefits for the Six-month period ended March 31, 2007.

first such anniversary date. The fair value of ~~share-based~~the awards ~~used~~was equal to ~~compute pro forma net income per share disclosures is~~ the ~~estimated present~~market value atof the Company’s common stock on the grant date. During the three-month period ended December 31, 2007 the Company recognized approximately $14,000 of compensation cost in its consolidated statements of operations related to restricted stock awards vesting under the 2007 Equity Plan.

The following table summarizes restricted stock activity from September 30, 2007 through December 31, 2007 (restricted stock grants approved during this period but having a grant date ~~using~~of January 2, 2008, are not reflected in the ~~Black-Scholes option-pricing model with~~table).

As of December 31, 2007, there was approximately $34,000 of total unrecognized compensation cost related to 21,999 of restricted stock awards (reflected in the ~~following weighted average assumptions:~~

~~Expected Term~~~~: The expected term represents~~table above) granted under the ~~period over which the share-based awards are~~2007 Equity Incentive Plan. That cost is expected to be ~~outstanding.~~

~~Risk-Free Interest Rate~~: The Company based the risk-free interest rate used in its assumptions on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equivalent to the award's expected term.

~~Expected Volatility~~~~: The volatility factor used in the Company's assumptions is based on the historical price of its stock~~recognized over the ~~most recent period commensurate with the expected term~~remainder of the ~~award.~~requisite service period.

~~Expected Dividend Yield~~: The Company historically has not paid any dividends on its common stock and had no intention to do so on the date the share-based awards were granted. Accordingly, the Company used a dividend yield of zero in its assumptions.

The Company estimated the expected term and expected volatility of share-based awards based upon historical data. There were no awards granted during the three or six-month period ended March 31, 2007. Forfeitures were recognized as they occurred.

The table below illustrates the effect on net income and income per share during the three and six-month periods ended March 31, 2006 if we had applied the fair value recognition provisions of SFAS No. 123R.

As of ~~October 1, 2006, all share-based payments granted prior~~December 31, 2007, warrants to October 1, 2006, were fully vested. Additionally, the Company did not grant any share-based payments during the six-month period ended March 31, 2007. As such, the Company did not recognize compensation cost or an excess tax benefit for share-based compensation awards during the six-month period ended March 31, 2007.

~~A summary~~purchase 75,000 shares of the ~~activity under our~~Company’s common stock ~~plan during~~at an exercise price of $1.75 were outstanding. These warrants are scheduled to expire 90 days after a registration statement is declared effective by the ~~six-month period ended March~~Securities and Exchange Commission. As of December 31, 2007, ~~is presented below:~~no such registration statement has been filed with the Securities and Exchange Commission.

The Company ~~has licensed~~was granted a license for the use of certain trademarks ofby Motorola, Inc. ("Motorola") for the distribution and sale of carry solution products throughout the EMEA Region under a non-exclusive license agreement effective October 1, 2004. The license agreement ~~expires~~expired by its terms on December 31, ~~2007.~~ 2007, with the Company being obligated to pay a royalty on sales effected through the expiration date. The Company and licensor are in negotiations to extend or renew the license. Subject to successful conclusion of such negotiations, as to which there can be no assurance, the Company has limited sell-through rights with respect to unsold inventory on hand as of December 31, 2007, as to which it is also obligated to pay royalties.

Under the terms of the license agreement, the Company is required to pay Motorola a royalty based upon a percentage of the Company's net sales to third parties of licensed products within the EMEA Region, subject to payment of minimum royalties (irrespective of actual net sales) to Motorola over ~~the following~~ three contract ~~periods:~~

~~Contract~~periods, the last two of which were calendar 2006 (Contract Period ~~1: October 1, 2004 to December 31, 2005~~

~~Contract~~2) and calendar 2007 (Contract Period ~~2: January 1, 2006 to December 31, 2006~~

The minimum royalty payment to Motorola for Contract Period 1 was $375,000, or $300,000 annualized. The minimum royalty payment to Motorola for Contract Period 2 was $225,000. At the time of negotiation of the agreement, the Company and Motorola had agreedlicense terms provided that, prior to ~~the~~ commencement of ~~each~~the latter two contract ~~period, they~~periods, the parties would ~~agree~~attempt to ~~establish~~negotiate a new minimum royalty amount for the ensuing contract period, in the absence of which a default formula would apply. The ~~Company was unable to reach an agreement with Motorola on the minimum royalty payment for Contract Period 3; consequently, the agreement of the parties is~~default formula provided that the minimum royalty payment for the ensuing Contract Period 3 may not be less than seventy-five per cent (75%) of the annualized royalties payable in respect of actual sales for the previous Contract Period, 2, provided, however, that in no event ~~shall~~may the minimum royalty in such ensuing Contract Period 3 be less than seventy-five percent (75%) nor more than one-hundred-twenty-five percent (125%) of the amount of such prior Contract Period’s annual minimum royalty. The Company and Motorola were unable to negotiate new agreed minimum royalty payment amounts for Contract Period ~~2's annualized minimum royalty.~~

~~Pursuant to this~~2 and Contract Period 3. Consequently, application of the default formula resulted in fixing the minimum royalty ~~is expected to be fixed in the amount of~~amounts at $225,000 for Contract Period 2 and $281,000 for Contract Period 3.

If the Company elects to terminate the license agreement before its expiration on December 31, 2007, it will be required to pay a penalty of an amount equal to up to one year's minimum royalty under certain conditions as specified in the agreement. The minimum royalty commitments are recognized as expense over the contract period.

In July 2005, the license agreement with Motorola was amended to expand the licensed territory to include the APAC Region as well as the EMEA Region in consideration for payment of additional royalties on sales in such licensed territory, subject to payment of minimum royalties, separate and apart from royalties payable in respect of sales in the EMEA Region.

Under ~~its current~~the license ~~agreement with Motorola,~~ the Company recorded royalty expense of approximately ~~$116,000~~$89,000 and ~~$253,000~~$137,000 for the ~~three and six-month~~three-month periods ended ~~March~~December 31, 2007 ~~respectively,~~ and ~~$155,200 and $240,200 for the three and six-month periods ended March 31,~~ 2006, respectively. These amounts are included in selling expenses in the accompanying consolidated statements of operations. These amounts represent minimum royalty in respect of the 2008 Quarter and royalties paid in respect of actual sales ~~and in each case represent an amount in excess (and in lieu) of the minimum royalties otherwise payable to Motorola~~ in respect of ~~those periods.~~the 2007 Quarter. The minimum ~~royalty~~royalties for the ~~three and six-month~~three-month periods ended ~~March~~December 31, 2007 and 2006 were $89,000 and ~~$158,000, respectively, and~~ $69,000, ~~and $154,000 for the three and six-month periods ended March 31, 2006,~~ respectively.

In July 2002, Forward Innovations and its European logistics provider (freight forwarding and customs agent) entered into a Representation Agreement whereby, among other things, the European logistics provider agreed to act as such subsidiary's fiscal representative in The Netherlands for the purpose of providing services in connection with any value added tax matters. As part of this agreement, the subsidiary agreed to provide an undertaking to the logistics provider with respect to any value added tax liability arising in The Netherlands that the logistics provider paid on the subsidiary's behalf. In February 2004, such subsidiary entered into a guarantee agreement with a Swiss bank relating to the repayment of any amount up to €224,000 ~~(approximately $300,000~~(equal to approximately $327,000 as of ~~March~~December 31, 2007) paid by such bank to the logistics provider pursuant to a letter of credit that was issued by the bank in favor of the logistics provider in order to satisfy such undertaking. The subsidiary would be required to perform under the guarantee only in the event that: (i) a value added tax liability is imposed on the Company's sales in The Netherlands, (ii) the logistics provider asserts that it has been called upon in its capacity as surety by the Dutch Receiver of Taxes to pay such taxes, (iii) the subsidiary or the Company on its behalf fails or refuses to remit the amount of value added tax due to the logistics provider, and (iv) the logistics provider makes a drawing under the letter of credit. Commencing December 31, 2004, and on each anniversary thereafter until December 31, 2009, it is intended that the bank letter of credit will be renewed automatically for one-year periods. The subsidiary has agreed to keep a letter of credit guarantee in place for five years following the date its relationship terminates with the logistics provider. As of ~~March~~December 31, 2007, the Company has not incurred a liability in connection with this guarantee.

