** **

** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, 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 December 31, 2006.**

**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 |  (I.R.S.Employer Identification No.) |
| incorporation or organization)  |                                      |

**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, or a non-accelerated filer (see definition of "acceleratedfiler and large accelerated filer" in Rule 12b-2 of the Exchange Act).

[  ] Large accelerated filer                                   [   ] Acceleratedfiler                            [**X**] Non-accelerated filer

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 February 7, 2007, was 7,861,438 shares.

** **

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**Forward Industries, Inc.**

|          |          |                                                                                         | **INDEX**  |
|---------------|---------------|----------------------------------------------------------------------------------------------|------------|
|          |          |                                                                                         |       |
| **PART  I.**  | ** **    | **FINANCIAL  INFORMATION**                                                                   | Page No.   |
|               |               |                                                                                         |            |
|               | **Item  1.**  | **Financial  Statements**                                                                    |            |
|               |               |      - Consolidated Balance Sheets (unaudited), as of December 31, 2006       |            |
|               |               |      and September 30, 2006                                                   | 4          |
|               |               |                                                                                         |            |
|               |               |      - Consolidated Statements of Income (unaudited) for the Three Months     |            |
|               |               | Ended December 31, 2006 and 2005                                                             | 5          |
|               |               |                                                                                         |            |
|               |               |      - Consolidated Statements of Cash Flows (unaudited) for the Three Months |            |
|               |               |      Ended December 31, 2006 and 2005                                         | 6          |
|               |               |                                                                                         |            |
|               |               |      - Notes to Consolidated Financial Statements (unaudited)                 | 7          |
|               |               |                                                                                         |            |
|               | **Item  2.**  | **Management's  Discussion and Analysis of Financial Condition and Results of Operations**   | 15         |
|               | ** **    | ** **                                                                                   |            |
|               | **Item  3.**  | **Quantitative  and Qualitative Disclosures About Market Risk**                              | 24         |
|               | ** **    | ** **                                                                                   |            |
|               | **Item  4.**  | **Controls  and Procedures**                                                                 | 25         |
|               | ** **    |                                                                                         |            |
| **PART  II.** | ** **    | **OTHER  INFORMATION**                                                                       | ** ** |
|               | ** **    |                                                                                         |            |
|               | **Item  1.**  | **Legal  Proceedings**                                                                       | 26         |
|               | ** **    | **  **                                                                             |            |
|               | **Item  1A.** | **Risk  Factors**                                                                            | 26         |
|               | ** **    | ** **                                                                                   |            |
|               | **Item  2**   | **Unregistered  Sales of Equity Securities and Use of Proceeds**                             | 28         |
|               | ** **    | ** **                                                                                   |            |
|               | **Item  3**   | **Defaults  Upon Senior Securities**                                                         | 28         |
|               | ** **    | ** **                                                                                   |            |
|               | **Item  4.**  | **Submission  of Matters to a Vote of Security Holders**                                     | 28         |
|               | ** **    | ** **                                                                                   |            |
|               | **Item  5.**  | **Other  Information**                                                                       | 28         |
|               | ** **    | ** **                                                                                   |            |
|               | **Item  6.**  | **Exhibits**                                                                                 | 28         |
|               | ** **    | ** **                                                                                   |            |
|               |               | **Signatures**                                                                               | 29         |
|               |               | ** **                                                                                   |            |
|               |               | **Certifications**                                                                           | 30         |

**Explanatory Note**The registrant determined, as of September 30, 2006,its most recent fiscal year-end, that it no longer met the definition of asmall business issuer, in accordance with Rule 228.10(a) under the ExchangeAct.  Accordingly, its Annual Report on Form 10-KSB for the fiscal year endedSeptember 30, 2006, was its last annual report filing as a Small Businessissuer in exiting the Small Business Disclosure System (until such time as itsfiling status may be reassessed).  This Quarterly Report on Form 10-Q for thequarterly period ended December 31, 2006, pursuant to the Securities ExchangeAct of 1934 of Forward Industries, Inc. represents the registrant's  initialfiling as a non-accelerated filer in accordance with Form 10-Q and RegulationS-K.

