** UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

________________

**FORM 10-Q**

________________

 

**[X]       QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**            ****For the quarterly period ended March31, 2008.**

**OR**

**[   ]       TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**            ****For the transition period from____ to ____.**

** **

**Commission File Number: 0-6669**

________________

**FORWARD INDUSTRIES, INC.**

(Exact name of registrant as specified in its charter)

________________

** **

**                                    **

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

 

 

**1801 Green Rd., Suite E, Pompano Beach, FL  33064**

(Address of principal executive offices, including zipcode)

**(954) 419-9544**

(Registrant’s telephone number, including area code)

________________

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding twelve months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.    [**X**] Yes    [   ] No

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company.  Seethe definitions of “ large accelerated filer”, “accelerated filer”, and“smaller reporting company” in Rule 12b-2 of the Exchange Act).

[  ] Large accelerated filer                                                                                            [  ] Accelerated filer   [**  **] Non-accelerated filer (Do not check if a smaller reporting company)            [**X**]Smaller reporting company 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).    [**  **] Yes   [**X**] No

Thenumber of shares outstanding of the registrant’s common stock, par value $0.01per share, at the latest practical date  April 30, 2008, was 7,904,522  shares.

1

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**Forward Industries, Inc.**

 

**INDEX**

 

| **PART  I.**                         | **FINANCIAL  INFORMATION** | Page No.                                                                                                                                                                                                                            |
|--------------------------------------|----------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |                       |                                                                                                                                                                                                                                |   |
|                                 | **Item  1.**               | **Financial  Statements**                                                                                                                                                                                                           |   |
|                                 |                       |      			- Consolidated Balance Sheets as of March 31, 2008 (unaudited)                                                                                                                                               |   |
|                                 |                       |      and September 30, 2007............................................................................................................                                                                              | 4 |
|                                 |                       |                                                                                                                                                                                                                                |   |
|                                 |                       |      			- Consolidated Statements of Operations (unaudited) for the Three and Six Months                                                                                                                             |   |
|                                 |                       | Ended March 31, 2008 and 2007.............................................................................................                                                                                                          | 5 |
|                                 |                       |                                                                                                                                                                                                                                |   |
|                                 |                       |      			- Consolidated Statements of Cash Flows (unaudited) for the Six Months                                                                                                                                       |   |
|                                 |                       |      Ended March 31, 2008 and 2007.............................................................................................                                                                                      | 6 |
|                                 |                       |                                                                                                                                                                                                                                |   |
|                                 |                       |      			- Notes to Consolidated Financial Statements (unaudited)...............................................                                                                                                      | 7 |
|                                 |                       |                                                                                                                                                                                                                                |   |
|                                 | **Item  2.**               | **Management’s  Discussion and Analysis of Financial Condition and Results ofOperations**..................................................................................................................................... | 17 |
|                                 | ** **                 | ** **                                                                                                                                                                                                                          |   |
|                                 | **Item  3.**               | **Quantitative  and Qualitative Disclosures About Market Risk**...........................................                                                                                                                          | 29 |
|  

                        | ** **

**Item  4.**   | ** **

**Controls  and Procedures**............................................................................................................                                                                                |  

29 |
|                                 | ** **                 | ** **                                                                                                                                                                                                                          |   |
|                                 | **Item  4T.**              | **Controls  and Procedures**............................................................................................................                                                                                            | 29 |
|                                 | ** **                 |                                                                                                                                                                                                                                |   |
| **PART  II.**                        | **OTHER  INFORMATION**     | ** **                                                                                                                                                                                                                          |
|                                 | ** **                 |                                                                                                                                                                                                                                |   |
|                                 | **Item  1.**               | **Legal  Proceedings**.......................................................................................................................                                                                                       | 30 |
|                                 | ** **                 | ** **                                                                                                                                                                                                                          |   |
|                                 | **Item  1A.**              | **Risk  Factors**.................................................................................................................................                                                                                  | 30 |
|                                 | ** **                 | ** **                                                                                                                                                                                                                          |   |
|                                 | **Item  2**                | **Unregistered  Sales of Equity Securities and Use of Proceeds**............................................                                                                                                                        | 33 |
|                                 | ** **                 | ** **                                                                                                                                                                                                                          |   |
|                                 | **Item  3**                | **Defaults  Upon Senior Securities**..............................................................................................                                                                                                  | 33 |
|                                 | ** **                 | ** **                                                                                                                                                                                                                          |   |
|                                 | **Item  4.**               | **Submission  of Matters to a Vote of Security Holders**...........................................................                                                                                                                 | 33 |
|                                 | ** **                 | ** **                                                                                                                                                                                                                          |   |
|                                 | **Item  5.**               | **Other  Information**........................................................................................................................                                                                                      | 34 |
|                                 | ** **                 | ** **                                                                                                                                                                                                                          |   |
|                                 | **Item  6.**               | **Exhibits**..........................................................................................................................................                                                                              | 34 |
|                                 | ** **                 | ** **                                                                                                                                                                                                                          |   |
|                                 |                       | **Signatures**.....................................................................................................................................                                                                                 | 35 |
|                                 |                       | ** **                                                                                                                                                                                                                          |   |
|                                 |                       | **Certifications**................................................................................................................................                                                                                  | Exhibits |

** **

 

2

 

 

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**Note Regarding Use ofCertain Terms**

In thisQuarterly Report on Form 10-Q, unless the context otherwise requires, the terms"we", "our", and the "Company"  refer to ForwardIndustries, Inc., a New York corporation, together with its consolidatedsubsidiaries; “Forward” or “Forward Industries” refers to Forward Industries,Inc.; “common stock” refers to the common stock, $.01 par value per share, ofForward Industries, Inc.; "Koszegi" refers to Forward Industries’wholly owned subsidiary Koszegi Industries, Inc., an Indiana corporation;“Koszegi Asia” refers to Forward Industries’ wholly owned subsidiary KoszegiAsia Ltd., a Hong Kong corporation; “Forward Innovations” refers to ForwardIndustries’ wholly owned subsidiary Forward Innovations GmbH, a Swisscorporation;  “GAAP” refers to accounting principles generally accepted in theUnited States; “Commission” refers to the United States Securities and ExchangeCommission; “Exchange Act” refers to the United States Securities Exchange Actof 1934; the “2008 Quarter” refers to the three months ended March 31, 2008;the “2007 Quarter” refers to the three months ended March 31, 2007; the “2008Period” refers to the six months ended March 31, 2008; the “2007 Period” refersto the six months ended March 31, 2007; “Fiscal 2008” refers to our fiscal yearending September 30, 2008; “Fiscal 2007” refers to our fiscal year endedSeptember 30, 2007; “EMEA Region” means the geographic area encompassingEurope, 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 andVietnam; and “Americas” refers to the geographic area encompassing North,Central, and South America.

 

 

 

 

 

 

 

| 3 |
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# PART I.   FINANCIAL INFORMATION

### **ITEM 1.  FINANCIAL STATEMENTS**

Forward Industries,Inc.

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                                                                                       |            |       |              |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|------------|-------------------|
|                                                                                                                                                                                                                                                       |            |       |              |
|                                                                                                                                                                                                                                                       | **March 31,**   | ** ** | **September 30,** |
|                                                                                                                                                                                                                                                       | **2008**        | ** ** | **2007**          |
| **Assets**                                                                                                                                                                                                                                                 | **(Unaudited)** | ** ** | ** **        |
| **Current assets:**                                                                                                                                                                                                                                        |            |       |              |
| Cash and cash equivalents...........................................................................................                                                                                                                                       | $20,239,507     |       | $20,267,791       |
| Accounts receivable, net ..............................................................................................                                                                                                                                    | 3,539,101       |       | 4,135,117         |
| Inventories, net...............................................................................................................                                                                                                                            | 1,146,816       |       | 1,072,360         |
| Prepaid expenses and other current  assets................................................................                                                                                                                                                 | 401,140         |       | 628,786           |
| Deferred tax asset...........................................................................................................                                                                                                                              | 263,170         |       | 279,741           |
| **Total current assets**..........................................................................................                                                                                                                                         | 25,589,734      |       | 26,383,795        |
|                                                                                                                                                                                                                                                       |            |       |              |
| Property, plant, and equipment, net.................................................................................                                                                                                                                       | 146,714         |       | 160,644           |
| Deferred tax asset...............................................................................................................                                                                                                                          | 242,908         |       | 29,898            |
| Other assets.........................................................................................................................                                                                                                                      | 57,181          |       | 57,538            |
| **Total Assets**........................................................................................................................                                                                                                                   | $26,036,537     |       | $26,631,875       |
|                                                                                                                                                                                                                                                       |            |       |              |
| **Liabilities and shareholders’ equity**                                                                                                                                                                                                              |            |       |              |
| Current liabilities:                                                                                                                                                                                                                                       |            |       |              |
|    Accounts payable...........................................................................................................                                                                                                                   | $1,946,106      |       | $1,904,946        |
|    Accrued expenses and other current liabilities...........................................................                                                                                                                                     | 222,531         |       | 303,185           |
| **Total current liabilities**....................................................................................                                                                                                                                          | 2,168,637       |       | 2,208,131         |
|                                                                                                                                                                                                                                                       |            |       |              |
| **Commitments and contingencies**....................................................................................                                                                                                                                      |            |       |              |
| ** **                                                                                                                                                                                                                                                 |            |       |              |
| **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, 

8,610,932 and 8,488,932 shares issued,  respectively (including 706,410 and		633,493 held in treasury, respectively)............................................................ |  

86,109  |       |  

84,889    |
| Capital in excess of par value....................................................................................                                                                                                                                         | 15,809,171      |       | 15,546,046        |
| Treasury stock, 706,410 and 633,493  shares at cost .............................................                                                                                                                                                          | (1,260,057)     |       | (1,085,057)       |
| Retained earnings.......................................................................................................                                                                                                                                   | 9,232,677       |       | 9,877,866         |
| **Total shareholders' equity**...............................................................................................                                                                                                                              | 23,867,900      |       | 24,423,744        |
| **Total liabilities and shareholders’ equity**......................................................................                                                                                                                                  | $26,036,537     |       | $26,631,875       |

 

 

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

 

4

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Forward Industries,Inc.

**CONSOLIDATED STATEMENTS OF OPERATIONS**

|                                                                                                                          | **(UNAUDITED)**                  | ** ** | **(UNAUDITED)**                |
|-------------------------------------------------------------------------------------------------------------------------------|----------------------------------|------------|--------------------------------|
|                                                                                                                          | **Three Months Ended March 31,** | ** ** | **Six Months Ended March 31,** |
|                                                                                                                          | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** |
| **Net  sales**..........................................................................                                      | $4,727,704                       |       | $5,875,768                     |   | $9,680,794 |   | $13,310,190 |
| **Cost of goods sold**..........................................................                                              | 4,108,644                        |       | 4,575,048                      |   | 7,943,914 |   | 10,052,760 |
| **Gross profit**.....................................................................                                         | 619,060                          |       | 1,300,720                      |   | 1,736,880 |   | 3,257,430 |
|                                                                                                                          |                             |       |                           |   |   |   |   |
| **Operating expenses:**                                                                                                       |                             |       |                           |   |   |   |   |
| Selling.......................................................................                                                | 695,487                          |       | 926,127                        |   | 1,475,192 |   | 1,777,038 |
| General  and administrative....................................                                                               | 650,622                          |       | 664,136                        |   | 1,585,546 |   | 1,559,250 |
| **Total operating expenses**..............................                                                                    | 1,346,109                        |       | 1,590,263                      |   | 3,060,738 |   | 3,336,288 |
| ** **                                                                                                                    |                             |       |                           |   |   |   |   |
| **(Loss) from operations**..................................................                                                  | (727,049)                        |       | (289,543)                      |   | (1,323,858) |   | (78,858) |
| ** **                                                                                                                    |                             |       |                           |   |   |   |   |
| **Other income:**                                                                                                             |                             |       |                           |   |   |   |   |
| Interest  income........................................................                                                      | 173,504                          |       | 252,120                        |   | 413,123 |   | 493,410 |
| Other  income (expense), net..................................                                                                | 17,375                           |       | (4,565)                        |   | 30,872 |   | 6,168 |
| **Total other income**.........................................                                                               | 190,879                          |       | 247,555                        |   | 443,995 |   | 499,578 |
| ** **                                                                                                                    |                             |       |                           |   |   |   |   |
| **(Loss) income before (benefit) provision for				income  taxes**............................................................ | (536,170)                        |       | (41,988)                       |   | (879,863) |   | 420,720 |
| **(Benefit) provision for  income taxes**..........................                                                           | (178,047)                        |       | (7,271)                        |   | (234,676) |   | 82,729 |
| **Net (loss) income**..........................................................                                               | ($358,123)                       |       | ($34,717)                      |   | ($645,187) |   | $337,991 |
| ** **                                                                                                                    |                             |       |                           |   |   |   |   |
| **Net (loss) income per common and common				equivalent  share**                                                              |                             |       |                           |   |   |   |   |
| Basic.................................................................                                                        | ($0.05)                          |       | $0.00                          |   | ($0.08) |   | $0.04 |
| Diluted..............................................................                                                         | ($0.05)                          |       | $0.00                          |   | ($0.08) |   | $0.04 |
| ** **                                                                                                                    |                             |       |                           |   |   |   |   |
| **Weighted average number of common and				common  equivalent shares outstanding**                                            |                             |       |                           |   |   |   |   |
| Basic.................................................................                                                        | 7,872,606                        |       | 7,861,438                      |   | 7,863,975 |   | 7,861,438 |
| Diluted..............................................................                                                         | 7,872,606                        |       | 7,861,438                      |   | 7,863,975 |   | 7,974,700 |