Effective October 1, 2005, the Company entered into an employment agreement with each of Jerome E. Ball, Michael M. Schiffman, and Douglas W. Sabra in order to secure their services to Forward during the terms of their respective agreements. Mr. Ball’s and Mr. Schiffman’s agreement expired December 31, 2007 (see Note 11 Subsequent Events, below, with respect to Mr. Schiffman’s separation arrangements). Mr. Sabra’s agreement expires December 31, 2008. Mr. Sabra’s agreement, provides for successive one-year renewal terms, unless either party provides written notice of its intention not to renew the agreement not later than 90 days prior to the end of the term (or renewal period). If Forward gives such notice, subject to certain conditions, the executive would be entitled to receive six months salary, at the rate then in effect, as severance. No stock options or other equity compensation is granted to any such executive pursuant to these agreements.

Under his employment agreement, which was amended in connection with his appointment to succeed Mr. Ball as Chief Executive Officer, Mr. Sabra is employed as President and Chief Executive Officer at an annual salary of $250,000, increased from $225,000. At the time of this appointment and salary increase the Compensation Committee of the Company’s Board of Directors also determined to grant Mr. Sabra 20,000 shares of restricted stock under the 2007 Plan, with a grant date of January 2, 2008, vesting in equal proportions over three years from the grant date.

In addition, under his agreement Mr. Sabra is eligible to receive bonus compensation in each year of the term of his agreement based on financial incentives. The formula, as amended, that determines the amount of bonus that may be earned in each year during the term of the agreement is based on a percentage of, Forward’s Pre-Tax Income (defined to exclude “other income”).

Mr. Sabra is entitled to receive customary benefits including health, life and disability insurance, auto allowances and participation in the Company's 401K retirement plan.

The Company entered into a two-year consulting agreement with its Chairman of its Board of Directors, Jerome E. Ball, effective upon his retirement as Chief Executive Officer on January 1, 2008. Under this consulting agreement the Company has retained him to advise the Company as to its principal customer relationships, development and strategies under its business plan, and potential acquisitions and/or business combinations. In exchange for such services, the Company has agreed to pay Mr. Ball $10,000 per month during the term of the consulting agreement, which commenced January 1, 2008 and is scheduled to expire on December 31, 2009. If the agreement is terminated due to Mr. Ball’s permanent disability or death during the term of the agreement, the Company has agreed to pay Mr. Ball or his estate, as the case may be, one half the payments remaining under the agreement as a termination benefit. In addition, if during the term of the agreement Mr. Ball is re-elected to the Board of Directors and serves as its Chairman, he will be entitled to a fee of $25,000 per annum, payable in monthly installments.

From time to time, the Company may become a party to legal actions or proceedings in the ordinary course of its business. As of ~~March~~December 31, 2007, ~~except as described below,~~ there were no such actions or proceedings, either individually or in the aggregate, that, if decided adversely to the ~~Company's~~Company’s interests, the Company believes would be material to its business.

On ~~October 3, 2006,~~January 28, 2008, the Company entered into severance arrangements with Mr. Michael M. Schiffman, whose employment as President and Chief Operating Officer expired December 31, 2007. Under these arrangements, in addition to other customary terms and conditions, Mr. Schiffman was ~~served~~granted a severance package consisting of $162,500, or six months salary at the annual rate under his employment agreement at expiration, vested benefits under the Company’s health and retirement plans in accordance with plan terms, and a ~~summons~~release by the Company of potential claims, Mr. Schiffman released the Company from potential claims and ~~purported class action complaint that was filed July 31, 2006,~~agreed to certain modifications of the non-competition and non-solicitation covenants contained in ~~a matter captioned Lynn Finkelstein & Company, Inc., on behalf of certain of its clients as attorney-in-fact and all others similarly situated, Plaintiff, vs.~~ the employment agreement.

Forward Industries, Inc. and certain of its executive officers, in their individual capacities, Defendants, brought in the United States District Court for the Southern District of Florida. The complaint alleges that the Company during the purported class period July 25, 2005, to February 2, 2006, made certain misrepresentations of fact, or failed to disclose certain material facts, and violated certain generally accepted accounting principles in the presentation of its financial statements included in its periodic reports filed with the Commission pursuant to the Exchange Act.

On November 15, 2006, the Plaintiffs filed a First Amended Complaint that purports to state substantially identical claims. The Company filed a motion to dismiss the complaint, as amended, in its entirety for failure to satisfy the pleading requirements of the Private Securities Litigation Reform Act of 1995 and Plaintiff's attorneys filed a responsive motion and brief. The Company filed its brief in response in February 2007. The parties to this action anticipate attendance at a May 2007 hearing called by the judge assigned to hear this case at which a schedule for discovery and motion practice may be proposed.

The Company, as well as each of the individual defendants, believes that the complaint, as amended, is wholly without merit and intends to vigorously contest this lawsuit. The Company has directors and officers' liability insurance, including entity coverage. The Company has, in the course of defending the complaint, incurred legal and other expenses up to the retention amount of $250,000, in its directors and officers liability insurance policy and that incurring expenses not covered by this policy may adversely affect its reported results of operations in future periods. While the Company believes that the complaint, as amended, is without merit and the Plaintiff has yet to assert an amount of damages claimed, the outcome of this lawsuit cannot be predicted and the Company's ultimate liability if this lawsuit is adversely determined cannot currently be ascertained and could be material.

~~Forward Industries, Inc.~~

~~Item~~

ITEM 2. ~~Management's Discussion and Analysis of Financial Condition and Results of Operations~~ MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our unaudited Consolidated Financial Statements and the notes thereto and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form ~~10-KSB~~10-K for the fiscal year ended September 30, ~~2006.~~2007. The following discussion and analysis compares our consolidated results of operations for the three months ended ~~March~~December 31, 2007 (the ~~"2007 Quarter"~~“2008 Quarter”), with the three months ended ~~March~~December 31, 2006 (the ~~"2006 Quarter"~~“2007 Quarter”)~~, and the six months ended March 31, 2007 (the "2007 Period"), with the six months ended March 31, 2006 (the "2006 Period)~~, and is based on or derived from the Unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report. There have been no material changes in critical accounting estimates since September 30, ~~2006.~~2007. All figures in the following discussion are presented on a consolidated basis. All dollar amounts and percentages presented herein have been rounded to approximate values.

~~Cautionary statement for purposes of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of~~CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This quarterly report contains forward-looking statements that are not based on historical fact and that involve assessments of certain risks, developments, and uncertainties. Such forward looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, can be identified by the use of forward-looking terminology such as ~~"may"~~“may”, ~~"will"~~“will”, ~~"should"~~“should”, ~~"expect"~~“expect”, ~~"anticipate"~~“anticipate”, ~~estimate"~~estimate”, ~~"intend"~~“intend”, ~~"continue"~~“continue”, or ~~"believe"~~“believe”, or the negatives or other variations of these terms or comparable terminology. Forward looking statements may include projections, forecasts, or estimates of future performance. Forward looking statements are based upon assumptions that we believe to be reasonable at the time such forward looking statements are made. Whether those assumptions will be realized will be determined by future factors, developments, and events, which are difficult to predict and may be beyond our control. Actual factors, developments, and events may differ materially from those assumed. Such risk factors, developments, uncertainties, and contingencies ~~and~~ developments, including those discussed in this ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations and those identified in ~~"Risk Factors"~~“Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q and in our annual report on Form ~~10-KSB~~10-K for the fiscal year ended September 30, ~~2006,~~2007, could cause our future operating results to differ materially from those set forth in any forward looking statement. Such factors include, among other, the following: our success in winning new business from our customers and against competing vendors; whether replacement programs that we win will be as successful as those that are replaced; the loss of a key salesman who has significant influence on our relationships with certain Original Equipment Manufacturer (“OEM”) diabetic customers; levels of demand and pricing generally for cellular handsets and blood glucose monitoring devices sold by our customers for which we supply carry solutions; variability in order flow from our OEM customers; general economic and business conditions, nationally and internationally in the countries in which we do business; the expiration of our license agreement with Motorola by its terms on December 31, 2007, and the uncertainty as to whether such agreement will be renewed or extended on terms acceptable to us; the need to add materially to our inventory allowance, including the impact on inventory levels or saleability of inventory arising out of hub agreements we have entered into with two of our OEM customers; demographic changes; changes in technology, including developments affecting cellular handsets; developments in ~~cellular handsets~~the treatment or ~~the~~ control of ~~diabetes;~~diabetes that affect the incidence of use of handheld blood glucose monitors by diabetics; increased ~~competition;~~competition in the business of distribution of carry solutions for handheld electronic devices generally or increased competition to include carry solutions with products manufactured by our OEM customers in particular; changes affecting the business or business prospects of one or more of our principal ~~Original Equipment Manufacturer ("OEM")~~OEM customers; governmental regulations and changes in, or the failure to comply with, governmental regulations; and other factors included elsewhere in this report and our other reports filed with the Commission, including without limitation, those described under the caption Risk Factors contained in our Annual Report on Form ~~10-KSB~~10-K for the year ended September 30, ~~2006.~~2007. Accordingly, there can be no assurance that any such forward looking statement, projection, forecast or estimate can be realized or that actual returns or results will not differ materially from those set forth in any forward looking statement.