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; "KoszegiAsia" refers to Forward Industries' wholly owned subsidiary Koszegi Asia Ltd.,a Hong Kong corporation; "Forward Innovations" refers to Forward Industries'wholly owned subsidiary Forward Innovations GmbH, a Swiss corporation;  "GAAP"refers to accounting principles generally accepted in the United States; "Commission"refers to the United States Securities and Exchange Commission; "Exchange Act"refers to the United States Securities Exchange Act of 1934; the "2007 Quarter"refers to the three months ended December 31, 2006; the "2006 Quarter" refersto the three months ended December 31, 2005; "Fiscal 2007" refers to our fiscalyear ending September 30, 2007; "Fiscal 2006" refers to our fiscal year endedSeptember 30, 2006; "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**

|                                                                                                                                            |                   |            |                               |
|--------------------------------------------------------------------------------------------------------------------------------------------|-------------------|------------|-------------------------------|
|                                                                                                                                            | **December 31,**  | ** ** | **September 30,**             |
|                                                                                                                                            | **2006**          | ** ** | **2006**                      |
| **Assets**                                                                                                                                 | **(Unaudited)**   | ** ** | ** **                    |
| **Current assets:**                                                                                                                        |                   |            |                               |
| Cash and cash equivalents                                                                                                                  | $21,153,296       |            | $18,609,371                   |
| Accounts receivable, net                                                                                                                   | 5,151,837         |            | 6,069,058                     |
| Inventories, net                                                                                                                           | 2,466,059         |            | 2,449,065                     |
| Prepaid expenses and other current  assets                                                                                                 | 383,718           |            | 329,461                       |
| Deferred tax asset                                                                                                                         | 88,000            |            | 83,000                        |
| **Total current assets**                                                                                                                   | 29,242,910        |            | 27,539,955                    |
|                                                                                                                                       |                   |            |                               |
| Property, plant, and equipment, net                                                                                                        | 173,064           |            | 190,084                       |
| Other assets                                                                                                                               | 50,412            |            | 51,932                        |
| **Total Assets**                                                                                                                           | $29,466,386  |            |  $27,781,971        |
|                                                                                                                                       |                   |            |                               |
| **Liabilities and shareholders' equity**                                                                                                   |                   |            |                               |
| Current liabilities:                                                                                                                       |                   |            |                               |
|    Accounts payable                                                                                                              | $ 3,752,000       |            |  $ 2,141,191             |
|    Accrued expenses and other current liabilities                                                                                | 391,311           |            | 690,413                       |
| **Total current liabilities**                                                                                                              | 4,143,311         |            | 2,831,604                     |
|                                                                                                                                       |                   |            |                               |
| **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, 	and 8,424,931 shares issued (including  563,493 held in treasury) | 84,249            |            | 84,249                        |
| Capital in excess of par value                                                                                                             | 15,287,952        |            | 15,287,952                    |
| Treasury stock, 563,493 shares at cost                                                                                                     | (853,159)         |            | (853,159)                     |
| Retained earnings                                                                                                                          | 10,804,033        |            | 10,431,325                    |
| **Total shareholders' equity**                                                                                                             | 25,323,075        |            | 24,950,367                    |
| **Total liabilities and shareholders' equity**                                                                                             | $29,466,386  |            |  $27,781,971   |

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

4

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**Forward Industries,Inc.**

 

**CONSOLIDATED STATEMENTS OF INCOME**

|                                                                                 | **(UNAUDITED)**                     |
|---------------------------------------------------------------------------------|-------------------------------------|
|                                                                                 | **Three Months Ended December 31,** |
|                                                                                 | **2006**                            | ** ** | **2005** |
| **Net  sales**.                                                                 | $7,434,422                          |  | $8,670,359 |
| **Cost of goods sold**                                                          | 5,477,712                           |  | 6,026,062 |
| **Gross profit**                                                                | 1,956,710                           |  | 2,644,297 |
|                                                                            |                                     |  |  |
| **Operating expenses:**                                                         |                                     |  |  |
| Selling                                                                         | 850,911                             |  | 776,339 |
| General  and administrative                                                     | 895,114                             |  | 695,223 |
| **Total operating expenses**                                                    | 1,746,025                           |  | 1,471,562 |
| ** **                                                                      |                                     |  |  |
| **Income from operations**                                                      | 210,685                             |  | 1,172,735 |
| ** **                                                                      |                                     |  |  |
| **Other income:**                                                               |                                     |  |  |
| Interest  income                                                                | 241,290                             |  | 151,272 |
| Other  income (expense), net                                                    | 10,733                              |  | (16,843) |
| **Total other income**                                                          | 252,023                             |  | 134,429 |
| ** **                                                                      |                                     |  |  |
| **Income before provision  for income taxes**                                   | 462,708                             |  | 1,307,164 |
| **Provision for income  taxes**                                                 | 90,000                              |  | 532,674 |
| **Net income**                                                                  | $   372,708               |  | $   774,490 |
| ** **                                                                      |                                     |  |  |
| **Net income per common  and common equivalent share**                          |                                     |  |  |
| Basic                                                                           | $0.05                               |  | $0.10 |
| Diluted                                                                         | $0.05                               |  | $0.10 |
| ** **                                                                      |                                     |  |  |
| **Weighted average number of  common and common equivalent shares outstanding** |                                     |  |  |
| Basic                                                                           | 7,861,438                           |  | 7,838,422 |
| Diluted                                                                         | 7,978,869                           |  | 8,023,535 |