 

 

 

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

 

| 5 |
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**Forward Industries, Inc.**

**CONSOLIDATED STATEMENTS OFCASH FLOWS**

|                                                                                                                                                                                        | **(Unaudited)**                     |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------|
|                                                                                                                                                                                        | **Six Months Ended**

**March 31,** |
|                                                                                                                                                                                        | **     2008**   | ** ** | **2007** |
| **Operating activities:**                                                                                                                                                                   |                                |   |   |
| Net (loss)  income..............................................................................................................                                                            | $(645,187)                          |   | $337,991 |
| Adjustments to reconcile net (loss) income to net  cash (used) provided by 		operating activities:                                                                                          |                                |   |   |
| Provision  for obsolete inventory.............................................................................                                                                              | 446,497                             |   | 159,861 |
| Depreciation  and amortization..................................................................................                                                                            | 32,822                              |   | 45,051 |
| Share-based  compensation.......................................................................................                                                                            | 50,843                              |   | -- |
| Deferred  income taxes................................................................................................                                                                      | (196,439)                           |   | (10,000) |
|      Provision for bad debt expense...............................................................................                                                           | (20,033)                            |   | -- |
| Changes  in operating assets and liabilities:                                                                                                                                               |                                |   |   |
| Accounts receivable..................................................................................................                                                                       | 616,049                             |   | 2,281,190 |
| Inventories..................................................................................................................                                                               | (520,953)                           |   | 140,383 |
| Prepaid expenses and other  current assets............................................................                                                                                      | 227,646                             |   | (292,336) |
| Other assets................................................................................................................                                                                | 357                                 |   | 1,520 |
| Accounts payable......................................................................................................                                                                      | 41,160                              |   | (19,785) |
| Accrued expenses and other  current liabilities......................................................                                                                                       | (80,654)                            |   | (438,661) |
| **Net cash (used  in) provided by operating activities**                                                                                                                                    | (47,892)                            | ** ** | 2,205,214 |
|                                                                                                                                                                                        |                                |   |   |
| **Investing activities:**                                                                                                                                                                   |                                |   |   |
| Purchases of property,  plant, and equipment................................................................                                                                                | (18,892)                            |   | (15,457) |
| **Net cash used in  investing activities**                                                                                                                                                  | (18,892)                            |   | (15,457) |
|                                                                                                                                                                                        |                                |   |   |
| **Financing activities:**                                                                                                                                                                   | ** **                          | ** ** |   |
| Proceeds from exercise of  stock options......................................................................                                                                              | 38,500                              |   | -- |
| **Net cash provided by  financing activities**....................................................................                                                                          | 38,500                              |   | -- |
|                                                                                                                                                                                        |                                |   |   |
| **Net (decrease) increase  in cash and cash equivalents**....................................................                                                                               | (28,284)                            |   | 2,189,757 |
| ** **                                                                                                                                                                                  |                                |   |   |
| **Cash and  cash equivalents at beginning of period**...........................................................                                                                            | 20,267,791                          |   | 18,609,371 |
| ** **                                                                                                                                                                                  |                                |   |   |
| **Cash and  cash equivalents at end of period**.......................................................................                                                                      | $20,239,507                         |   | $20,799,128 |
|                                                                                                                                                                                        |                                |   |   |
| **Supplemental disclosure  of non-cash activities:**                                                                                                                                        |                                |   |   |
| The  Company accepted 72,917 shares of common stock from a director as  		consideration to exercise options to purchase 100,000 shares of common stock  				as part of a cashless exercise. |

 

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

 

 

| 6 |
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**Forward Industries, Inc.**

** **

 

**NOTE 1     OVERVIEW**

ForwardIndustries, Inc. was incorporated under the laws of the State of New York andbegan operations in 1961.  The Company is engaged in the design, marketing, anddistribution of custom-designed, soft-sided carrying cases and other carrysolutions products made from leather, nylon, vinyl, and other syntheticfabrics.  The cases and other products are used primarily for the protectionand transport of portable electronic devices such as cellular phones andmedical devices. The Company markets products as a direct seller tooriginal-equipment-manufacturers in the EMEA Region (meaning the geographicarea encompassing Europe, the Middle East and Africa), the APAC Region (meaningthe 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 geographicarea, encompassing North, Central, and South America) and, until December 31,2007, as a seller to retailers and wholesalers in the EMEA Region under a non-exclusivelicense for certain trademarks.  This license expired December 31, 2007, andhas not been renewed.  See Note 10.  

In theopinion of management, the accompanying consolidated financial statementsreflect all normal recurring adjustments necessary to present fairly thefinancial position and results of operations and cash flows for the interimperiods presented herein, but are not necessarily indicative of the results ofoperations for the full fiscal year ending September 30, 2008. These financialstatements should be read in conjunction with the accompanying notes and with theCompany's audited consolidated financial statements included in its annualreport on Form 10-K for the fiscal year ended September 30, 2007, and with thedisclosures and risk factors presented herein and therein.

**NOTE 2     ACCOUNTINGPOLICIES**

**Accountingestimates**

Preparingthe Company's financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

**Basis ofpresentation**

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

**RevenueRecognition**

Inaccordance with the requirements of Staff Accounting Bulletin (SAB) No. 104, RevenueRecognition in Financial Statements, the Company generally recognizes revenuefrom product sales to customers when: products that do not require furtherservices by the Company are shipped, there are no uncertainties surroundingcustomer acceptance, and collectibility is reasonably assured. 

7

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**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE2     ACCOUNTING POLICIES (CONTINUED)**

**Supplier Rebates**

EmergingIssues Task Force (EITF) Issue No. 02-16, Accounting by a Customer (Including aReseller) for Certain Consideration Received from a Vendor, permits recognitionof a rebate or refund of a specified amount of cash consideration that ispayable if the customer completes a specified cumulative level of purchases. The Company has entered into agreements with several of its suppliers thatgrant the Company a rebate based on its level of purchases made during each fiscalquarter. In lieu of a cash payment from these suppliers the Company generallyreceives a credit memo. The Company reduces accounts payable to the supplierand cost of goods sold each quarter as the Company earns the rebates.  For thethree-month periods ended March 31, 2008 and 2007, the cumulative amounts ofsuch quarterly rebates were approximately $100,000 and $135,000, respectively. Forthe six-month periods ended March 31, 2008 and 2007, the cumulative amounts ofsuch quarterly rebates were approximately $200,000 and $328,000, respectively. Thequarterly rebates are net of amounts allocated to unsold inventories and are reflectedin the accompanying consolidated statements of operations as a reduction ofcost of goods sold.

**Foreign CurrencyTransactions**

Thefunctional currency of the Company's wholly owned foreign subsidiaries is theU.S. dollar. Foreign currency transactions may generate receivables or payablesthat are fixed in terms of the amount of foreign currency that will be receivedor paid. Fluctuations in exchange rates between the functional currency and thecurrency in which a transaction is denominated increases or decreases theexpected amount of functional currency cash flows upon settlement of thetransaction. These increases or decreases in expected functional currency cashflows are foreign currency transaction gains or losses that are included in“other income, net” in the accompanying unaudited consolidated statements of operations.The net gains (losses) from foreign currency transactions were approximately $17,000and $(5,000) for the three-month periods ended March 31, 2008 and 2007,respectively. The net gains from foreign currency transactions wereapproximately $27,000 and $6,000 for the six-month periods ended March 31, 2008and 2007, respectively.

**Comprehensive (Loss)Income**

 For the threeand six-month periods ended March 31, 2008 and 2007, the Company did not haveany components of comprehensive (loss) income other than net (loss) income.

**RecentAccounting Pronouncements**

On July13, 2006 the Financial Accounting Standards Board (FASB) issued FASBInterpretation No. 48, Accounting for Uncertainty in Income Taxes, as amendedby FASB Interpretation No. 48-1, Definition of Settlement in FASBInterpretation No. 48 on May 2, 2007 (FIN 48). FIN 48, clarifies the accountingfor income taxes by prescribing the minimum recognition threshold a taxposition is required to meet before being recognized in the financialstatements. 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 thescope of FASB Statement No. 5, Accounting for Contingencies.

FIN 48applies to all tax positions related to income taxes subject to FASB StatementNo. 109, Accounting for Income Taxes, (FAS 109). This includes tax positionsconsidered to be “routine” as well as those with a high degree of uncertainty.

TheCompany adopted FIN 48 effective October 1, 2007.  The adoption of FIN 48 didnot have a material impact on the consolidated financial statements.

8

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**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 3     INVENTORIES**

Inventoriesconsist primarily of finished goods and are stated at the lower of cost(determined by the first-in, first-out method) or market.  Provision has beenmade to reduce excess, obsolete, or otherwise un-saleable inventories to netrealizable value. Changes in this provision are reflected in the cost of goods soldline of the Company’s consolidated statements of operations.  

**NOTE 4     DEBT**

In March 2008, Forward and itswholly-owned U.S. subsidiary, Koszegi Industries, Inc., elected not to renew theircredit facility with a U.S. bank that provided for a committed line of creditin the maximum amount of $3.0 million, including a $1.5 million sub-limit forletters of credit.  Accordingly, this credit facility expired March 30, 2008.There were no borrowings or letter of credit obligations outstanding under thisfacility during the three and six-month periods ended March 31, 2008. 

In 2003, Forward’s wholly-ownedSwiss subsidiary, Forward Innovations GmbH (Forward Innovations), established acredit facility with a Swiss bank that provides for an uncommitted line ofcredit in the maximum amount of $400,000.  Amounts borrowed under the facilitymay be structured as a term loan or loans, with a maximum repayment period of12 months, as a letter of credit facility, or as a guarantee facility, or anycombination of the foregoing.  Either party may terminate the facility at anytime; however, such termination would not affect the stated maturity of anyterm loans outstanding.  Amounts borrowed other than as a term loan must besettled quarterly or converted into term loans.  In connection with thisfacility, Forward Innovations agreed to certain covenants. Amounts drawn underthis credit facility bear interest at variable rates established by the bank (5.35%as March 31, 2008).  At March 31, 2008, Forward Innovations is contingentlyliable to the bank in respect of a letter of credit issued on its behalf in theamount of €224,000 (equal to approximately $354,000 as at March 31, 2008) infavor of Forward Innovations’ freight forwarder and customs agent in connectionwith its logistics operations in The Netherlands.  The effect of the issuanceof the letter of credit is to reduce the availability of the credit line in anamount equal to the face amount of the letter of credit.  

**NOTE 5     SHAREHOLDERS’EQUITY**

**Anti-takeoverProvisions**

The Company is authorized to issueup to 4,000,000 shares of "blank check" preferred stock. The Board ofDirectors has the authority and discretion, without shareholder approval, toissue preferred stock in one or more series for any consideration it deemsappropriate, and to fix the relative rights and preferences thereof includingtheir redemption, dividend and conversion rights.

**Stock Repurchase**

On September 27, 2002, the Company’sBoard of Directors authorized the repurchase of up to 400,000 shares of theCompany’s outstanding common stock (approximately 7% of the number of sharesthen outstanding and 5% outstanding at March 31, 2008). On January 21, 2004,the Company’s Board increased the amount of shares authorized for repurchase to486,200.  Under these authorizations, as of March 31, 2008, the Companyhad repurchased an aggregate of 172,603 shares at a cost of approximately $0.4million during the 2008 Period. No purchases were made during the 2008 Periodor 2007 Period.  Separately, on March 5, 2008, the Company in effect purchased72,917 outstanding shares of common stock held by Jerome E. Ball, the Company’sChairman of the Board of Directors and former principal executive officer, byaccepting such shares at their fair market value on such date as considerationfor his exercise of options to purchase 100,000 shares of common stock as partof a cashless exercise. 