Forward Industries, Inc.

Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future results, events or developments.

~~Forward Industries, Inc.~~

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

This ~~management's~~management’s discussion and analysis of financial condition and results of operations is based upon our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. We base these estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, and these estimates form the basis for our judgments concerning the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically evaluate these estimates and judgments based on available information and experience. Actual results could differ from our estimates under different assumptions and conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted. Please refer to ~~"Management's~~“Management’s Discussion and ~~Analysis-Critical~~Analysis—Critical Accounting Policies and ~~Estimates"~~Estimates” included in our Annual Report on Form ~~10-KSB~~10-K for the fiscal year ended September 30, ~~2006,~~2007, for further information regarding our critical accounting policies and estimates.

The notes to our audited consolidated financial statements and ~~"Management's~~“Management’s Discussion and ~~Analysis"~~Analysis” included in our Annual Report on Form ~~10-KSB~~10-K for the year ended September 30, ~~2006,~~2007 (including the information under “Risk Factors” therein), the notes to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, ~~and~~ the factors and events described elsewhere in ~~"Management's~~the “Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations,"~~Operations” that follows below, as well as the information contained under the caption “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q contain additional information related to our accounting policies and should be read in conjunction with the following discussion and analysis relating to ~~the individual financial statement captions and~~ our overall financial performance, operations and financial position.

Revenue Recognition

In accordance with the requirements of Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition in Financial Statements,, the Company recognizes revenue from product sales to customers when: products that do not require further services by the Company are shipped; there are no uncertainties surrounding customer acceptance; and collectibility is reasonably assured.

Accounts Receivable

We record an allowance for doubtful accounts for all receivables judged by us to be unlikely to be collected. The effect of the allowance is to reduce the accounts receivable reported on our balance sheet to an amount that we believe will actually be collected. Significant management judgments and estimates must be made and used in connection with establishing this valuation account, based on a combination of factors: ~~Specifically, we analyze~~Our analysis includes, among other factors, of the age of receivable balances, our historical bad debts write-off experience, and our respective ~~customer's~~customer’s creditworthiness to determine the appropriate allowance for doubtful accounts. At ~~March~~December 31, 2007 and September 30, ~~2006,~~2007, our allowance for doubtful accounts was approximately ~~$47,000.~~$27,000 and $47,000, respectively. Changes to this account are reflected in the general and administrative expense line of our ~~statement~~consolidated statements of operations. Although we consider our allowance for doubtful accounts to be adequate and proper, changes in economic conditions, the assessments of new ~~customers'~~customers’ creditworthiness, changes in customer circumstances, or other factors could have a material effect on the recorded allowance.

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Forward Industries, Inc.

Inventory Valuation

We ~~use certain~~make estimates and judgments to value our inventory. Our inventory is recorded at the lower of cost or market. The majority of our inventory consists of finished goods that are custom made by our suppliers based on firm orders from our OEM customers and held for our account. We ~~do, however,~~also supply custom manufactured inventory to our ~~customers'~~OEM customers’ distribution hubs in anticipation of their draw-downs to fulfill orders; we also periodically stock inventory in anticipation of orders from our OEM customers when it appears to us commercially advantageous to do so. We also hold inventory in support of our license ~~agreements.~~agreement. At the end of each fiscal quarter, we evaluate our ending inventories, and we establish an allowance for inventory that is considered obsolete, slow moving, or otherwise un-saleable. This evaluation includes, among other factors, analyses of inventory levels, historical loss trends, sales history, and projections of future sales demand. We physically dispose of inventory once its marketability has been determined to be zero. Inventory allowances were approximately ~~$0.2~~$0.7 and $0.6 million at ~~March~~December 31, 2007 and September 30, ~~2006. The cost of obsolete inventory is included~~2007, respectively. Changes to this account are reflected in the cost of goods sold online of our ~~statement~~consolidated statements of operations.

The vast majority of our production is made to customer specifications. If a customer elects not to accept delivery, or defaults on a purchase order or commitment, or returns inventory from its hub without payment in violation of the hub arrangements, additional inventory write-downs or reserves may be required and would be reflected in cost of goods sold in the period the revision is made. Historically, actual inventory valuation results have not deviated significantly from those previously estimated by us.

Deferred Income Taxes

In the preparation of our consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we are subject to taxation. This process involves estimating actual current income tax expense together with assessing temporary differences resulting from differing treatment of revenue and expense items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We had approximately ~~$93,000 and $83,000~~$0.3 million of deferred tax assets at ~~March~~December 31, 2007, and September 30, ~~2006,~~2007, respectively. No valuation allowances were recorded in respect of these deferred tax assets as of such dates.

Management evaluates our deferred tax assets on a quarterly basis and assesses the need for valuation allowances. Our deferred tax assets are evaluated by considering historical levels of income, estimates of future taxable income, and the impact of our tax planning strategies. We record a valuation allowance to reduce deferred tax assets when it is determined, on a more likely than not basis, that we will not be able to use all or part of our deferred tax assets.

In the event that it should be subsequently determined that we can not, on a more likely than not basis, realize all or part of our deferred tax assets, if any, in the future, an adjustment to establish (or record an increase in) the deferred tax asset valuation allowance would be charged to income in the period in which such determination is made. Changes in our deferred tax assets are reflected in the tax (benefit) expense ~~(benefit)~~ line of our consolidated statements of operations.

Variability of Revenues and Results of Operation

Because our sales revenues are highly concentrated in a few large customers, and because the volumes of these ~~customers'~~customers’ order flows to us are highly variable, with short lead times, our quarterly revenues, and consequently our results of operations, are susceptible to significant variability over a relatively short period of time.

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Forward Industries, Inc.

We depend for the predominant proportion of our sales revenues on OEM orders from our three largest customers, each of which is a large, multinational corporation. Each of these customers launches many different products and purchases products accessories, such as carrying cases, from many different vendors. When we are selected to supply a carry solution ~~"in-box"~~“in-box” for a specific product and launch, we may not be in a position to know the frequency or volumes of our ~~customers'~~customers’ orders, or the duration of such orders (which will depend on the OEM customer ~~product's~~product’s life cycle), all of which depend on our ~~customers'~~customers’ ongoing assessments of the ~~product's~~product’s relative contribution to their businesses, as well as other factors. Our OEM customers may keep products for which our carry solutions have been selected to be packaged ~~"in-box"~~“in-box” in active promotion for many months, or for a very short period of time, depending on the popularity of the product, product development cycles and new product introductions, and our ~~customers' competitors'~~customers’ competitors’ product offerings. Short product life cycles and/or significant variability in product pricing are particularly characteristic of the cellular handset market, where new functionality is constantly introduced, competition among vendors is high, and industry technical standards are subject to continuing change. When ~~"in-box"~~“in-box” programs end, and to the extent that the introduction of new programs does not include our products as an accessory ~~"in-box"~~“in-box”, or such new programs do include our products as an accessory ~~"in-box"~~“in-box” but do not result in a comparable level of demand for our products, the level of our OEM product sales is susceptible to significant and rapid change.