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

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

 

**CONSOLIDATED STATEMENTS OFCASH FLOWS**

|                                                                                                                                |  | **(Unaudited)**                     |
|--------------------------------------------------------------------------------------------------------------------------------|--|-------------------------------------|
|                                                                                                                                |  | **Three Months Ended December 31,** |
|                                                                                                                                |  | **     2006**   | ** ** | **2005** |
| **Operating activities:**                                                                                                      |  |                                     |  |  |
| Net  income                                                                                                                    |  | $   372,708               |  | $   774,490 |
| Adjustments to reconcile  net income to net cash provided          by operating activities: |  |                                     |  |  |
| Tax benefit  from exercise of stock options                                                                                    |  | --                                  |  | 479,405 |
| Provision  for obsolete inventory                                                                                              |  | 54,000                              |  | 37,064 |
| Depreciation  and amortization                                                                                                 |  | 22,210                              |  | 28,522 |
| Deferred  income taxes                                                                                                         |  | (5,000)                             |  | 11,900 |
| Changes  in operating assets and liabilities:                                                                                  |  |                                     |  |  |
| Accounts receivable                                                                                                            |  | 917,221                             |  | 5,768,804 |
| Inventories                                                                                                                    |  | (70,994)                            |  | (415,946) |
| Prepaid expenses and other  current assets                                                                                     |  | (54,257)                            |  | 17,143 |
| Other assets                                                                                                                   |  | 1,520                               |  | -- |
| Accounts payable                                                                                                               |  | 1,610,809                           |  | (2,941,382) |
| Accrued expenses and other  current liabilities                                                                                |  | (299,102)                           |  | (964,159) |
| **Net cash  provided by operating activities**                                                                                 |  | **2,549,115**                       | ** ** | **2,795,841** |
|                                                                                                                           |  |                                     |  |  |
| **Investing activities:**                                                                                                      |  |                                     |  |  |
| Proceeds from sale of  marketable equity securities                                                                            |  | --                                  |  | 75,034 |
| Purchases of property,  plant, and equipment                                                                                   |  | (5,190)                             |  | (6,093) |
| **Net cash (used) provided  by investing activities**                                                                          |  | **(5,190)**                         | ** ** | **68,941** |
|                                                                                                                           |  |                                     |  |  |
| **Financing activities:**                                                                                                      |  |                                     |  |  |
| Proceeds from exercise of  stock options                                                                                       |  | --                                  |  | 87,653 |
| **Net  cash provided by financing activities**                                                                                 |  | **--**                              | ** ** | **87,653** |
|                                                                                                                                |  |                                     |  |  |
| **Net increase in cash and  cash equivalents**                                                                                 |  | 2,543,925                           |  | 2,952,435 |
| ** **                                                                                                                     |  |                                     |  |  |
| **Cash and  cash equivalents at beginning of period**                                                                          |  | 18,609,371                          |  | 15,291,739 |
| ** **                                                                                                                     |  |                                     |  |  |
| **Cash and  cash equivalents at end of period**                                                                                |  | $21,153,296                    |  | $18,244,174  |
|                                                                                                                                |  |                                     |  |  |
|                                                                                                                                |  |                                     |  |  |

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

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

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)**

NOTE 1      OVERVIEW 

ForwardIndustries, Inc. was incorporated under the laws of the State of New York and began operations in 1961.  The Company is engaged in the design, marketing,and distribution of custom-designed, soft-sided carrying cases and other carrysolutions products made from leather, nylon, vinyl and other syntheticfabrics.  The cases and other products are used primarily for the transport ofportable electronic devices such as cellular phones and medical devices. TheCompany markets products as a direct seller to original-equipment-manufacturersin the EMEA Region (meaning the geographic area encompassing Europe, the MiddleEast and Africa), the APAC Region (meaning the Asia Pacific Region,encompassing Australia, New Zealand, Hong Kong, Taiwan, China, South Korea,Japan, Singapore, Malaysia, Thailand, Indonesia, India, the Philippines andVietnam) and  the Americas (meaning the geographic area, encompassing North,Central, and South America) and as a seller under non-exclusive licenses forcertain trademarks to retailers and wholesalers in Europe, the Middle East andAfrica.  