9

----

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

** **

**NOTE 6     OPERATINGSEGMENT INFORMATION**

The Company operates in a singlesegment: the supply of carrying solutions for portable electronic devices. Thiscarrying-solution segment includes the design, marketing, and distribution ofproducts to its customers that include manufacturers of consumer hand heldwireless telecommunications and medical monitoring devices. The Company’s carryingsolution segment operates in geographic regions that include primarily theAmericas, EMEA, and APAC regions. Geographic regions are defined based primarilyon the location of the customer.  The following table presents net salesrelated to these geographic segments:

|   | *(all amounts in thousands of dollars)*
 
**Three Months Ended**

**March 31,**

** **

**Six Months Ended**

**March 31,**

 

**2008**

** **

**2007**

** **

**2008**

** **

**2007**

APAC..........................................................		

$2,759

 

$2,765

 

$5,054

 

$6,120

Americas.....................................................		

1,047

 

1,815

 

2,571

 

4,277

EMEA..........................................................		

922

 

1,296

 

2,056

 

2,913

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

**$4,728**

** **

**$5,876**

** **

**$9,681**

** **

**$13,310**

 

**NOTE 7     INCOME TAXES**

The Company’s income tax (benefit) provision consists of the followingUnited States and foreign components.

 
**Three Months Ended**

**March 31,**

** **

**Six Months Ended**

**March 31,**

 

**2008**

** **

**2007**

** **

**2008**

** **

**2007**

U.S.  Federal and State:

 

 

 

 

 

 

 

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

--

 

$5,600 

 

--

 

$83,600

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

($159,287)

 

(5,000)

 

($209,516)

 

(10,000)

 

** **

** **

 

** **

** **

** **

** **

Foreign:

** **

** **

 

** **

** **

** **

** **

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

**--**

** **

(7,871)

** **

**--**

** **

9,129

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

(18,760)

 

 

 

(25,160)

** **

** **

**Income  tax (benefit) provision..............**

**($178,047)**

** **

($7,271)

** **

**($234,676)**

** **

**$82,729**

 

TheCompany’s effective tax rate does not approximate the statutory United Statesfederal income tax rate primarily due to tax rate differentials in respect ofUnited States state and foreign taxes.   

EffectiveJune 2001, undistributed earnings of the Company’s Swiss subsidiary areconsidered to be permanently invested; therefore, in accordance with SFAS No.109, no provision for U.S. Federal and state income taxes on those earnings hasbeen provided.  At March 31, 2008, the Company’s Swiss subsidiary hadapproximately $4,513,000 of accumulated undistributed earnings.  

**NOTE 8     (LOSS) EARNINGSPER SHARE**

Basic pershare data for each period presented is computed using the weighted-averagenumber of shares of common stock outstanding during each period.  Diluted pershare data is computed using the weighted-average number of common and dilutivecommon-equivalent shares outstanding during each period. Dilutivecommon-equivalent shares consist of shares that would be issued upon theexercise of stock options and warrants, computed using the treasury stockmethod. For this purpose, the average quoted market prices on the NASDAQSmallCap Market for the Company's common stock for the three-month periodsended March 31, 2008 and 2007, were $2.29 and $4.33, respectively. The averagequoted market prices on the NASDAQ SmallCap Market for the Company's commonstock for the six-month periods ended March 31, 2008 and 2007, were $2.48 and $4.61,respectively.

 

10

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

Loss pershare data for the three and six-month periods ended March 31, 2008 and threemonth period ended March 31, 2007, excludes all outstanding dilutive commonequivalent shares as inclusion of such shares would be anti-dilutive. Incomeper share data for the six-month period ended March 31, 2007, excludes optionsto purchase a total of 70,000 shares of commonstock from the computation of diluted earnings per share because the exerciseprices were greater than the average quoted market prices of the Company’scommon stock for those periods, and therefore, their effect would beanti-dilutive as calculated under the treasury method promulgated by theStatement of Financial Accounting Standard No. 128, Earnings per Share (“SFAS128”). 

Inaccordance with the contingently issuable shares provision of SFAS 128, 44,999shares of service-based common stock awards (“restricted stock”) were excludedfrom the calculation of diluted loss per share for the three-month period endedMarch 31, 2008.

**NOTE 9     STOCK BASEDCOMPENSATION**

In May 2007, shareholders of the Companyapproved the 2007 Equity Incentive Plan (the 2007 Plan), pursuant to which up to400,000 shares of common stock can be issued to officers, employees, andnon-employee directors of the Company upon the grant of restricted common stockand the exercise of stock options granted to such persons. This plan was adoptedby the Board of Directors in February 2007.  The price at which restrictedcommon stock may be granted and the exercise price of stock options granted maynot be less than the fair market value of the common stock at the date ofgrant. The Company’s Compensation Committee administers the plan.  Optionsgenerally expire ten years after the date of grant and restricted stock grants generallyvest in equal proportions over three years.   

TheCompany’s 1996 Stock Incentive Plan (the 1996 Plan) expired in accordance withits terms in November 2006.  The exercise price of incentive options grantedunder the 1996 Plan to officers, employees, and non-employee directors of theCompany were required by its provisions to be equal at least to the fair marketvalue of the common stock at the date of grant. Options expire ten years afterthe date of grant and generally vest in equal proportions over three years. Unexercised options granted pursuant to the 1996 Plan prior to expirationremain outstanding until the earlier of exercise or option expiration.

**Stock OptionAwards**

OnFebruary 15, 2008, the Compensation Committee granted 60,000 stock optionawards, in the aggregate, to the Company’s directors under the 2007 Plan. Theseawards are subject to a continued service condition and vest on the anniversarydate the awards were granted. Accordingly, the Company recognized approximately$14,000 of compensation cost related to these stock option awards in its consolidatedstatements of operations for the three- and six-month periods ended March 31,2008.  All stock option awards granted under the 1996 Plan are fully vested.

11

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 9     STOCK BASEDCOMPENSATION (CONTINUED)**

A summaryof the stock option activity under the 2007 Plan and the 1996 Plan during the six-monthperiod ended March 31, 2008 is presented below: 

 

**Shares**

** **

**Weighted 		AverageExercise 		Price**

** **

**Weighted 		AverageRemaining 		Contractual 		Term 		(Years)**

** **

** **

** **

** **

**Aggregate 		Intrinsic 		Value**

**Outstanding at September 30, 2007**

232,000

 

$4.51

 

4.68

 

$233,000

Granted..............................................		

60,000

 

 

 

 

 

 

Exercised............................................		

122,000

 

 

 

 

 

 

Forfeited............................................		

--

 

 

 

 

 

 

Expired...............................................		

--

 

 

 

 

 

 

**Outstanding at March 31, 2008**

**170,000**

** **

**$5.67**

** **

**6.35**

** **

**$13,200**

 

 

 

 

 

 

 

 

**Options  vested at March 31, 2008.....**

110,000

 

$7.56

 

10.0

 

--

**Options  exercisable at**

**March 31, 2008...............................**

 

110,000

 

 

$7.56

 

 

10.0

 

 

--

The fairvalue of each stock option on the date of grant was estimated using aBlack-Scholes option-pricing formula applying the following assumptions foreach respective period: 

 

** **

**For the Three and Six-Month Periods Ended  March 31,**

 

** **

**2008**

** **

**2007**

Expected  term (in years).................................................... 

 

10.0

 

10.0

Risk-free  interest rate........................................................ 

 

3.78%

 

5.24%

Expected  volatility............................................................. 

 

80.2%

 

86.1%

Expected  dividend yield.................................................... 

 

0%

 

0%

Theexpected term represents the period over which the stock option awards areexpected to be outstanding. The Company based the risk-free interest rate usedin its assumptions on the implied yield currently available on U.S. Treasuryzero-coupon issues with a remaining term equivalent to the award’s expectedterm. The volatility factor used in the Company’s assumptions is based on thehistorical price of its stock over the most recent period commensurate with theexpected term of the award. The Company historically has not paid any dividendson its common stock and had no intention to do so on the date the share-basedawards were granted. Accordingly, the Company used a dividend yield of zero inits assumptions. The Company estimates the expected term, volatility andforfeitures of share-based awards based upon historical data. 

**Restricted Stock Awards**

Under the2007 Plan as of March 31, 2008, the Compensation Committee approved and grantedawards of 56,000 shares of restricted stock, in the aggregate, to certain keyemployees, one of whom also serves as a director, pursuant to the 2007 Plan.  Vestingof the restricted stock is generally subject to a continued service conditionwith one-third of the awards vesting each year on the anniversary date theawards were granted commencing on the first such anniversary date.  The fairvalue of the awards granted was equal to the market value of the Company’scommon stock on the grant date. During the three- and six-month periods ended March31, 2008, the Company recognized approximately $14,000 and $37,000,respectively, of compensation cost in its consolidated statements of operationsrelated to restricted stock awards vesting under the 2007 Equity Plan.

12

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 9     STOCK BASEDCOMPENSATION (CONTINUED)**

The following table summarizes restricted stock activity from September30, 2007, through March 31, 2008.

 

 

** **

**Shares**

** **

**Weighted 		Average  Grant Date		Fair Value**

Non-vested balance at September 30,  2007........................................ 

 

21,999

 

$3.49

Changes during the period:

 

 

 

 

Shares granted................................................................................		

 

23,000

 

$2.37

Shares vested..................................................................................		

 

--

 

--

Shares forfeited...............................................................................		

 

--

 

--

Non-vested balance at March 31, 2008...............................................		

 

44,999

 

$2.92

As of March 31, 2008, there wasapproximately $65,000 of total unrecognized compensation cost related to 44,999shares of unvested restricted stock awards (reflected in the table above)granted under the 2007 Equity Incentive Plan. That cost is expected to berecognized over the remainder of the requisite service (vesting) period.

**Warrants**

As of March31, 2008, warrants to purchase 75,000 shares of the Company’s common stock atan exercise price of $1.75 were outstanding. These warrants are scheduled toexpire 90 days after a registration statement is declared effective by theSecurities and Exchange Commission. As of March 31, 2008, no such registrationstatement has been filed with the Securities and Exchange Commission.

**NOTE 10   COMMITMENTS ANDCONTINGENCIES**

**RoyaltyCommitments**

The Companywas granted a license for the use of certain trademarks by Motorola, Inc.("Motorola") for the distribution and sale of carry solution productsthroughout the EMEA Region under a non-exclusive license agreement effectiveOctober 1, 2004.  The license agreement expired by its terms on December31, 2007, with the Company being obligated to pay a royalty on sales effectedthrough the expiration date. Pursuant to the provisions of the licenseagreement, the Company had limited, post-expiration sell-through rights, withrespect to unsold inventory on hand as of December 31, 2007 (includinginventory in manufacture at that date), as to which it is also obligated to payroyalties.  By the terms of the agreement these sell-through rights expired onMarch 30, 2008. However, the Company and licensor are presently in negotiationswith respect to a new license agreement. For so long as negotiations continue,if at all, the Company is proceeding with the understanding that Motorola hasinformally granted the Company the rights to continue to sell licensed productin the EMEA Region.

Under theterms of the license agreement, the Company was required to pay Motorola aroyalty based upon a percentage of the Company's net sales to third parties oflicensed products within the EMEA Region, subject to payment of minimumroyalties (irrespective of actual net sales) to Motorola over three contractperiods, the last two of which were calendar 2006 (Contract Period 2) andcalendar 2007 (Contract Period 3). 

13

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 10   COMMITMENTS ANDCONTINGENCIES (CONTINUED)**

Thelicense terms provided that, prior to commencement of the latter two contractperiods, the parties would attempt to negotiate a new minimum royalty amountfor the ensuing contract period, in the absence of which a default formulawould apply.  The default formula provided that the minimum royalty payment forthe ensuing Contract Period may not be less than seventy-five per cent (75%) ofthe annualized royalties payable in respect of actual sales for the previous ContractPeriod, provided, however, that in no event may the minimum royalty in suchensuing Contract Period be less than seventy-five percent (75%) nor more thanone-hundred-twenty-five percent (125%) of the amount of such prior ContractPeriod’s annual minimum royalty. The Company and Motorola were unable to negotiatenew agreed minimum royalty payment amounts for Contract Period 2 and ContractPeriod 3. Consequently, application of the default formula resulted in fixingthe minimum royalty amounts at $225,000 for Contract Period 2 and $281,000 forContract Period 3.

In July2005, the license agreement with Motorola was amended to expand the licensedterritory to include the APAC Region as well as the EMEA Region inconsideration for payment of additional royalties on sales in such licensedterritory, subject to payment of minimum royalties of $75,000 for calendar year2007, separate and apart from royalties payable in respect of sales in the EMEARegion. 