All of this makes our quarterly revenue levels susceptible to a high degree of variability and difficult to predict. Significant, rapid shifts in our operating results may occur if and when one or more of these customers increases or decreases the size(s) of, or eliminates, its orders from us by amounts that are material to our business.

TRENDS IN RESULTS OF OPERATIONS

We foresee a continuation of weak results from our major cell phone OEM customer. Revenue from Motorola, historically our largest customer, has trended down on a comparable quarter basis since the first quarter of Fiscal 2007. This downtrend accelerated in the third and fourth quarters of Fiscal 2007, and in the 2008 Quarter, revenue from Motorola fell precipitously from the lower levels of Fiscal 2007. We believe as part of the economics accompanying our customer’s cell phone launch cycle that Motorola has reduced and/or eliminated the inclusion of accessories in-box for formerly high-price handset models that have transitioned to mid- and lower-price handsets, with consequent revenue loss for us. We have not received awards of significant new “in-box” programs to make up for higher revenue programs in previous reporting periods. Currently, we foresee no imminent new “in-box” programs or developments to reverse this trend in the immediate future. The uncertainties relating to a reversal of this trend toward more positive developments have increased with Motorola’s disclosures that it is evaluating strategic alternatives for its wireless handset business unit. Absent a reversal of this trend, which we do not foresee in the immediate future, and absent a material increase in sales revenues from other product markets, we will continue to incur operating losses, and possibly net losses, throughout Fiscal 2008. See “Risk Factors” in Part II, Item 1A, for a discussion of recent developments relating to our relationship with Motorola.
We anticipate that gross profit and gross profit percentage will continue to be impacted by several factors. First, reduction in volume demand (particularly with respect to our cell phone products) in the 2008 Quarter was, and we anticipate for Fiscal 2008 likely will be, the most significant factor in the level of gross profit. Second, we anticipate that our gross profit will continue to be pressured by a difficult pricing environment for our cell phone and blood glucose carry solution product lines, combined with inflationary cost pressures on our cost of goods sold, as described below. Third, while revenues from Lifescan, our largest customer, and certain other OEM customers in this product line have trended higher, gross margin on these sales is relatively narrow. As revenue from these programs accounts for an overall higher percentage of our revenue mix, we expect gross profit percentage may further decline. Finally, aftermarket sales under the Motorola license have tended to carry higher profit margins than OEM sales on certain products. If we are not successful in renewing or extending the license agreement, and if net sales under any such license are not material, gross profit percentage will be further pressured.
Our customer base is becoming more concentrated.Four customers, accounted for 78% of our net sales in the 2008 Quarter. In ~~the~~Fiscal 2007, ~~Period,~~ three customers, including their subsidiaries, affiliates, or their contract manufacturers, accounted for ~~75%~~72% of our net sales. In Fiscal 2006, four such customers accounted for approximately 73% of our net sales. Sales to the fourth customer, Bayer Healthcare LLC ("Bayer"), declined to an immaterial amount during the 2007 Period as our sole "in-box" program with them concluded. Additionally, Motorola accounted for all of our net sales in our OEM cell phone product line in the 2007 Period as our Fiscal 2005-2006 "in-box" program for Nokia ended. In Fiscal 2006, combined sales to Bayer and Nokia represented approximately $3.3 million or 14% of our net sales, compared to $0.1 million and less than 1% in the 2007 Period. Although weWe continue to pursue ~~additional~~ opportunities with ~~these two customers, as~~several new OEM suppliers of ~~March 31, 2007, we have not been selected to participate in any new "in-box" programs or successors to those that were concluded.~~ handheld devices.

Forward Industries, Inc.

Revenue from our largest customer, Motorola, has trended down on a comparable quarter basis since the second quarter of Fiscal 2006 and we anticipate that this trend will continue through the third fiscal quarter of 2007 as well.We believe that ~~the revenue trend~~recent, macro-economic developments in ~~recent quarters is broadly the result~~or affecting China’s economy will continue to contribute to rising costs of ~~a cell phone launch cycle,~~goods sold, which has seen certain of Motorola's very successful models (for which we have supplied accessories in-box), after an extended time on the market, make a pricing transition to mid- and lower-tier phones. As partwill pressure gross profit. We source 100% of the ~~economics accompanying this transition,~~products we ~~believe that~~sell and distribute from vendors located in China. We continue to face rising labor costs (particularly in South China, where we source the ~~inclusion~~majority of ~~accessories in-box has been reduced with consequent revenue loss for~~our products), higher fuel costs, and the rising value of the Renminbi in comparison to the U.S. dollar in Fiscal 2008. The appreciation of the Renminbi versus the US dollar may accelerate in Fiscal 2008. While our cost of goods sold is denominated in US dollars, higher labor costs and Chinese currency appreciation are reflected in our vendors’ prices to us. ~~Currently, we foresee no imminent new in-box programs or developments to reverse this trend.~~ We believe that ~~sales under~~currently we have relatively little ability to pass these higher costs on to our ~~license agreement with Motorola are being similarly affected as consumers are less inclined to purchase relatively high cost cases and other accessories for mature, lower-tier phones.~~ Notwithstanding this development, we believe that our cell phone accessory supply relationship with Motorola remains strong and continue to work closely with Motorola to ensure we are considered for future in-box opportunities.larger customers.
~~While our gross profit continues~~Our 2008 Quarter and Fiscal 2007 operating results led to ~~be pressured by~~ a difficult pricing environment for both our cell phone carry solution product line (OEM and licensed sales) and also our blood glucose carry case product line, reduction in volume demand has become the most significant factor in the level of gross profit, as noted in the previous paragraph.
~~Our business incurred a~~pre-tax net loss that would have been significantly larger but for the substantial level of ~~other income consisting~~“other income”, which consists primarily of interest income on cash balances. ~~Absent~~We anticipate that these conditions will likely persist in the foreseeable future absent any significant reductions in selling, general, and administrative expense or improvements to our gross ~~profit in the near term, we will continue to incur a loss from operations.~~profit.

~~Forward Industries, Inc.~~
Our inventory remains at historically high levels primarily as a result of supporting hub agreements entered into with two of our largest OEM customers. We expect ~~our~~ inventory to remain at ~~this~~ higher ~~level or perhaps trend slightly higher through Fiscal 2007.~~levels in the foreseeable future in large part because of the recent entry into additional hub agreements with these customers. Under these agreements, we are required to source and ship our products to our OEM ~~customers'~~customers’ distribution hubs at multiple locations, but do not invoice the OEM customers until they withdraw our product from the hub for sale through their chain of distribution. The implementation of these arrangements negatively affects our liquidity. In the 2007 Quarter, we entered into three new hub arrangements, bringing the total to six hub agreements. We anticipate that in the course of stocking these new hubs, inventory levels may trend higher than the level experienced in the 2007 Period unless our customers in whole or in part stock the new hubs with product withdrawn from existing hubs.
~~Product manufacture, in many cases, has been outsourced by our OEM customers to contract manufacturing firms in China and in Southeast Asia~~. Such firms are performing manufacturing, assembly and product packaging functions, including the bundling of product accessories such as ours with the OEM customer's product. As a consequence, we are selling our carry solution products to the contract manufacturing firm. In these cases, we invoice the contract manufacturing firm and not the OEM customer. Therefore, it is the contract manufacturing firm's credit to which we must look for payment in such cases and not that of our OEM "customer". In addition, in recent periods APAC has accounted for a significant percentage of our sales revenues, as seen in the tables below. We believe that the reliance on contract manufacturers by our OEM customers is an effort to reduce their costs of supply that may also be increasing pressure generally to compress margins in respect of accessory products packaged "in-box" with various consumer electronics.
RESULTS OF OPERATIONS FOR THE ~~2007~~2008 QUARTER COMPARED TO THE ~~2006~~2007 QUARTER
Net (loss) income
We incurred a net loss of ~~$35,000~~$0.3 million in the ~~2007~~2008 Quarter compared to net income of ~~$64,000~~$0.4 million in the ~~2006 Quarter. The~~2007 Quarter, a decrease ~~in our results~~ of ~~operations~~$0.7 million. This decrease was ~~predominantly~~ due to ~~lower~~a 43% decline in gross profit ~~due to lower~~resulting from a significant decline in sales of cell phone products, as detailed ~~below, combined with an increase in selling,~~below. Our operating expenses (higher general and administrative ~~expenses primarily resulting from higher personnel costs. The deterioration in operating results was~~expense offset ~~in part~~ by ~~an increase in~~lower selling expense) and other income ~~due~~remained essentially flat. Income taxes swung $150,000 to ~~higher interest income resulting~~a benefit in the 2008 Quarter from ~~higher average cash balances and higher yields on those cash balances.~~a provision in the 2007 Quarter, which had the effect of reducing the net loss. Basic and diluted ~~net loss~~ per share data was ($0.04) for the 2008 Quarter, compared to $0.05 for the 2007 Quarter. The decrease in earnings per share in the 2008 Quarter was ~~$0.00 compared~~due to ~~basic and diluted~~the decrease in net ~~income per share of $0.01 in the 2006 Quarter.~~income.
Net Sales
Net sales decreased ~~$0.6~~$2.5 million or 9%33% to ~~$5.9~~$5.0 million in the 2008 Quarter compared to $7.4 million in the 2007 Quarter ~~compared to $6.5 million in the 2006 Quarter~~ due to ~~declines of $0.8 million~~a decline in sales of cell phone products ~~and $0.1~~of $3.7 million, or 87%. This decline was offset in part by increases in sales of diabetic products of $1.0 million, or 42%, and sales of other products ~~offset in part by a $0.3 million increase in sales~~ of cases for diabetic products. Net sales of cell phone products declined primarily as a result of lower OEM volume demand from Motorola, our only OEM cell phone customer during the 2007 Quarter, as well as lower sales volumes of licensed products to retailers and distributors under our license agreement with Motorola. In the 2006 Quarter Nokia contributed $0.2 million, ~~to OEM cell phone sales but none in the 2007 Quarter.~~or 22%. The tables below set forth sales by product line and geographic location of our customers for the periods indicated.

19
20

Forward Industries, Inc.

Net Sales for 2007 Quarter
3 Months ended March 31, 2007
(millions of dollars)
Net Sales for 2008 Quarter
3 Months ended December 31, 2007
(millions of dollars)
Net Sales for 2008 Quarter
3 Months ended December 31, 2007
(millions of dollars)

Americas
EMEA
APAC
Total
APAC
Americas
EMEA
Total
Cell Phone Products
$0.4
$0.8
$0.7
$1.9
Diabetic Products
0.7
0.5
2.0
3.2
$1.9
$0.7
$0.9
$3.5
Other Products
0.7
--
0.1
0.8
0.1
0.7
--
0.9
Cell Phone Products
0.2
0.1
0.2
0.5
Total*
$1.8
$1.3
$2.8
$5.9
$2.3
$1.5
$1.1
$5.0

Net Sales for 2006 Quarter 3 Months ended March 31, 2006 (millions of dollars)
Net Sales for 2007 Quarter 3 Months ended December 31, 2006 (millions of dollars)					Net Sales for 2007 Quarter 3 Months ended December 31, 2006 (millions of dollars)
	Americas	EMEA	APAC	Total	APAC	Americas	EMEA	Total
Cell Phone Products	$0.6	$1.1	$0.9	$2.6
Diabetic Products	1.2	0.5	1.2	2.9	$1.4	$0.8	$0.3	$2.5
Other Products	0.6	--	0.3	0.9	0.1	0.6	--	0.7
Cell Phone Products					1.9	1.1	1.3	4.2
Total*	$2.4	$1.6	$2.4	$6.5	$3.4	$2.5	$1.6	$7.4

Our cell phone carry solutions products include carrying cases for handsets and camera attachments, plastic belt clips, carrying case straps and bags, screen cleaners, decorative faceplates, and other attachments used to carry or enhance the appearance of cellular telephone handsets.

We design to the order of and sell these products directly to cell phone handset original equipment manufacturers including Motorola. Our cases are packaged as an accessory "in-box" with the handsets that are sold by our OEM customers. In addition, under our license agreements with Motorola and SAGEM, we distribute our products as separately packaged accessories directly to third party wholesalers and retailers in the EMEA Region and, under the Motorola license, the APAC Region. Cell phone product sales consist of OEM "in-box" sales to Motorola and (in the 2006 Quarter only) Nokia and sales under our license agreements.

Total sales of cell phone products decreased $0.8 million, or 30%, to $1.9 million in the 2007 Quarter from $2.6 million in the 2006 Quarter. Sales to Motorola, our only OEM cell phone customer for the 2007 Quarter, decreased $0.3 million from the 2006 Quarter due to reduced demand. Most OEM sales to Motorola related to two "in-box" programs (consisting of cases and other accessories) that have continued from Fiscal 2005 and 2006, but at lower levels than in the 2006 Quarter. During the 2007 Quarter, we experienced no demand from Nokia, which was our only other significant OEM cell phone customer in Fiscal 2006, representing approximately 7% of our total sales for that period.

Sales to third parties under our license agreement with Motorola totaled approximately $0.6 million in the 2007 Quarter compared to $1.0 million in the 2006 Quarter, a decrease of $0.4 million, or 40%. The significant decline is due to a number of factors, including reduced demand from distributors and retailers for certain cell phone models and consequently our carrying cases and other products that are custom designed to accessorize those models under license.

~~Sales of carry solutions for cell phone products represented approximately 32% of our total net sales in the 2007 Quarter compared to 40% for in 2006 Quarter.~~

Forward Industries, Inc.

PART II. OTHER INFORMATION

~~Item~~ITEM 1. ~~Legal Proceedings~~LEGAL PROCEEDINGS

From time to time, wethe Company may become a party to legal actions or proceedings in the ordinary course of ~~our~~its business. As of ~~March~~December 31, 2007, ~~except as described below,~~ there were no such actions or proceedings, either individually or in the aggregate, that, if decided adversely to ~~our~~the Company’s interests, ~~we believe~~the Company believes would be material to ~~our~~its business.

On October 3, 2006, we were served with a summons and purported class action complaint that was filed July 31, 2006 in a matter captioned Lynn Finkelstein & Company, Inc., on behalf of certain of its clients as attorney-in-fact and all others similarly situated, Plaintiff, vs. Forward Industries, Inc. and certain of its executive officers, in their individual capacities, Defendants, brought in the United States District Court for the Southern District of Florida. The complaint alleges that the Company during the purported class period July 25, 2005 to February 2, 2006 made certain misrepresentations of fact, or failed to disclose certain material facts, and violated certain generally accepted accounting principles in the presentation of its financial statements included in its periodic reports filed with the Commission pursuant to the Exchange Act.

On November 15, 2006, the Plaintiffs filed a First Amended Complaint that purports to state substantially identical claims. We filed a motion to dismiss the complaint, as amended, in its entirety for failure to satisfy the pleading requirements of the Private Securities Litigation Reform Act of 1995 and Plaintiff's attorneys have filed a responsive motion and brief. We filed our brief in response in February 2007. The parties to this action anticipate attendance at a May 2007 hearing called by the judge assigned to hear this case at which a schedule for discovery and motion practice may be proposed.

We believe that the complaint, as amended, is wholly without merit and intend to vigorously contest this lawsuit. We have directors and officers' liability insurance, including entity coverage. In the course of defending the complaint, we have incurred legal and other expenses up to the retention amount of $250,000, in our directors and officers liability insurance policy and that incurring expenses not covered by this policy may adversely affect our reported results of operations in future periods. While we believe that the complaint, as amended, is without merit and the plaintiff has yet to assert an amount of damages claimed, the outcome of this lawsuit cannot be predicted and our ultimate liability if this lawsuit is adversely determined cannot currently be ascertained and could be material.