Under the licensethe Company recorded royalty expense of approximately $13,000 and $102,000 forthe three and six-month periods ended March 31, 2008, respectively, and $116,000and $253,000 for the three-and six-month periods ended March 31, 2007,respectively. These amounts are included in selling expenses in theaccompanying consolidated statements of operations.  There were no minimumroyalties for the post expiration sell through period. As such, minimumroyalties for the three and six-month periods ended March 31, 2008 were $89,000.Minimum royalties for the three and six-month periods ended March 31, 2007 were$89,000 and $158,000, respectively.  Minimum royalty amounts include the APACroyalty referred to above.

**Bank Guarantee**

In July2002, Forward Innovations and its European logistics provider (freightforwarding and customs agent) entered into a Representation Agreement whereby,among other things, the European logistics provider agreed to act as suchsubsidiary's fiscal representative in The Netherlands for the purpose ofproviding services in connection with any value added tax matters. As part ofthis agreement, the subsidiary agreed to provide an undertaking to thelogistics provider with respect to any value added tax liability arising in TheNetherlands that the logistics provider paid on the subsidiary's behalf. InFebruary 2004, such subsidiary entered into a guarantee agreement with a Swissbank relating to the repayment of any amount up to €224,000 (equal to approximately$354,000 as of March 31, 2008) paid by such bank to the logistics providerpursuant to a letter of credit that was issued by the bank in favor of thelogistics provider in order to satisfy such undertaking.  The subsidiarywould be required to perform under the guarantee only in the event that: (i) avalue 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 itscapacity as surety by the Dutch Receiver of Taxes to pay such taxes, (iii) thesubsidiary or the Company on its behalf fails or refuses to remit the amount ofvalue added tax due to the logistics provider, and (iv) the logistics providermakes a drawing under the letter of credit. Commencing December 31, 2004, andon each anniversary thereafter until December 31, 2009, it is intended that thebank letter of credit will be renewed automatically for one-year periods. Thesubsidiary has agreed to keep a letter of credit guarantee in place for fiveyears following the date its relationship terminates with the logisticsprovider. As of March 31, 2008, the Company has not incurred a liability inconnection with this guarantee. 

14

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 10   COMMITMENTS ANDCONTINGENCIES (CONTINUED)**

**EmploymentAgreements**

EffectiveOctober 1, 2005, the Company entered into an employment agreement with each ofJerome E. Ball, Michael M. Schiffman, and Douglas W. Sabra in order to securetheir services to Forward during the terms of their respective agreements.  Mr.Ball’s and Mr. Schiffman’s agreements expired December 31, 2007 (see theinformation below with respect to Mr. Ball’s consulting arrangements and Mr.Schiffman’s separation arrangements).  Mr. Sabra’s agreement expires December31, 2008. Mr. Sabra’s agreement provides for successive one-year renewal terms,unless either party provides written notice of its intention not to renew theagreement not later than 90 days prior to the end of the term (or renewalperiod). If Forward gives such notice, subject to certain conditions, theexecutive 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 anysuch executive pursuant to these agreements.  

Under hisemployment agreement, which was amended effective at the commencement of the2008 Quarter in connection with his appointment to succeed Mr. Ball as ChiefExecutive Officer, Mr. Sabra is employed as President and Chief Executive Officerat an annual salary of $250,000, increased from $225,000.   At the time of thisappointment and salary increase the Compensation Committee of the Company’sBoard of Directors also determined to grant Mr. Sabra 20,000 shares ofrestricted stock under the 2007 Plan, with a grant date of January 2, 2008,vesting in equal proportions over three years from the grant date.

Inaddition, under his agreement Mr. Sabra is eligible to receive bonuscompensation in each year of the term of his agreement based on financialincentives.  The formula, as amended, that determines the amount of bonus thatmay be earned in each year during the term of the agreement is based on apercentage of Forward’s Pre-Tax Income (defined to exclude “other income”).

Mr. Sabra isentitled to receive customary benefits including health, life and disabilityinsurance, auto allowances and participation in the Company's 401K retirementplan.  

**ConsultingArrangement**

The Companyentered into a two-year consulting agreement with its Chairman of its Board ofDirectors, Jerome E. Ball, effective upon his retirement as Chief ExecutiveOfficer on January 1, 2008.  Under this consulting agreement the Company retainedhim to advise the Company as to its principal customer relationships,development and strategies under its business plan, and potential acquisitionsand/or business combinations. In exchange for such services, the Company agreedto pay Mr. Ball $10,000 per month during the term of the consulting agreement, whichcommenced January 1, 2008 and was scheduled to expire on December 31, 2009. TheAgreement provides that if at any time during its term the Agreement isterminated by Mr. Ball's death or permanent disability, his estate would beentitled to payment of one-half the monthly payments remaining under theAgreement at the time of such termination. In addition, on February 14, 2008, Mr.Ball was re-elected to the Board of Directors as its Chairman, and under theterms of the agreement, was entitled to a fee of $25,000 per annum, payable inmonthly installments. Refer to Note 12 Subsequent Events below.

**Severance Arrangement**

On January 28, 2008, the Company entered into severance arrangementswith Mr. Michael M. Schiffman, whose employment as President and ChiefOperating Officer expired December 31, 2007.  Under these arrangements, inaddition to other customary terms and conditions, Mr. Schiffman was granted aseverance package consisting of $162,500 (paid in full upon execution of theagreement) and a release by the Company of potential claims. In return, Mr.Schiffman released the Company from potential claims and agreed to certainmodifications of the non-competition and non-solicitation covenants containedin the employment agreement. 

15

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 11   LEGALPROCEDINGS**

            From time to time,the Company may become a party to legal actions or proceedings in the ordinarycourse of its business.  As of March 31, 2008, there were no such actions orproceedings, either individually or in the aggregate, that, if decidedadversely to the Company’s interests, the Company believes would be material toits business.

**NOTE 12   SUBSEQUENTEVENTS**

On April 22, 2008, theCompany’s Chairman of its Board of Directors, Jerome E. Ball died.  At thetime of his death, Mr. Ball was serving as a consultant to the Company with atwo year term expiring December 31, 2009, in consideration of a monthlyconsulting fee of $10,000.  Pursuant to the terms of the Agreement, Mr.Ball’s estate is entitled to payment of one-half the monthly payments remainingunder the Agreement at the time of his death as a termination benefit. Accordingly, the Company anticipates making a payment of $100,000 to Mr. Ball'sestate within thirty days of termination.  In addition, pursuant to thisAgreement Mr. Ball’s election as director and appointment as Chairman of theBoard in February 2008 entitled him to $25,000 per annum, payable in monthlyinstallments.  Monthly payments of approximately $2,100 through April 2008aggregating $6,250 were made to Mr. Ball.  No further payments are due andowing to his estate under this part of the Agreement.  

Unexercised stock options topurchase 10,000 shares of common stock granted to Mr. Ball pursuant to the 2007Equity Incentive Plan in February 2008 were subject to a vesting period of oneyear.  The Compensation Committee in recognition of Mr. Ball’s nearly ten yearsof service as Chairman and CEO, has determined that such options shall vest in orderto permit Mr. Ball’s estate to exercise the options within a one year period ifin the interest of the estate to do so.

 

 

 

 

 

16

 
****
 

 

**Forward Industries, Inc.**

 

 

**ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS  **

*Thefollowing discussion and analysis should be read in conjunction with ourunaudited Consolidated Financial Statements and the notes thereto and otherfinancial information appearing elsewhere in this Quarterly Report on Form 10-Qand in our Annual Report on Form 10-K for the fiscal year ended September 30,2007.  The following discussion and analysis compares our consolidated resultsof operations for the three months ended March 31, 2008 (the “2008 Quarter”),with the three months ended March 31, 2007 (the “2007 Quarter”), and the sixmonths ended March 31, 2008 (the “2008 Period”), with the six months endedMarch 31, 2007 (the “2007 Period”), and is based on or derived from theUnaudited Consolidated Financial Statements included elsewhere in thisQuarterly Report. There have been no material changes in critical accountingestimates since September 30, 2007.  All figures in the following discussionare presented on a consolidated basis. All dollar amounts and percentagespresented herein have been rounded to approximate values.*

**CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFEHARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995**

Thisquarterly report contains forward-looking statements that are not based onhistorical fact and that involve assessments of certain risks, developments,and uncertainties.  Such forward looking statements, within the meaning of thePrivate Securities Litigation Reform Act of 1995, can be identified by the useof forward-looking terminology such as “may”, “will”, “should”, “expect”,“anticipate”, estimate”, “intend”,  “continue”, or “believe”, or the negativesor other variations of these terms or comparable terminology.  Forward lookingstatements may include projections, forecasts, or estimates of futureperformance.  Forward looking statements are based upon assumptions that webelieve to be reasonable at the time such forward looking statements are made. Whether those assumptions will be borne out will be determined by futurefactors, developments, and events, which are difficult to predict and may bebeyond our control.  Actual factors, developments, and events may differmaterially from those assumed.  Such risk factors, developments, uncertainties,and contingencies, including those discussed in this Management’s Discussionand Analysis of Financial Condition and Results of Operations and thoseidentified in “Risk Factors” in Item 1A of Part II of this Quarterly Report onForm 10-Q and in our annual report on Form 10-K for the fiscal year endedSeptember 30, 2007, could cause our future operating results to differmaterially from those set forth in any forward looking statement.  Such factorsinclude, among others, the following: our success in winning new business from existingand new customers and against competing vendors; future prospects with OEMcellphone customer Motorola in light of strategic changes in its business andorganization; whether replacement programs that we win will be as successful asthose that are replaced; the loss of a key salesman who has significantinfluence on our relationships with certain Original Equipment Manufacturer(“OEM”) customer makers of diabetic test kits; our ability to maintain qualitycontrol standards at levels acceptable to our OEM customers’ requirements; levelsof demand and pricing generally for cellular handsets and blood glucosemonitoring devices sold by our customers for which we supply carry solutions; variabilityin order flow from our OEM customers; general economic and business conditions,nationally and internationally in the countries in which we do business; theexpiration of our license agreement with Motorola by its terms on December 31,2007; the need to add materially to our inventory allowance, including theimpact on inventory levels or saleability of inventory arising out of hubagreements we have entered into with two of our OEM customers; demographicchanges; changes in technology, including developments affecting cellularhandsets; developments in the treatment or control of diabetes that affect theincidence of use of handheld blood glucose monitors by diabetics; increasedcompetition in the business of distribution of carry solutions for handheldelectronic devices generally or increased competition to include carrysolutions with products manufactured by our OEM customers in particular;changes affecting the business or business prospects of one or more of ourprincipal OEM customers; governmental regulations and changes in, or thefailure to comply with, governmental regulations; and other factors includedelsewhere in this report and our other reports filed with the Commission,including without limitation, those described under the caption Risk Factorscontained in our Annual Report on Form 10-K for the year ended September 30, 2007. Accordingly, there can be no assurance that any such forward looking statement,projection, forecast or estimate can be realized or that actual returns orresults will not differ materially from those set forth in any forward lookingstatement.

17

 

 

 

**Forward Industries, Inc.**

 

 

Given theseuncertainties, readers are cautioned not to place undue reliance on suchforward-looking statements.  The Company disclaims any obligation to update anysuch factors or to publicly announce the results of any revisions to any of theforward-looking statements contained herein to reflect future results, eventsor developments.

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

Thismanagement’s discussion and analysis of financial condition and results ofoperations is based upon or derived from our unaudited consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues, and expenses, and related disclosureof contingent liabilities. We base these estimates on our historical experienceand on various other assumptions that we believe to be reasonable under thecircumstances, and these estimates form the basis for our judgments concerningthe carrying values of assets and liabilities that are not readily apparentfrom other sources. We periodically re-evaluate these estimates and judgmentsbased on available information and experience. Actual results could differ fromour estimates under different assumptions and conditions. If actual resultssignificantly differ from our estimates, our financial condition and results ofoperations could be materially impacted. Please refer to “Management’sDiscussion and Analysis—Critical Accounting Policies and Estimates” included inour Annual Report on Form 10-K for the fiscal year ended September 30, 2007,for further information regarding our critical accounting policies andestimates. 

The notesto our audited consolidated financial statements and “Management’s Discussionand Analysis” included in our Annual Report on Form 10-K for the year endedSeptember 30, 2007 (including the information under “Risk Factors” therein),the notes to our consolidated financial statements included in Part I, Item 1of this Quarterly Report on Form 10-Q, the factors and events describedelsewhere in the “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” that follows below, as well as the informationcontained under the caption “Risk Factors” in Item 1A of Part II of thisQuarterly Report on Form 10-Q  contain additional information related to ouraccounting policies and should be read in conjunction with the followingdiscussion and analysis relating to our overall financial performance,operations and financial position. 