~~Item~~ITEM 1A. ~~Risk Factors~~RISK FACTORS

This ~~"Risk Factors"~~“Risk Factors” section provides new or updated information in certain areas from the ~~"Risk Factors"~~“Risk Factors” set forth in our Annual Report on Form ~~10-KSB~~10-K for the fiscal year ended September 30, ~~2006. Set forth below are certain~~2007. These risk factors ~~that~~are new or have been expanded or updated from our Annual Report on Form ~~10-KSB,~~10-K, but the factors below do not constitute all the risk factors that pertain to our business. Please review our Annual Report on Form ~~10-KSB~~10-K for a complete listing of ~~"Risk Factors"~~“Risk Factors” that pertain to our business. Please ~~read~~refer to ITEM 2. “Cautionary statement for purposes of the ~~note regarding "Additional Forward Looking Information" that appears~~“Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995 on page 1516 of this Quarterly Report on Form 10-Q.

New Risk Factors

With the steep decline in cell phone revenue in the three months ended December 31, 2008, our business has become more highly concentrated in one product line, thus increasing the risks to our financial condition and results of operations compared to periods when revenue from two principal product lines was more balanced.

With the steep decline in revenues from sales of accessories for cellular handsets, revenues from sales of carry solutions for diabetic monitoring cases accounted for 71% of net revenues. Thus, revenue from Lifescan, Abbott Labs, and Roche Diagnostics has accounted for a higher percentage of our customer base. In recent years, revenue from the two product lines fluctuated without one being predominant. If cellular handset revenues do not improve over the near- and medium term, our financial condition and results of operations will be subject to higher risk from the loss of one or more of these diabetic OEM customers due to product line concentration.

Motorola disclosed in late January 2008 that it is exploring the structural and strategic realignment of its businesses in order to better equip its Mobile Devices unit to recapture market share and enhance shareholder value. The results of this realignment can not be foreseen at this time, but this development increases the risk to our ongoing relationship with Motorola.

In late January 2008 Motorola disclosed that it was evaluating strategic alternatives for its Mobile Devices unit, which has been our OEM customer for over 10 years. It is believed that a sale or other disposition of the Mobile Devices unit is among the strategic alternatives being considered by Motorola. We cannot predict the outcome of the strategic evaluation undertaken by Motorola nor the effects upon our business if the Mobile Devices unit were to be disposed of. We do believe that this development increases the risks and uncertainties attendant to continuation of our long-standing relationship to the Mobile Devices unit as a reliable, valuable supplier of carry solution accessories. If this relationship were adversely affected by the result of the strategic evaluation undertaken by Motorola, our business, financial condition and results of operations would likely be adversely affected, including a more pronounced concentration in our product lines, as described in the preceding risk factor.

Forward Industries, Inc.

Updated Risk Factors

Our license agreement with Motorola ~~expires~~expired on December 31, 2007, and the failure to extend or renew this agreement ~~would~~could have a material, adverse effect on our results of operations and financial condition.

~~Forward Industries, Inc.~~

Our license agreement with Motorola, Inc. ~~expires~~expired on December 31, 2007. Motorola is our single largest customer, as detailed in the next risk factor. We anticipate that Motorola and we will initiate discussions relating to an extension or new agreement in the near future, but there is no guarantee that we will be able to successfully hold such discussions or achieve an extension or new agreement on terms that we find acceptable. If we cannot conclude an extension or a new license agreement beyond December 31, 2007,Accordingly, our rights to sell certain cell phone carry solution cases and accessories bearing the Motorola trademark ~~will expire at that time,~~has expired, except for limited sell-through rights with respect to existing inventory ~~then~~ on hand. ~~The expiration~~We are presently in negotiations with Motorola relating to an extension or renewal of the agreement, but there can be no assurance that we will be able to successfully achieve an extension or renewal on terms acceptable to us. Motorola’s disclosure in January 2008 that it is evaluating strategic alternatives for its Mobile Devices unit is likely to increase the uncertainty, complexity, and difficulty in these negotiations. Any failure to extend or renew the license agreement ~~with Motorola without an extension or renewal~~on a long-term basis on terms acceptable to us would have a material and adverse effect on our results of operations and financial condition. In addition to the reduction of revenues as a consequence of losing aftermarket sales to cell phone retailers and distributors, we would expect that our profit margins ~~could~~would suffer materially, as currently margins on certain sales of licensed products exceed those in respect of sales of many OEM cell phone sales. Further, we are unable to predict the influence, if any, that a failure to extend or renew the license agreement would have on our OEM customer relationship with Motorola, but it could be adverse and material. Notwithstanding the foregoing developments, we believe that our cell phone accessory supply relationship with Motorola remains strong and we believe that we continue to work closely with Motorola to ensure we are considered for future in-box opportunities.

Our dependence on foreign manufacturers creates product cost, pricing, availability, quality control, and delivery risks.

All of our products are manufactured by Chinese manufacturers in China. Our reliance on foreign suppliers, manufacturers, and other contractors involves significant risks, including reduced control over delivery schedules, quality assurance, manufacturing yields, and costs, the potential lack of adequate capacity, and potential misappropriation of our designs.

In Fiscal 2006, we transitioned the responsibility for quality assurance inspection of products from our Koszegi Asia facility to a third-party quality assurance provider. Since making this transition we have experienced a high level of personnel turnover at Koszegi Asia, particularly in our sourcing department, as well as in employees who oversee the quality control activities of our quality assurance provider. As a result, certain quality control and delivery problems have continued to surface in Fiscal 2007 and Fiscal 2008. We are working diligently to improve our quality assurance operations to meet the exacting quality and delivery standards our customers require from us on a consistent basis. However, there can be no assurance that we will be successful in doing so and our failure to do so may adversely affect customer relationships and could result in the loss of a key customer, which could have an adverse effect on our results of operations and our business reputation.

Our business is and has been characterized by a high degree of customer concentration. ~~Two significant~~Our three largest customers accounted for ~~57% of net sales in Fiscal 2006. The same two customers~~approximately 70%, 72% and ~~a third customer accounted for 75%~~65% of net sales in the 2008 Quarter, Fiscal 2007 ~~Period;~~and Fiscal 2006, respectively; the loss of, or material reduction in orders from, any of these customers ~~would~~could materially and adversely affect our results of operations and financial condition.

The predominant percentage of our sales revenues is concentrated in three large OEM ~~customers. In the 2007 Period, direct sales to Motorola, together with its~~customers (including their international affiliates ~~accounted for approximately 35% of our net sales,~~ and/or ~~approximately $4.6 million (which amount excludes approximately 11% of our net sales, or $1.5 million, of products under our license agreement with Motorola)~~their contract manufacturers). ~~Lifescan accounted for approximately 25% of our net sales, or approximately $3.3 million. Abbott Labs accounted for approximately 15% of our net sales or $2.0 million.~~ The loss of any of these three key customers ~~or one additional OEM customer who accounted for 15%, of net sales in the 2007 Period~~ (whether as a result of such customers purchasing their carry solution requirements from another vendor, deciding to manufacture their own carrying cases, or eliminating the inclusion of our carrying cases with their products) would have a material adverse effect on our financial condition, liquidity and results of operations. In addition, sales to a fourth customer, who represented 7% of our sales in Fiscal 2006 declined to an immaterial amount during the 2007 Period as our sole "in-box" program with them concluded.

~~By contrast, in Fiscal 2006, direct sales to Motorola, together with its international affiliates, accounted for approximately 37% of our net sales,~~products or approximately $11.5 million (which amount excludes approximately 11% of our net sales, or $3.2 million, of products under our license agreement with Motorola). Lifescan accounted for approximately 19% of our net sales, or approximately $5.8 million. In addition, two other OEM customers accounted for 9%, and 7% of net sales in Fiscal 2006.