**Revenue Recognition**

Inaccordance with the requirements of Staff Accounting Bulletin (SAB) No. 104, RevenueRecognition in Financial Statements, the Company generally recognizes revenuefrom product sales to customers when: products that do not require furtherservices by the Company are shipped; there are no uncertainties surroundingcustomer acceptance; and collectibility is reasonably assured. 
Accounts Receivable
We recordan allowance for doubtful accounts for all receivables judged by us to beunlikely to be collected. The effect of the allowance is to reduce the accountsreceivable reported on our balance sheet to an amount that we believe willactually be collected.  Significant management judgments and estimates must bemade and used in connection with establishing this valuation account, based ona combination of factors:  Our analysis includes, among other factors, of theage of receivable balances, our historical bad debts write-off experience, andour respective customer’s creditworthiness to determine the appropriateallowance for doubtful accounts. At March 31, 2008 and September 30, 2007, ourallowance for doubtful accounts was approximately $10,000 and $47,000,respectively.  Changes to this account are reflected in the general andadministrative expense line of our consolidated statements of operations. Although we consider our allowance for doubtful accounts to be adequate andproper, changes in economic conditions, the assessments of new customers’creditworthiness, changes in customer circumstances, or other factors couldhave a material effect on the recorded allowance.

18

 

 

 

**Forward Industries, Inc.**

 
 Inventory Valuation
We make estimatesand judgments to value our inventory. Our inventory is recorded at the lower ofcost or market. The majority of our inventory consists of finished goods thatare custom made by our suppliers based on firm orders from our OEM customersand held for our account.  We also supply custom manufactured inventory to our OEMcustomers’ distribution hubs in anticipation of their draw-downs to fulfill orders;we also periodically stock inventory in anticipation of orders from our OEMcustomers when it appears to us commercially advantageous to do so. We alsohold inventory in support of our license agreement. At the end of each fiscalquarter, we evaluate our ending inventories, and we establish an allowance forinventory that is considered obsolete, slow moving, or otherwise un-saleable.  Thisevaluation includes, among other factors, analyses of inventory levels,historical loss trends, sales history, and projections of future sales demand.  Wephysically dispose of inventory once its marketability has been determined tobe zero.  Inventory allowances were approximately $1.0 million and $0.7 millionat March 31, 2008 and September 30, 2007, respectively.  The increase in theallowance from September 30, 2007, to March 31, 2008, was due almost entirelyto obsolescence or unsaleability of cell phone inventory, in particularinventory held for sale under the Motorola license, which expired December 31,2007. Changes to this account are reflected in the cost of goods sold line ofour consolidated statements of operations.  

The vastmajority of our production is made to customer specifications.  If a customerelects not to accept delivery, or defaults on a purchase order or commitment, orreturns inventory from its hub without payment in violation of the hubarrangements, additional inventory write-downs or reserves may be required andwould be reflected in cost of goods sold in the period the revision is made.Historically, actual inventory valuation results have not deviatedsignificantly from those previously estimated by us. 
Deferred IncomeTaxes 
In thepreparation of our consolidated financial statements, we are required toestimate income taxes in each of the jurisdictions in which we are subject totaxation. This process involves estimating actual current income tax expensetogether with assessing temporary differences resulting from differingtreatment of revenue and expense items for tax and accounting purposes. Thesedifferences result in deferred tax assets and liabilities, which are includedin our consolidated balance sheet. We had approximately $0.4 million and $0.3million of deferred tax assets at March 31, 2008, and September 30, 2007,respectively. No valuation allowances were recorded in respect of thesedeferred tax assets as of such dates.

Managementevaluates our deferred tax assets on a quarterly basis and assesses the needfor valuation allowances. Our deferred tax assets are evaluated by consideringhistorical levels of income, estimates of future taxable income, and the impactof our tax planning strategies. We record a valuation allowance to reducedeferred 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 theevent that it should be subsequently determined that we can not, on a morelikely 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) thedeferred tax asset valuation allowance would be charged to income in the periodin which such determination is made. Changes in our deferred tax assets are reflectedin the tax (benefit) expense line of our consolidated statements of operations.

**VARIABILITY OF REVENUES AND RESULTS OF OPERATION**

Because oursales revenues are highly concentrated in a few large customers, and becausethe volumes of these customers’ order flows to us are highly variable, withshort lead times, our quarterly revenues, and consequently our results ofoperations, are susceptible to significant variability over a relatively shortperiod of time.

19

 

 

 

**Forward Industries, Inc.**

 

 

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

All of thismakes our quarterly revenue levels susceptible to a high degree of variabilityand difficult to predict.  Significant, rapid shifts in our operating resultsmay occur if and when one or more of these customers increases or decreases thesize(s) of, or eliminates, its orders from us by amounts that are material toour business.  

**TRENDS IN RESULTS OF OPERATIONS**
-  *We foresee a continuation ofweak operating results due primarily to the steeply lower level of cell phoneproduct sales*.  Revenue fromMotorola, historically our largest customer, has trended down on a comparablequarter basis since the first quarter of Fiscal 2007.  This downtrendaccelerated in the third and fourth quarters of Fiscal 2007, and in the first andsecond quarters of Fiscal 2008 revenue from Motorola fell precipitously fromthe lower levels of Fiscal 2007*.*  Currently, we foresee no imminent new“in-box” programs or developments to reverse this trend in the immediatefuture.  Uncertainties relating to our business prospects with this customer haveincreased with Motorola’s March 2008 announcement that it will spin off its MobileDevices business.  Absent a reversal of this trend, and absent a materialincrease in sales revenues from other product markets, we anticipate that we willcontinue to incur operating losses, and possibly net losses, throughout Fiscal 2008. See “Risk Factors” in Part II, Item 1A, of this Quarterly Report on Form 10-Q fora discussion of recent developments relating to our relationship with Motorola. 
-  *We anticipate that gross profitand gross profit percentage may continue to be impacted by several factors.*First, reduction in volume demand with respect to ourcell phone products in the first and second quarters of Fiscal 2008 was, and weanticipate for Fiscal 2008 likely will be, the most significant factor in thelevel of gross profit. Second, we anticipate that gross profit will continue tobe pressured by a difficult pricing environment for our cell phone and bloodglucose carry solution product lines.  In addition, rising inflationary costpressures on our cost of goods sold, as described below, is contributing tofurther erosion of gross profit percentage.  Third, while diabetic caserevenues from Lifescan, our largest customer, and certain other OEM customersin this product line have trended higher, gross margin on these sales tend tobe relatively narrow.  As revenue from these programs accounts for an overallhigher percentage of our revenue mix, we expect gross profit percentage may furtherdecline.  Finally, aftermarket sales under the expired Motorola license tendedto carry higher profit margins than OEM sales on certain products.  In theabsence of a material contribution of net sales under such license or renewalthereof, gross profit percentage will be further pressured.
-  *We believe that recent,macro-economic developments in or affecting China’s economy will continue to contributeto rising costs of goods sold, which will pressure gross profit.*  We source 100% of the products we sell anddistribute from vendors located in China.  We anticipate that rising laborcosts (particularly in South China, where we source the majority of ourproducts), higher fuel costs, and the rising value of the Renminbi incomparison to the U.S. dollar in Fiscal 2008 will continue to adversely affectgross profit.  We believe that currently we have relatively little ability topass these higher costs on to our larger customers.

20
 
 
** 
 

**Forward Industries, Inc.**

 

 
-  *Pre-tax net loss in recentreporting periods would have been significantly larger but for the substantiallevel of “other income”, which consists primarily of interest income on cashbalances. *However, we anticipatethat recent Federal Reserve reductions in the level of interest rates combinedwith slightly lower cash balances will result in lower levels of other incomeand thus result in a smaller offset to operating losses. 
-  *Our inventory remains at historicallyhigh levels primarily as a result of supporting hub agreements entered intowith two of our largest OEM customers. *Underthese agreements, we are required to source and ship our products to our OEMcustomers’ distribution hubs at multiple locations, but do not invoice the OEMcustomers until they withdraw our product from the hub for sale through theirchain of distribution. The implementation of these arrangements negativelyaffects our liquidity. 

**RESULTS OF OPERATIONS FOR THE 2008 QUARTER COMPAREDTO THE 2007 QUARTER**

**Net loss**

Net lossincreased to $0.4 million in the 2008 Quarter from a net loss of $35,000 in the2007 Quarter. This increase was due primarily to a $0.7 million, or 52%,decline in gross profit compared to the 2007 Quarter resulting from asignificant decline in sales of cell phone products, as detailed below. To alesser extent net loss widened as a result of the decline in other income of$57,000, or 23%, compared to the 2007 Quarter.  The decline in our gross profitwas offset, in part, by reductions in operating expenses of $0.2 million, or15%. Our benefit from income taxes increased $0.2 million compared to the 2007Quarter, which had the effect of reducing our net loss. Basic and diluted pershare data was ($0.05) for the 2008 Quarter, compared to $0.00 for the 2007Quarter. The increase in loss per share in the 2008 Quarter was due to the increasein net loss.

**Net Sales**

Netsales decreased $1.2 million, or 20%, to $4.7 million in the 2008 Quarter from $5.9million in the 2007 Quarter due to a precipitous decline in sales of cell phoneproducts of $1.6 million, or 85%. This decline was offset in part by increasesin sales of diabetic products of $0.4 million, or 13%, and sales of otherproducts of $0.1 million, or 13%.  The tables below set forth sales by productline and geographic location of our customers for the periods indicated.

21

 

 

 

**Forward Industries, Inc.**

 

 

 

**Net Sales for 2008 Quarter**

**3 Months ended March 31, 2008**

**(millions of dollars)**

** **

**APAC**

**Americas**

**EMEA**

Total*

Diabetic Products..................................		

$2.4

$0.4

$0.7

$3.6

Other Products.......................................		

0.2

0.6

--

0.9

Cell Phone Products..............................		

0.1

--

0.1

0.3

**Total***

**$2.8**

**$1.0**

**$0.9**

**$4.7**

                               

**Net Sales for 2007 Quarter**

**3 Months ended March 31, 2007**

**(millions of dollars)**

** **

**APAC**

**Americas**

**EMEA**

Total*

Diabetic Products..................................		

$2.0

$0.7

$0.5

$3.2

Other Products.......................................		

0.1

0.7

--

0.8

Cell Phone Products..............................		

0.7

0.4

0.8

1.9

**Total***

**$2.8**

**$1.8**

**$1.3**

**$5.9**

* Tables maynot total due to rounding.

**Diabetic Product Sales**

Wedesign to the order of and sell directly to our OEM customers carrying casesused by diabetics to carry their personal electronic, blood glucose monitoringkits. In the 2008 Quarter, OEM customers for these carrying cases includedLifescan, Abbott Labs, and Roche Diagnostics (including their subsidiaries,affiliates and contract manufacturers) as well as other customers. Our carryingcases are packaged as an accessory "in-box" with the monitoring kitsthat are sold by our OEM customers.

Salesof cases for blood glucose monitoring kits increased approximately $0.4million, or 13%, to $3.6 million in the 2008 Quarter from $3.2 million in the2007 Quarter. This increase was primarily due to higher sales to Lifescan of$0.4 million and Roche of $0.4 million in the 2008 Quarter, offset in part by adecrease in sales to Abbot of $0.5 million. 

Salesof carrying cases for blood glucose monitoring kits represented 75% of ourtotal net sales in the 2008 Quarter compared to 55% of our total net sales inthe 2007 Quarter due primarily to the significant decline in cell phone productsales.

**OtherProduct Sales**

Wedesign and sell a number of other carrying solutions for items such as cameras,portable oxygen tanks, bar code scanners, MP3 players, and other carryingsolutions for an assortment of products on a made-to-order basis that arecustomized to meet the individual needs of our smaller OEM customers.  Bythe nature of our distribution in this market, sales of these customizedproducts to order in their product category vary from period to period withoutnecessarily reflecting a significant trend in overall demand for these items.Sales of other products increased $0.1 million, or 13%, to $0.9 million in the 2008Quarter from $0.8 million in the 2007 Quarter due primarily to a $0.2 millionincrease in sales to one OEM customer. This increase was offset by severalsmaller decreases in sales to other suppliers of these items.

**Cell Phone Product Sales**

Ourcell phone carry solutions products include carrying cases for handsets andcamera attachments, plastic belt clips, carrying case straps and bags, screencleaners, decorative faceplates, and other attachments used to carry or enhancethe appearance of cellular telephone handsets.  We design to the order ofand sell these products directly to cell phone handset original equipmentmanufacturers.  Our cases are packaged as an accessory "in-box"with the handsets that are sold by our OEM customers. Motorola was our only OEMcell phone customer in Fiscal 2007, as well as the 2008 Quarter.  

22

 

 

 

**Forward Industries, Inc.**

 

 

Inaddition, until December 31, 2007, when  our license agreement with Motorola, Inc.expired, we sold certain separately packaged cell phone carry solution casesand accessories bearing the Motorola trademark directly to third partywholesalers and retailers in the EMEA and APAC Regions. Under the provisions ofthe agreement, during the 2008 Quarter, we had the limited right to sell existinginventory on hand (or that was in the process of manufacture as of December 31,2007). This limited sell-through right expired on March 30, 2008. However, weare presently in negotiations with Motorola with respect to a new licenseagreement. As long as these negotiations may continue, if at all, ourunderstanding is that Motorola has informally granted us the right to continueto sell licensed product in the EMEA Region.

See“Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q andin our Annual Report on Form 10-K for the fiscal year ended September 30, 2007,for a discussion of the risks relating to OEM customer Motorola.

Totalsales of cell phone products decreased $1.6 million, or 85%, to $0.3 million inthe 2008 Quarter from $1.9 million in the 2007 Quarter. “In-box” sales toMotorola decreased $1.0 million to 0.2 million in the 2008 Quarter from $1.2million in the 2007 Quarter. We believe this significant decrease may be due toa number of factors, including increased competition and the economicsaccompanying our customer’s cell phone launch cycle. After an extended time onthe market, successful handsets typically make a pricing transition to mid- andlower-tier phones, and the cost to the OEM of inclusion of accessories “in-box”comes to account for an unacceptably high percentage of the declining grossprofit.  As a consequence, we believe our “in-box” accessories have been reducedand/or eliminated with consequent revenue loss for us.  Although we continue tobe selected to participate in several new “in-box” programs with Motorola,these programs have not been significant, and the revenue from successfulprograms in recent fiscal years has not been replaced.  

Salesto third party distributors and retailers under our license agreement with Motorolatotaled $0.1 million in the 2008 Quarter compared to $0.7 million in Fiscal 2007,a decrease of $0.6 million, or 85%.  2008 Quarter sales under licenserepresented exclusively sales for the 90-day period following expiration of thelicense, during which we had the limited right to sell inventory on hand. Webelieve that sales under our license agreement with Motorola were adverselyaffected as consumers may be less inclined to purchase relatively high costcases and other accessories for mature, lower-tier phones accessorized by ourproducts.   We believe that the decline may also be attributable to thelicensor’s direct sales in the EMEA Region to one or more distributors, in directcompetition with our sales efforts.

Salesof carry solutions for cell phone products represented 6% of our total netsales in the 2008 Quarter compared to 32% in the 2007 Quarter, due primarily tothe significant decline in cell phone sales and, to a much lesser extent, theincreases in our diabetic and other product sales.

**Gross Profit**

Grossprofit decreased $0.7 million, or 52%, to $0.6 million in the 2008 Quarter from$1.3 million in the 2007 Quarter primarily due to the steep decline in revenuefrom cell phone products, but other factors affecting operations also adverselyaffected gross profit.   Sales of diabetic products, which typically havenarrower margins than sales in the cell phone product line, accounted for anoverall much higher percentage of our total net sales in the 2008 Quartercompared to the 2007 Quarter.  This adversely affected our gross profit percentage.Margins across all product lines continue to be affected by a difficult pricingenvironment.  In addition, higher costs of goods sold, including labor andmaterials costs due to inflation and currency factors, all contributed toreduced gross profit and gross profit percentage. Further, certain costs ofoperating our Hong Kong facility, which constitutes part of our cost of goodssold on our statements of operations, are relatively fixed and, on a lowerrevenue base, tend to act as a drag on our gross margin. 

23

 

 

 

**Forward Industries, Inc.**

 

 

Ourgross profit was also adversely affected by a $0.3 million charge we recorded inthe 2008 Quarter for obsolete inventory. The majority of this charge relates toinventory held for sale under license as of March 31, 2008, bearing theMotorola trademark. 

Finally,in order to meet certain of our customers’ delivery requirements, we incurredhigher freight, duties and customs costs in the 2008 Quarter, which, on a lowerrevenue base, had the effect of further reducing our gross margin.  

Grossprofit as a percentage of net sales decreased to 13% in the 2008 Quarter from 22%in the 2007 Quarter due to the factors discussed above.

**Selling, General, and Administrative Expenses**

Selling,general, and administrative expenses decreased $0.2 million, or 15%, to $1.3million in the 2008 Quarter from $1.6 million in the 2007 Quarter.  Thisdecrease was primarily due to reductions in personnel costs in both selling andgeneral and administrative categories in the 2008 Quarter of $68,000 and$89,000, respectively, primarily due to expiration of employment agreements ofexecutives, one in each area. In addition, royalty and commission expense was lowerby $0.1 million in the 2008 Quarter as sales of Motorola licensed products postlicense expiration were not subject to a minimum royalty in the 2008 Quarter.These decreases were offset in part by higher professional fees, whichincreased $56,000 in the 2008 Quarter compared to the 2007 Quarter, due primarilyto consulting fees incurred in respect of preparation for compliance with Rule404 of the Sarbanes-Oxley Act, and to consulting fees paid to a director underhis consulting agreement. Increases/decreases in other components of selling,general, and administrative expenses were not significant. 

**Other Income**

Otherincome, predominantly consisting of interest income, declined 23% to $0.2million, due primarily to lower average interest rates in the 2008 Quarter on slightlylower cash balances compared to the 2007 Quarter. The second component of“other income” consists of gain (loss) from foreign currency transactions, asto which we recorded a $17,000 gain in the 2008 Quarter compared to a smallloss in the 2007 Quarter.

**Pretax (Loss) Income**

Pretaxloss increased to $0.5 million in the 2008 Quarter from $42,000 in the 2007Quarter as a result of the changes as described above.

**Income Taxes**

Benefitfrom income taxes increased to $0.2 million in the 2008 Quarter from $7,000 inthe 2007 Quarter due primarily to the increased pre-tax loss in the 2008 Quarter. Our effective tax rate does not approximate the United States statutory federalincome tax rate primarily due to tax rate differentials in respect of state andforeign taxes, to which income recorded by Forward Innovations is subject. The (benefit)provision consists primarily of estimated U.S. federal income taxes, and to alesser extent, current state and foreign income taxes.  See Note 7 to theFinancial Statements. 

We considerthe earnings of our foreign subsidiaries indefinitely invested and,accordingly, have not recorded a provision for U.S. income taxes on theirun-repatriated earnings.  At March 31, 2008, those cumulative earnings wereapproximately $4.5 million.  

**RESULTS OF OPERATIONS FOR THE 2008 PERIOD COMPARED TOTHE 2007 PERIOD**

**Net (loss)income**

Weincurred a net loss of $0.6 million in the 2008 Period compared to net income of$0.3 million in the 2007 Period, a decrease of $1.0 million. This decrease wasdue to a $1.5 million, or 47%, decline in gross profit resulting from asignificant decline in sales of cell phone products, as detailed below, as wellas, in small part, to a decline in other income. The decline in our gross profitwas partially offset by reductions in our operating expenses of $0.3 million,or 8%, in the 2008 Period. Income taxes swung $0.3 million to a benefit in the2008 Period from a provision in the 2007 Period, which had the effect ofreducing the net loss. Basic and diluted per share data was ($0.08) for the2008 Period, compared to $0.04 for the 2007 Period. The decrease in earningsper share in the 2008 Period was due to the decrease in net income.

24

 

 

 

**Forward Industries, Inc.**

 

 

**Net Sales**

Netsales decreased $3.6 million, or 27%, to $9.7 million in the 2008 Periodcompared to $13.3 million in the 2007 Period due to a decline in sales of cellphone products of $5.3 million, or 86%. This decline was offset in part byincreases in sales of diabetic products of $1.4 million, or 25%, and sales ofother products of $0.3 million, or 17%.  The tables below set forth sales byproduct line and geographic location of our customers for the periodsindicated.

 

**Net Sales for 2008 Period**

**6 Months ended March 31, 2008**

**(millions of dollars)**

** **

**APAC**

**Americas**

**EMEA**

Total*

Diabetic Products..................................		

$4.3

$1.1

$1.6

$7.1

Other Products.......................................		

0.4

1.3

0.1

1.8

Cell Phone Products..............................		

0.3

0.2

0.3

0.8

**Total***

**$5.0**

**$2.6**

**$2.1**

**$9.7**

                               

**Net Sales for 2007 Period**

**6 Months ended March 31, 2007**

**(millions of dollars)**

** **

**APAC**

**Americas**

**EMEA**

Total*

Diabetic Products..................................		

$3.4

$1.5

$0.8

$5.7

Other Products.......................................		

0.2

1.3

--

1.5

Cell Phone Products..............................		

2.5

1.5

2.1

6.1

**Total***

**$6.1**

**$4.3**

**$2.9**

**$13.3**

* Tables maynot total due to rounding.

**Diabetic Product Sales**

Salesof cases for blood glucose monitoring kits increased approximately $1.4million, or 25%, to $7.1 million in the 2008 Period from $5.7 million in the2007 Period. This increase was primarily due to higher sales to Lifescan andRoche of $1.1 million and $0.9 million, respectively, in the 2008 Period. Theseincreases were offset by decreases in sales to Abbott and other suppliers ofdiabetic devices of $0.5 million and $0.1 million, respectively. 

Salesof carrying cases for blood glucose monitoring kits represented 73% of ourtotal net sales in the 2008 Period compared to 43% of our total net sales inthe 2007 Period due primarily to the significant decline in cell phone productsales.

**OtherProduct Sales**

Salesof other products increased $0.3 million, or 17%, to $1.8 million in the 2008Period from $1.5 million in the 2007 Period due primarily to a $0.3 millionincrease in sales to one OEM customer. 

**Cell Phone Product Sales**

Totalsales of cell phone products decreased $5.3 million, or 86%, to $0.8 million inthe 2008 Period from $6.1 million in the 2007 Period. “In-box” sales toMotorola decreased $4.0 million to $0.6 million in the 2008 Period from $4.6million in the 2007 Period. We believe this significant decrease may be due toa number of factors, including increased competition and the economicsaccompanying our customer’s cell phone launch cycle. After an extended time onthe market, successful handsets typically make a pricing transition to mid- andlower-tier phones, and the cost to the OEM of inclusion of accessories “in box”comes to account for an unacceptably high percentage of the declining grossprofit As a consequence, we believe our “in-box” accessories have been reducedand/or eliminated with consequent revenue loss for us.  Although we continue tobe selected to participate in several new “in-box” programs with Motorola,these programs have not been significant, and the revenue from successfulprograms in recent fiscal years has not been replaced.

25

 

 

 

**Forward Industries, Inc.**

 

 

Salesto third party distributors and retailers under our license agreement with Motorolatotaled $0.3 million in the 2008 Period compared to $1.5 million in the 2007Period, a decrease of $1.2 million, or 82%.  2008 Period sales under licenserepresented exclusively sales for the 90-day period following expiration of thelicense, during which we had the limited right to sell inventory on hand. Webelieve that sales under our license agreement with Motorola are being, andwill continue to be, adversely affected as consumers may be less inclined topurchase relatively high cost cases and other accessories for mature,lower-tier phones accessorized by our products.   We believe that the declinemay also be attributable to the licensor’s direct sales in the EMEA Region toone or more distributors, in direct competition with our sales efforts.

Salesof carry solutions for cell phone products represented 9% of our total netsales in the 2008 Period compared to 46% in the 2007 Period, due primarily tothe significant decline in cell phone sales and, to a much lesser extent, theincreases in our diabetic and other product sales.

Seethe discussion under “Results of Operations for the 2008 Quarter Compared tothe 2007 Quarter” above relating to the status of the Motorola license and also“Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q andin our Annual Report on Form 10-K for the fiscal year ended September 30, 2007,for a discussion of the risks relating to OEM customer Motorola.

**Gross Profit**

Grossprofit decreased $1.5 million, or 47%, to $1.7 million in the 2008 Period from$1.3 million in the 2007 Period, primarily due to the steep decline in revenuefrom cell phone products, but other factors affecting our operations also contributedsignificantly to the decrease in gross profit.   With the decline in salesof cell phone products, sales of diabetic products, which typically havenarrower margins, accounted for an overall higher percentage of our total netsales in the 2008 Period.  This adversely affected gross profit percentage.Margins across all product lines continue to be affected by a difficult pricingenvironment.  In addition, higher costs of goods sold, including labor andmaterials costs, due to inflation and currency factors, all contributed toreduced gross profit and gross profit percentage. Further, certain costs ofoperating our Hong Kong facility, which constitutes part of our cost of goodssold on our statements of operations, are relatively fixed and, on a lowerrevenue base, tend to act as a drag on our gross margin.