~~At any time, a significant percentage of our accounts receivable risk may be concentrated in a small number of customers.~~

~~Two customers accounted for approximately 71% and 74% of our accounts receivable at March 31, 2007 and September 30, 2006. The failure to receive or collect such amounts when, and as, due~~otherwise) could have a material adverse effect on our financial condition, liquidity and results of operations.

Forward Industries, Inc.

	Dollars in millions
	2008 Quarter		Fiscal 2007		Fiscal 2006
Customer:	Net Sales	Percentage of Net Sales	Net Sales	Percentage of Net Sales	Net Sales	Percentage of Net Sales
Lifescan	$ 2.0	40%	$ 7.1	32%	$ 5.3	17%
Motorola *	**	**	6.0	27%	11.3	37%
Abbott	0.9	19%	2.9	13%	3.3	11%
Roche	0.5	11%	**	**	**	**
Totals	$3.4	70%	$16.0	72%	$19.9	65%

* Amounts exclude approximately 9% and 11% of our net sales, or $2.0 million and $3.2 million of products under our license agreement with Motorola for Fiscal 2007 and Fiscal 2006, respectively.

** Amount not disclosed because the percentage of net sales was less than 10%

We ~~have incurred substantial expenses for legal fees~~experienced severe erosion in ~~defending the purported class action litigation~~our OEM product sales margins during Fiscal 2007 and this has continued into Fiscal 2008, and it is not clear when these margins will begin to improve. We continue to encounter pressures from certain OEM customers to constrain or even roll back prices. This price constraint factor is being exacerbated by inflationary pressures that ~~has been filed against us.~~ affect our costs of supply.

~~On October 3, 2006,~~

During Fiscal 2007 and into the ~~Company was served~~2008 Quarter, we have experienced significant pricing pressure from our OEM customers in both cell phone product sales and blood glucose monitor carrying case sales. We have been unable to extract comparable pricing concessions from our product suppliers across all product lines, which has resulted in the erosion of product sales margins. We anticipate that pressures on our pricing power and shifts in our product mix will continue to exert downward pressure on our gross profit percentage in the fiscal year ending September 30, 2008. We are also facing more persistent increases in costs of goods sold, due to inflationary pressures on materials and labor costs incurred by our Chinese vendors. In addition, prices these vendors charge to us are reflecting the appreciation of Chinese currency against the US dollar, which are passed through to us in the form of higher US dollar prices. Other components of cost of goods sold, such as our Hong Kong/China inspection costs, which traditionally have been relatively fixed, are showing signs of wage-price inflation. We also face higher energy costs passed through to us in freight charges. When calculated on the basis of reduced sales volumes, these pressures are also contributing to reduced gross profit percentage. We cannot predict when, if at all, our overall product sales margins will begin to improve. If we are unable to renew the license agreement with ~~a summons~~Motorola on terms acceptable to us, as detailed in the risk factor above, our product sales margins could be subject to further compression, as margins on licensed aftermarket sales are frequently more advantageous to us than on OEM sales.

Our business could suffer if the services of any of the key personnel we rely on were lost to us.

We are highly dependent on the efforts and ~~purported class action complaint, as described in Item 1.~~services of ~~Part II~~certain key sales representatives, including one individual, who is not under any contractual obligation to us, upon whom relationships with several of our largest OEM diabetic customers are highly dependent. Our business could be materially and adversely affected if we lost the services of such individual. If we lost the services of this ~~Quarterly Report, "Legal Proceedings." We maintain directors~~key sales representative, we might experience a reduction in or significant loss of orders from such customers, resulting in a loss of revenues, which could materially and officers' liability insurance, including entity coverage. We have incurred legal and other expenses up to the retention amount of $250,000, above which it is our expectation that it is the insurance carrier's responsibility to assume under such policy. We may incur additional legal or other expenses that are not covered by this policy, and this may adversely affect our ~~reported~~ results of operations and financial condition The degree of this risk has increased to the extent that our OEM customer relationships in ~~future periods.~~

~~While the purported class action that has been filed against us is~~our cell phone product line face greater uncertainty in ~~its early stages, the ultimate liability~~light of the ~~action is not predictable but may be material.~~Motorola disclosures described above.

30ITEM 2. UNREGISTERED SALES AND PURCHASES OF EQUITY SECURITIES AND USE OF PROCEEDS

None/Not Applicable.

Forward Industries, Inc.

While we believe that the complaint is without merit and will vigorously contest this action, and the plaintiff has yet to assert a specific amount in its claim for damages, the outcome of this lawsuit cannot be predicted and the Company's ultimate liability if this lawsuit is adversely determined cannot currently be ascertained and could be material.

~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds~~

~~None.~~

~~Item~~

ITEM 3. ~~Defaults Upon Senior Securities~~DEFAULTS UPON SENIOR SECURITIES

None.

~~Item~~ITEM 4. ~~Submission of Matters to a Vote of Security Holders~~SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

~~Item~~ITEM 5. ~~Other Information~~OTHER INFORMATION

~~In connection with its review of various corporate governance matters,~~On January 28, 2008, the Company ~~has decided~~entered into severance arrangements with Mr. Michael M. Schiffman, whose employment as President and Chief Operating Officer expired December 31, 2007. Under these arrangements, in addition to ~~change the date~~other customary terms and conditions, Mr. Schiffman was granted a severance package consisting of its 2008 Annual Meeting of Shareholders and future meetings by more than 30 days from the 2007 Annual Meeting Date (May 2, 2007), in order to hold its annual meetings closer in time to its fiscal year end of September 30.

The Annual Meeting of Shareholders in 2008 (in respect of the fiscal year ending September 30, 2007) will be held on February 6, 2008. In our proxy statement released in March 2007, we indicated that our 2008 annual meeting would be held in April 2008-this should now be disregarded.

~~Shareholder proposals intended to be considered for inclusion in the proxy statement and form of proxy for presentation~~$162,500, or six months salary at the ~~2008~~ annual ~~meeting of shareholders~~rate under his employment agreement at expiration, vested benefits under the Company’s health and retirement plans in accordance with plan terms, and a release by the ~~procedures set forth in Rule 14a-8 under~~Company of potential claims, Mr. Schiffman released the ~~Exchange Act must be sent~~Company from potential claims and agreed to our offices at 1801 Green Road, Suite E, Pompano Beach, Florida 33064, addressed to the attention of our Corporate Secretary/Annual Meeting, and must be received not later than October 2, 2007. All proposals must comply with applicable Securities and Exchange Commission rules and regulations.

Outside the processes of Rule 14a-8 under the Exchange Act, our by-laws establish an advance notice procedure for shareholders to make nominations of candidates for election of director or to bring other business before our annual meeting. In general, under these procedures, a shareholder that proposes to nominate a candidate for director or propose other business at an annual meeting of shareholders must give us written notice of such nomination or proposal not less than 60 days and not more than 90 days prior to the anniversary datecertain modifications of the ~~prior year's annual meeting. However, if~~non-competition and non-solicitation covenants contained in the meeting date in 2008 changes by 30 days or more from the 2007 meeting date, proposals must be submitted by the later of 60 days prior to such changed date in 2008 or the tenth day following the date such changed date is first publicly announced or disclosed. Therefore, the advance notice date for submissions under our by-laws is December 8, 2007. employment agreement.