Ourgross profit was also adversely affected by $0.4 million in charges we recordedduring the 2008 Period for obsolete inventory. The majority of these chargesrelate to inventory held for sale under license as of March 31, 2008, bearingthe Motorola trademark and are as of that date considered unsalable.  Thebalance of the charges primarily relate to other cell phone product inventoryheld for sale to Motorola that was judged to be obsolete during the 2008Period.

Finally,in order to meet certain of our customers’ delivery requirements, we incurredhigher freight, duties and customs costs in the 2008 Period, which, on a lowerrevenue base, had the effect of further reducing our gross margin.   

Grossprofit as a percentage of net sales decreased to 18% in the 2008 Period from 25%in the 2007 Period due to the factors discussed above.

**Selling, General, and Administrative Expenses**

Selling,general, and administrative expenses decreased nearly $0.3 million, or 8%, to$3.1 million in the 2008 Period from $3.3 million in the 2007 Period. Selling expensesdecreased $0.3 million due to a 57% decline in royalty and commission expenses(due primarily to lower sales under the Motorola license), a 58% decline intravel and entertainment expenses, and a 5% decline in personnel costs. General and administrative expense remained essentially flat at $1.6 millionbetween the 2008 Period and 2007 Period, which masked certain changes ofsignificance. Personnel costs increased $0.1 million in the 2008 Period due toan executive’s severance, which was offset by a reduction in professional feesof $0.1 million in the 2008 Period, as the 2007 Period included a $250,000payment in respect of the defense of a purported class action litigationagainst the Company and certain of its directors. Increases/decreases in othercomponents of selling, general, and administrative expenses were notsignificant.

26

 

 

 

**Forward Industries, Inc.**

 

 

**Other Income**

Otherincome, predominately consisting of interest income, declined 11% to $0.4million due to lower average interest rates on slightly lower cash balances duringthe 2008 Period compared to the 2007 Period. The second component of “otherincome” consists of gain from foreign currency transactions, as to which we recorded$31,000 of gains in the 2008 Period compared to $6,000 of gains in the 2007 Period.

**Pretax (Loss) Income**

Pretax(loss) income decreased $1.3 million, to a pretax loss of $0.9 million in the2008 Period from pretax income of $0.4 million in the 2007 Period as a resultof the changes as described above.

**Income Taxes**

Werecorded a benefit from income taxes of $0.2 million in the 2008 Periodcompared to a provision for income taxes of $83,000 in the 2007 Period due tothe swing to pretax loss in the 2008 Period from pretax income in the 2007Period.  Our effective tax rate does not approximate the United Statesstatutory federal income tax rate primarily due to tax rate differentials inrespect of state and foreign taxes, to which income recorded by ForwardInnovations is subject. The (benefit) provision consists primarily of estimatedU.S. federal income taxes, and to a lesser extent, current state and foreignincome taxes.  See Note 7 to the Financial Statements. 

We considerthe earnings of our foreign subsidiaries indefinitely invested and,accordingly, have not recorded a provision for U.S. income taxes on theirun-repatriated earnings.  At March 31, 2008, those cumulative earnings wereapproximately $4.5 million.

**LIQUIDITY AND CAPITAL RESOURCES**

Duringthe 2008 Period, we used $48,000 of cash in operations compared to generating $2.2million of cash from operations in the 2007 Period. Our operating cash flows inthe 2008 Period consisted of a net loss of $0.6 million, decreased by $0.4 millionfor non-cash items, and $0.3 million for net changes in working capital items,consisting primarily of changes in accounts receivable, and prepaid expensesand other current assets of $0.6 million and $0.2 million, respectively. Thesewere offset, in part, by changes in inventories, and accrued expenses and othercurrent liabilities of $0.6 million. The change in accounts receivable is attributableto the lower sales levels in the 2008 Period. The change in prepaid expensesand other current assets is primarily attributable to federal and state incometaxes that were prepaid at September 30, 2007, and were subsequently refundedin the 2008 Period. The change in inventories is in support of sales ordersreceived. The change in accrued expenses and other current liabilities isprimarily due to decreases in royalties payable and sales bonuses payable.

Ouroperating cash flows in the 2007 Period consisted of net income of $0.3million, increased by $0.2 million for non-cash items. These cash flows were decreasedby net changes in working capital items of $1.7 million, consisting primarilyof a change in accounts receivable and inventories of $2.3 million and $0.1million, respectively, which was offset, in part, by changes in accruedexpenses and other liabilities, and prepaid expenses and other current assets of$0.4 million and $0.3 million, respectively.

27

 

 

 

**Forward Industries, Inc.**

 

 

Investingactivities used $19,000 in the 2008 Period for purchases of property, plant andequipment, primarily computer and telecommunications hardware and software. Inthe 2007 Period, net investing activities used $15,000 for purchases ofproperty, plant and equipment, primarily computer and telecommunicationshardware and software. 

Financingactivities generated $39,000 in proceeds from the exercise of stock options inthe 2008 Period. There were no financing activities in the 2007 Period.

At March31, 2008, our current ratio (current assets divided by current liabilities) was11.81; our quick ratio (current assets less inventories divided by currentliabilities) was 11.28; and our working capital (current assets less currentliabilities) was $23.4 million.  As of such date, we had no short or long-termdebt outstanding. 

Ourprimary source of liquidity is our cash on hand. The primary demands on ourworking capital are: operating losses and accounts payable arising in theordinary course of business, the most significant of which arise when ourcustomers place orders and we order from our suppliers. Historically, oursources of liquidity have been adequate to satisfy working capital requirementsarising in the ordinary course of business. We anticipate that our liquidityand financial resources for the twelve months will be adequate to manage ourfinancial requirements.

In March 2008, Forward and itswholly-owned U.S. subsidiary, Koszegi Industries, Inc. elected not to renew theircredit facility with a U.S. bank that provided for a committed line of creditin the maximum amount of $3.0 million, including a $1.5 million sub-limit forletters of credit.  Accordingly, this credit facility expired March 30, 2008.There were no borrowings or letter of credit obligations outstanding under thisfacility during the three and six-month periods ended March 31, 2008. See Note4 to the unaudited consolidated Financial Statements set forth in Item 1.

InFebruary 2003, Forward Innovations established a credit facility with a Swissbank 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 termloan or loans, with a maximum repayment Period of 12 months, or as a guaranteefacility, or any combination of the foregoing.  Either party may terminatethe facility at any time; however, such termination would not affect the statedmaturity of any term loan outstanding under the facility.  Amountsborrowed other than as a term loan must be settled Periodly or converted intoterm loans. In connection with this facility, Forward Innovations has agreed tocertain financial covenants.  Amounts drawn under this credit facility bearinterest at variable rates established by the bank (5.35% as March 31, 2008).At March 31, 2008, Forward Innovations is contingently liable to the bank undera letter of credit issued on its behalf in the amount of €224,000 (equal to approximately$354,000 as of March 31, 2008) in favor of Forward Innovations' freightforwarder and customs agent in connection with its logistics operations in TheNetherlands.  The effect of the issuance of the letter of credit is to reducethe availability of the credit line in an amount equal to the face amount ofthe letter of credit.  See Note 4 to the unaudited consolidated FinancialStatements set forth in Item 1.

OnSeptember 27, 2002, our Board of Directors authorized the repurchase of up to400,000 shares of our outstanding common stock, or approximately 7% of thenumber of shares then outstanding. On January 21, 2004, our Board increased theamount of shares authorized for repurchase to 486,200. Under thatauthorization, as of March 31, 2008, we had repurchased an aggregate of 172,603shares at a cost of approximately $0.4 million. In addition, in connection withan exercise of outstanding stock options, 72,917 shares were purchased duringthe 2008 Period in a non-cash transaction, which was outside the foregoingauthorizations. See Item 2 of Part II of this Quarterly Report: UnregisteredSales and Purchases of Equity Securities and Use of Proceeds.

**CONTRACTUAL OBLIGATIONS ANDCOMMERCIAL COMMITMENTS**

TheCompany has entered into various contractual obligations and commercialcommitments that, under accounting principles generally accepted in the UnitedStates, are not recorded as a liability.   The following is a summary of suchcontractual cash obligations as of March 31, 2008:

28

 

 

 

**Forward Industries, Inc.**

 

 

 

**Contractual  Obligation or Commitment**

**Apr 08 – Mar 09**

**Apr 09 - Mar 11**

**Apr 11 – Mar 13**

**Thereafter**

Employment & Consulting Agreements

$293,000

$            --		

$           --                

$         --            		

Operating Leases

318,000

378,000

169,000

--

**Totals**

**$611,000**

**$ 378,000**

**$169,000**

**    $        --**

The Company has not guaranteed thedebt of any unconsolidated entity and does not engage in derivativetransactions or maintain any off-balance sheet special purpose entities. 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

Notapplicable.

**ITEM4. CONTROLS AND PROCEDURES **

Notapplicable.

**ITEM 4T. CONTROLS AND PROCEDURES**

**Evaluationof Disclosure Controls and Procedures**

Ourmanagement is responsible for establishing and maintaining a system ofdisclosure controls and procedures (as defined in Rule 13a-15(e)) under theExchange Act) that is designed to ensure that information required to bedisclosed by the Company in the reports that we file or submit under theExchange Act is recorded, processed, summarized and reported, within the timespecified in the Commission's rules and forms. Disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed by an issuer in the reportsthat it files or submits under the Exchange Act is accumulated and communicatedto the issuer's management, including its principal executive officer orofficers and principal financial officer or officers, or persons performing similarfunctions, as appropriate to allow timely decisions regarding requireddisclosure.

Inaccordance with Exchange Act Rule 13a-15(b), our management, under thesupervision and with the participation of our Chief Executive Officer and ChiefFinancial Officer, performed an evaluation of the effectiveness of theCompany's disclosure controls and procedures as of the end of the fiscal quartercovered by this Quarterly Report. Based on that evaluation, the Company's ChiefExecutive Officer and Chief Financial Officer concluded that the Company'sdisclosure controls and procedures were effective, as of the end of the 2008 Quarter,to provide reasonable assurance that information required to be disclosed inthe Company's reports filed or submitted under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theCommission's rules and forms. 

**Changesin internal controls**

Ourmanagement, with the participation our Chief Executive Officer and ChiefFinancial Officer, performed an evaluation as to whether any change in ourinternal controls over financial reporting  occurred during the 2008 Quarter. Based on that evaluation, our Chief Executive Officer and our Chief FinancialOfficer concluded that no change occurred in the Company's internal controlsover financial reporting during the 2008 Quarter that has materially affected,or is reasonably likely to materially affect, the Company's internal controlsover financial reporting.

29

 

 

 

**Forward Industries, Inc.**

 
 PART II.   OTHER INFORMATION
**ITEM1. LEGAL PROCEEDINGS**

Fromtime to time, the Company may become a party to legal actions or proceedings inthe ordinary course of its business.  As of March 31, 2008, there were no suchactions or proceedings, either individually or in the aggregate, that, if decidedadversely to the Company’s interests, the Company believes would be material toits business.

**ITEM1A. RISK FACTORS**

This“Risk Factors” section provides new or updated information in certain areasfrom the “Risk Factors” set forth in our Annual Report on Form 10-K for thefiscal year ended September 30, 2007. These risk factors are new or have beenexpanded or updated from our Annual Report on Form 10-K, but the factors belowdo not constitute all the risk factors that pertain to our business.  Please reviewour Annual Report on Form 10-K for a complete listing of “Risk Factors” thatpertain to our business. Please refer to ITEM 2. “CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THEPRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 on page 16 of thisQuarterly Report on Form 10-Q.

**New RiskFactors**

*With thesteep decline in cell phone revenue in the six months ended March 31, 2008, ourbusiness has become more highly concentrated in one product line, thusincreasing the risks to our financial condition and results of operationscompared to periods when revenue from customers from our two principal productlines were more balanced.*

Withthe steep decline in revenues from sales of accessories for cellular handsets,revenues from sales of carry solutions for diabetic monitoring cases accountedfor 73% of net revenues.  Thus, revenue from Lifescan, Abbott Labs, and RocheDiagnostics has accounted for a higher percentage of net sales.  In recentyears, revenue from OEM customers in each of the two product lines fluctuatedwithout one being consistently predominant.  If cellular handset revenues donot improve over the near- and medium term, our financial condition and resultsof operations will be subject to higher risk from the loss of one or more ofthese diabetic OEM customers due to the increased customer concentration andheightened, adverse impact of a loss of material amounts of revenues from onecustomer among a smaller revenue base.

*Webelieve that Motorola’s announcement in March 2008 that it will spin off itsMobile Devices business increases the risk to our ongoing relationship withMotorola.*

In March2008 Motorola announced that it intends to spin off its Mobile Devicesbusiness, which has been our OEM customer for over 10 years.  During much ofthat 10-year period, Motorola was our largest customer by revenue and anchoredour revenue and earnings base.  The steady and deep decline in our revenuesfrom Motorola since September 2006 is, we believe, reflective of the risks andchallenges inherent in the highly competitive cell handset business.   Wecannot predict the further effects that the spin-off of the Mobile Devicesbusiness might have upon our business.  However, we do believe that thisdevelopment increases the risks and uncertainties attendant to continuation ofour long-standing relationship to the Mobile Devices business as a reliable,valuable supplier of carry solution accessories.  At the very least, theproposed spin-off increases the likelihood that a significant recovery inlevels of revenue from Motorola may require more time and be subject to greateruncertainty than a recovery in the absence of changes in strategic managementof the Mobile Devices unit.   On the other hand, if new management of theMobile Devices business undertakes a sweeping reassessment of all businessrelationships and methods, which circumstances our beyond our control, thefuture scope and economics of “in-box” accessories and suppliers thereof may beat risk.  If our relationship with the Mobile Devices unit were weakened as aresult of the spin-off, our business prospects, financial condition, andresults of operations would continue to be materially and adversely affected,including the possible continuation of operating and net losses.  See thediscussion of the Motorola license below.

30

 

 

 

**Forward Industries, Inc.**

 

 

**Updated Risk Factors**

*Our license agreement with Motorola expired onDecember 31, 2007, and the failure to extend or renew this agreement would havea material, adverse effect on our results of operations and financial condition.*

Ourlicense agreement with Motorola, Inc. expired on December 31, 2007. Accordingly, our rights to sell certain cell phone carry solution cases andaccessories bearing the Motorola trademark has expired. During the 2008Quarter, under the provisions of the license agreement, we had the limitedright to sell existing inventory on hand (or that was in the process ofmanufacture at December 31, 2007). These limited sell-through rights expired onMarch 30, 2008.

Weare presently in negotiations with Motorola with respect to a new license agreement,but there can be no assurance that we will be able to achieve an extension,renewal, or new agreement on terms acceptable to us.  Motorola’s announcementin March 2008 that it intends to spin off its Mobile Devices business is likelyto increase the uncertainty, complexity, and difficulty in thesenegotiations.   Any failure to obtain a new license agreement on a long-termbasis on terms acceptable to us would have a material and adverse effect on ourresults of operations and financial condition. In addition to the loss ofrevenues as a consequence of losing aftermarket sales to cell phone retailersand distributors, we would expect that our profit margins would suffermaterially, as currently margins on certain sales of licensed products exceed forthe most part those in respect of case sales for OEM cell phone handsets andblood glucose monitoring kits.    

*Ourdependence on foreign manufacturers creates quality control, product cost,pricing, availability, and delivery risks. As a result, from time to time weexperience certain quality control issues that may threaten customerrelationships.*

Allof our products are manufactured by Chinese manufacturers in China. Ourreliance on foreign suppliers, manufacturers, and other contractors involvessignificant risks, including reduced control over quality assurance,manufacturing yields and costs, delivery schedules, the potential lack ofadequate capacity, and potential misappropriation of our designs. 

InFiscal 2006, we transitioned the responsibility for quality assuranceinspection of products from our Koszegi Asia facility to a third-party qualityassurance provider. Since making this transition we have experienced a highlevel of personnel turnover at Koszegi Asia, particularly in our sourcingdepartment, as well as in employees who oversee the quality control activitiesof our quality assurance provider. As a result, certain quality control anddelivery problems surfaced in Fiscal 2007 and other quality control issues havecontinued in Fiscal 2008. We are working diligently to improve our qualityassurance operations to meet the exacting quality and delivery standards ourcustomers require from us on a consistent basis. However, there can be noassurance that we will be successful in doing so and our failure to do so mayadversely affect customer relationships and could result in the loss of a keycustomer, which could have an adverse effect on our results of operations andour business reputation.  Currently, we are attempting to resolve a qualityproblem with our largest customer. . We are working diligently with thiscustomer and independent labs to correct this problem, but there can be noassurance that our efforts will be successful. Our failure to resolve thisquality problem to this customer’s satisfaction may result in the loss of thiscustomer.

*Ourbusiness is and has been characterized by a high degree of customerconcentration.  Our three largest customers accounted for approximately 72%, 72%and 65% of net sales in the 2008 Period, Fiscal 2007 and Fiscal 2006,respectively; the loss of, or material reduction in orders from, any of thesecustomers could materially and adversely affect our results of operations andfinancial condition.*  

31

 

 

 

**Forward Industries, Inc.**

 

 

Thepredominant percentage of our sales revenues is concentrated in three large OEMcustomers (including their international affiliates and/or their contractmanufacturers).  The loss of any of these three key customers (whether as aresult of such customers purchasing their carry solution requirements fromanother vendor, deciding to manufacture their own carrying cases, oreliminating the inclusion of our carrying cases with their products orotherwise) could have a material adverse effect on our financial condition,liquidity and results of operations.

** **

*Dollars in millions*

** **

**2008 Period**

** **

**Fiscal 2007**

** **

**Fiscal 2006**

** **

**Customer:**

**Net Sales**

**Percentage 		of Net Sales**

** **

**Net Sales**

**Percentage 		of Net Sales**

** **

**Net Sales**

**Percentage of Net Sales**

Lifescan............... 

$  4.4

45%

 

$  7.1

32%

 

$  5.3

17%

Motorola *.......... 

**

**

 

6.0

27%

 

11.3

37%

Abbott................. 

1.5

16%

 

2.9

13%

 

3.3

11%

Roche................... 

1.0

11%

 

**

**

 

**

**

**Totals**.............		

**$6.9**

**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 underour license agreement with Motorola for Fiscal 2007 and Fiscal 2006,respectively.

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

*We experienced severe erosion in our OEMproduct 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 toencounter pressures from certain OEM customers to constrain or even roll backprices. This price constraint factor is being exacerbated by inflationarypressures that affect our costs of supply.*

 

DuringFiscal 2007 and into the 2008 Period, we have experienced significant pricingpressure from our OEM customers in both cell phone product sales and bloodglucose monitor carrying case sales.  We have been unable to extract comparablepricing concessions from our product suppliers across all product lines, whichhas resulted in the erosion of product sales margins.  We anticipate thatpressures on our pricing power and shifts in our product mix will continue toexert downward pressure on our gross profit percentage in the fiscal yearending September 30, 2008.  We are also facing more persistent increases incosts of goods sold, due to inflationary pressures on materials and labor costsincurred by our Chinese vendors.  In addition, prices these vendors charge tous 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. Othercomponents of cost of goods sold, such as our Hong Kong/China inspection costs,which traditionally have been relatively fixed, are showing signs of wage-priceinflation.  We also face higher energy costs passed through to us in freightcharges.  When calculated on the basis of reduced sales volumes, thesepressures are also contributing to reduced gross profit percentage.  We cannotpredict when, if at all, our overall product sales margins will begin toimprove. If we are unable to renew the license agreement with Motorola on termsacceptable to us, as detailed in the risk factor above, our product salesmargins could be subject to further compression, as margins on licensedaftermarket sales are frequently more advantageous to us than on OEM sales.

 

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

 

Weare highly dependent on the efforts and services of certain key salesrepresentatives, including one individual, who is not under any contractualobligation to us, upon whom relationships with several of our largest OEMdiabetic customers are highly dependent.  Our business could be materially andadversely affected if we lost the services of such individual.  If we lost theservices of this key sales representative, we might experience a reduction inor significant loss of orders from such customers, resulting in a loss ofrevenues, which could materially and adversely affect our results of operationsand financial condition   The degree of this risk has increased to the extentthat our OEM customer relationships in our cell phone product line face greateruncertainty in light of the Motorola disclosures described above.

32

 

 

 

**Forward Industries, Inc.**

 

 

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

**IssuerPurchases of Equity Securities**

On September 27, 2002, our Board ofDirectors authorized the repurchase of up to 400,000 shares of our outstandingcommon stock, or approximately 7% of the number of shares then outstanding. OnJanuary 21, 2004, our Board increased the amount of shares authorized forrepurchase to 486,200.  Under these authorizations, as of March 31, 2008,we had repurchased an aggregate of 172,603 shares at a cost of approximately$0.4 million during the 2008 Period. No purchases were made during the 2008Period or 2007 Period. Separately, on March 5, 2008, the Company in effectpurchased 72,917 outstanding shares of common stock held by Jerome E. Ball, theCompany’s Chairman of the Board of Directors and former principal executiveofficer, by accepting such shares at their fair market value at such date asconsideration for his exercise of options to purchase 100,000 shares of commonstock as part of a cashless exercise. 

**Amounts in  thousands, except per 		share amounts**

**Total Number 		of  Shares		Purchased**

**Average 		Price  Paid		Per Share**

**Total Number 		of  Shares 		Purchased as 		Part of 		Publicly 		Announced 		Plans or		Programs**

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

January 1, 2008 – January 31, 2008

--

$    -- 

--

 

February 1, 2008 – February 29, 2008

--

--

--

 

March 1, 2008 – March 31, 2008

72,917

2.40

--

313,600

**Totals**

**72,917**

**$2.40**

**--**

**313,600**

**ITEM 3.DEFAULTS UPON SENIOR SECURITIES**

None.

**ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

TheCompany held its Annual Meeting of Stockholders on February 13, 2008.  Thefollowing matters were voted upon at the Annual Meeting of Shareholders:

 

1.       Election of a Board of Directors

 

 

 

Number of Shares Voted

Name

 

For

 

Withheld

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

 

6,044,703

 

467,111

John Chiste..................................			

 

6,164,728

 

347,086

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

 

6,057,597

 

454,217

Fred Hamilton..............................			

 

6,167,828

 

343,986

Louis Lipschitz............................			

 

6,056,928

 

454,886

Douglas Sabra.............................			

 

6,062,728

 

449,086

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

 

6,037,664

 

474,150

 

 

33

 

**Forward Industries, Inc.**

2.     Ratification of the appointment ofKaufman, Rossin & Co., P.A. as the independent registered public accountingfirm for the Company for the Fiscal Year ending September 30, 2008.

 

 

Number of Shares Voted

 

 

For

 

Against

 

Abstain

Ratify  Kaufman  Rossin & Co., P.A. as the independent registered public  accounting firm for the Company the Fiscal Year ending September 30, 2008

 

6,116,105

 

205,371

 

143,215

 

 

**ITEM5. OTHER INFORMATION**

On April 22, 2008, theCompany’s Chairman of its Board of Directors, Jerome E. Ball died.  At thetime of his death, Mr. Ball was serving as a consultant to the Company with atwo year term expiring December 31, 2009, in consideration of a monthlyconsulting fee of $10,000.  Pursuant to the terms of the Agreement, Mr.Ball’s estate is entitled to payment of one-half the monthly payments remainingunder the Agreement at the time of his death as a termination benefit. Accordingly, the Company anticipates making a payment of $100,000 to Mr. Ball'sestate within thirty days of termination.  In addition, pursuant to thisAgreement Mr. Ball’s election as director and appointment as Chairman of theBoard in February 2008 entitled him to $25,000 per annum, payable in monthlyinstallments.  Monthly payments of approximately $2,100 through April 2008aggregating $6,250 were made to Mr. Ball.  No further payments are due andowing to his estate under this part of the Agreement.  

Unexercised stock options topurchase 10,000 shares of common stock granted to Mr. Ball pursuant to the 2007Equity Incentive Plan in February 2008 were subject to a vesting period of oneyear. The Compensation Committee in recognition of Mr. Ball’s nearly ten yearsof service as Chairman and CEO, has determined that such options shall vest inorder to permit Mr. Ball’s estate to exercise the options within a one yearperiod if in the interest of the estate to do so. 

The Company’s Nominating andGovernance Committee met on May 1, 2008 and determined not to fill the vacancyon the Board of Directors resulting from Mr. Ball’s death and approved aresolution to reduce the size of the Company’s Board to six directors fromseven. In addition, the Board of Directors approved the Committee’s nominationsof Douglas W. Sabra, the Company’s Chief Executive Officer, as Acting Chairmanof the Board.

**ITEM 6. EXHIBITS**

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

 

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

 

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

 

 

34

 

 

 

**Forward Industries, Inc.**

 

 

 

**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has duly causedthis report to be signed on its behalf by the undersigned, hereunto dulyauthorized.

 
Dated:  May 2, 2008FORWARD 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)
 

 

 

 

 

 

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