~~Item~~ITEM 6. ~~Exhibits~~EXHIBITS

3.2	Amended and Restated By-Laws (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K, filed on December 5, 2007).

10.9	Amendment to Employment Agreement effective as of January 1, 2008 between the Company and Douglas W. Sabra

10.10	Severance and Release Agreement effective as of February 5, 2008 between the Company and Michael M. Schiffman

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

31.2	Certification of the Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002

32.1	Certifications of the Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002

~~31.1 Certification of the Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002~~

~~31.2 Certification of the Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002~~

~~32.1 Certifications of the Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002~~

3130

New York	13-1950672
(State or other jurisdiction of	~~(I.R.S.~~(I.R.S. Employer Identification No.)
incorporation or organization)

	(UNAUDITED)		(UNAUDITED)		(UNAUDITED)
	Three Months Ended March 31,		Six Months Ended March 31,		Three Months Ended December 31,
	2007	2006	2007	2006	2007	2006
Net sales	$5,875,768	$6,457,318	$13,310,190	$15,127,677	$4,953,090	$7,434,422
Cost of goods sold	4,575,048	5,043,223	10,052,760	11,069,285	3,835,270	5,477,712
Gross profit	1,300,720	1,414,095	3,257,430	4,058,392	1,117,820	1,956,710

Operating expenses:
Selling	926,127	855,944	1,777,038	1,632,283	779,705	850,911
General and administrative	664,136	632,311	1,559,250	1,327,534	934,924	895,114
Total operating expenses	1,590,263	1,488,255	3,336,288	2,959,817	1,714,629	1,746,025

(Loss) income from operations	(289,543)	(74,160)	(78,858)	1,098,575	(596,809)	210,685

Other income:
Interest income	252,120	194,460	493,410	345,732	239,619	241,290
Other income (expense), net	(4,565)	3,620	6,168	(13,223)
Other income, net					13,497	10,733
Total other income	247,555	198,080	499,578	332,509	253,116	252,023

(Loss) income before provision (benefit) for income taxes	(41,988)	123,920	420,720	1,431,084	(343,693)	462,708
(Benefit) provision for income taxes	(7,271)	60,405	82,729	593,079	(56,629)	90,000
Net (loss) income	$(34,717)	$63,515	$337,991	$838,005	$ (287,064)	$ 372,708

Net (loss) income per common and common equivalent share
Basic	$0.00	$0.01	$0.04	$0.11	$(0.04)	$0.05
Diluted	$0.00	$0.01	$0.04	$0.10	$(0.04)	$0.05

Weighted average number of common and common equivalent shares outstanding
Basic	7,861,438	7,861,438	7,861,438	7,849,803	7,855,439	7,861,438
Diluted	7,861,438	8,014,331	7,974,700	8,018,807	7,855,439	7,978,869

	Three Months Ended March 31,		Six Months Ended March 31,		Three Months Ended December 31,
U.S. Federal and State	2007	2006	2007	2006	2007	2006
Current.	$ 5,600	$27,996	$83,600	$439,070
Current					$ --	$68,000
Deferred	(5,000)	38,609	(10,000)	168,309	(50,229)	5,000

Foreign:
Current	(7,871)	(6,200)	9,129	(14,300)	--	17,000
Deferred	--	--	--	--	(6,400)	--
Income tax (benefit) provision	$(7,271)	$60,405	$82,729	$593,079	$(56,629)	$90,000

	Shares	Weighted Average Exercise Price	Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding at September 30, 2007	232,000	$4.51	4.68	$233,000
Granted	--	--
Exercised	--	--
Forfeited	--	--
Expired	--	--
Outstanding at December 31, 2007	232,000	$4.51	4.17	$76,000

Options vested at December 31, 2007.	232,000	$4.51	4.17	$76,000
Options exercisable at December 31 , 2007	232,000	$4.51	4.17	$76,000

	Stock Options Outstanding and Exercisable
Range of Exercise Prices	Outstanding at December 31, 2007	Weighted Average Remaining Contractual Term (Years)	Weighted Average Exercise Price
$1.75 to $2.85	162,000	2.56	$2.02
$6.02	40,000	8.34	$6.02
$15.91	30,000	7.31	$15.91
	232,000

			INDEX

PART I.		FINANCIAL INFORMATION	Page No.

	Item 1.	Financial Statements
			- Consolidated Balance Sheets as of ~~March~~December 31, 2007 (unaudited)
		and September 30, ~~2006~~2007	4

			- Consolidated Statements of Operations (unaudited) for the Three ~~and Six~~ Months
		Ended ~~March~~December 31, 2007 and 2006	5

			- Consolidated Statements of Cash Flows (unaudited) for the ~~Six~~Three Months
		Ended ~~March~~December 31, 2007 and 2006	6

			- Notes to Consolidated Financial Statements (unaudited)	7

	Item 2.	~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations	1516

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2725
	Item 4.	Controls and Procedures	25

	Item 4.4T.	Controls and Procedures	2826

PART II.		OTHER INFORMATION

	Item 1.	Legal Proceedings	2927

	Item 1A.	Risk Factors	2927

	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	3129

	Item 3	Defaults Upon Senior Securities	3130

	Item 4.	Submission of Matters to a Vote of Security Holders	3130

	Item 5.	Other Information	3130

	Item 6.	Exhibits	3130

		Signatures	31

		Certifications	32

		~~Certifications~~	33

	Shares	Weighted Average Grant Date Fair Value
Nonvested balance at September 30, 2007	21,999	$3.49
Changes during the period:
Shares granted	--	--
Shares vested	--	--
Shares forfeited	--	--
Nonvested balance at December 31 , 2007	21,999	$3.49

		~~Three and Six-Months~~ ~~Ended March 31, 2006~~
~~Expected term (in years)~~		~~5.0~~
~~Risk-free interest rate~~		~~4.20 - 5.84~~
~~Expected volatility~~		~~99.6% - 103.6%~~
~~Expected dividend yield~~		0%

	Three-Months Ended March 31, 2006	Six-Months Ended March 31, 2006
Net income, as reported	$63,515	$838,005
Total share-based employee compensation cost, net of tax	--	--
Total share-based employee compensation cost determined under SFAS No. 123 for all awards, net of tax	--	--
Pro forma net income	$63,515	$838,005

Net income per share:
Basic - as reported	$0.01	$0.11
Basic - pro forma	$0.01	$0.11

Diluted - as reported	$0.01	$0.10
Diluted - pro forma	$0.01	$0.10

Net Sales for 2007 Quarter 3 Months ended March 31, 2007 (millions of dollars)
Net Sales for 2008 Quarter 3 Months ended December 31, 2007 (millions of dollars)					Net Sales for 2008 Quarter 3 Months ended December 31, 2007 (millions of dollars)
	Americas	EMEA	APAC	Total	APAC	Americas	EMEA	Total
Cell Phone Products	$0.4	$0.8	$0.7	$1.9
Diabetic Products	0.7	0.5	2.0	3.2	$1.9	$0.7	$0.9	$3.5
Other Products	0.7	--	0.1	0.8	0.1	0.7	--	0.9
Cell Phone Products					0.2	0.1	0.2	0.5
Total*	$1.8	$1.3	$2.8	$5.9	$2.3	$1.5	$1.1	$5.0

Net Sales for 2007 Period 6 Months ended March 31, 2007 (millions of dollars)
	Americas	EMEA	APAC	Total
Cell Phone Products	$1.5	$2.1	$2.5	$6.1
Diabetic Products	1.5	0.8	3.4	5.7
Other Products	1.3	--	0.2	1.5
Total*	$4.3	$2.9	$6.1	$13.3

Net Sales for 2006 Period 6 Months ended March 31, 2006 (millions of dollars)
	Americas	EMEA	APAC	Total
Cell Phone Products	$2.2	$2.5	$3.6	$8.3
Diabetic Products	2.3	0.8	2.0	5.0
Other Products	1.4	--	0.4	1.8
Total*	$5.8	$3.3	$6.1	$15.1

Contractual Obligation or Commitment	Apr 07 - Mar 08	Apr 08- Mar 10	Apr 10 - Mar 12	Thereafter	Jan 08 – Dec 08	Jan 09- Dec 10	Jan 11 – Dec 12	Thereafter
Employment & Consulting Agreements	$225,000	$ --		$ --	$370,000	$120,000	$ --	$ --
Operating Leases	168,000	295,000	323,000	29,000	318,000	419,000	216,000	--
License Agreements**	267,000	--
Totals	$660,000	$295,000	$323,000	$29,000	$688,000	$ 539,000	$216,000	$ --

	FORWARD INDUSTRIES, INC.
	(Registrant)


	By: /s/ Douglas W. Sabra
	Douglas W. Sabra
	Chief Executive Officer
	(Principal Executive Officer)


	By: /s/James O. McKenna
	James O. McKenna
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

PART I. FINANCIAL INFORMATION

ITEM 1. Financial StatementsFINANCIAL STATEMENTS

PART II. OTHER INFORMATION

ITEM 1. Financial Statements
FINANCIAL STATEMENTS