In the opinion of management,the accompanying consolidated financial statements reflect all normal recurringadjustments necessary to present fairly the financial position and results ofoperations and cash flows for the interim periods, but are not necessarilyindicative of the results of operations for a full fiscal year. These financialstatements should be read in conjunction the Company's consolidated financialstatements included in its annual report on Form 10-KSB for the fiscal yearended September 30, 2006, and with the disclosures presented therein.

NOTE 2      ACCOUNTINGPOLICIES

*Accounting estimates*:Preparing the Company's financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

*Basis ofpresentation:*The accompanying consolidated financial statements includethe accounts of Forward Industries, Inc. ("Forward") and its whollyowned subsidiaries (together the "Company"). All significantintercompany transactions and balances have been eliminated in consolidation.

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

*Supplier Rebates:*EmergingIssues Task Force (EITF) Issue No. 02-16, *Accounting by a Customer(Including a Reseller) for Certain Consideration Received from a Vendor*,permits recognition of a rebate or refund of a specified amount of cashconsideration that is payable if the customer completes a specified cumulativelevel of purchases.  The Company has entered into agreements with several ofits suppliers that grant the Company a rebate based on its level of purchasesmade during each quarter. In lieu of a cash payment from these suppliers theCompany generally receives a credit memo. The Company reduces accounts payableto the supplier and cost of goods sold each quarter as the Company earns the rebates. For the three-month periods ended December 31, 2006 and 2005, the cumulativeamounts of such quarterly rebates were approximately $193,000 and $186,000,respectively, net of amounts allocated to unsold inventories, and are reflectedin the accompanying consolidated statements of income as a reduction of cost ofgoods sold.

 

 

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NOTE2      ACCOUNTING POLICIES (CONTINUED)

*Foreign CurrencyTransactions:*The functional currency of the Company's wholly owned foreignsubsidiaries is the U.S. dollar. Foreign currency transactions may generate receivablesor payables that are fixed in terms of the amount of foreign currency that willbe received or paid. Fluctuations in exchange rates between the functionalcurrency and the currency in which a transaction is denominated increases ordecreases the expected amount of functional currency cash flows upon settlementof the transaction. These increases or decreases in expected functionalcurrency cash flows are foreign currency transaction gains or losses that areincluded in "other income, net" in the accompanying unaudited consolidatedstatements of income. The net gain (loss) from foreign currency transactionswas approximately $11,000 and ($15,000) for the three-month periods endedDecember 31, 2006 and 2005, respectively.

*ComprehensiveIncome:* For the three-month periods ended December 31, 2006 and 2005, the Company did not have any components of comprehensive income other than netincome.

*Recent Accounting Pronouncements*

On July 13, 2006 the FinancialAccounting Standards Board (FASB) issued FASB Interpretation No. 48, Accountingfor Uncertainty in Income Taxes, (FIN 48). FIN 48, creates a single model toaddress uncertainty in income tax positions. 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 derecognition, measurement,classification, interest and penalties, accounting in interim periods,disclosure and transition and, clearly scopes income taxes out of FASBStatement No. 5, Accounting for Contingencies.

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

FIN 48 is effective forfiscal years beginning after December 15, 2006. Differences between the amountsrecognized in the statements of financial position prior to the adoption of FIN48 and the amounts recognized after adoption should be accounted for as acumulative-effect adjustment recorded to the beginning balance of retainedearnings. The cumulative effect adjustment would not apply to those items thatwould not have been recognized in earnings, such as the effect of adopting FIN48 on tax positions related to business combinations. The Company will adoptFIN 48 effective October 1, 2007.  Although the Company has not completed itsevaluation of FIN 48, it does not expect the adoption will have a materialimpact on its financial statements.

NOTE 3      INVENTORY

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.

8

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NOTE 4      DEBT

In March 2006, Forwardand its wholly-owned U.S. subsidiary, Koszegi Industries, Inc. renewed their creditfacility with a U.S. bank that provides for a committed line of credit in themaximum amount of $3 million, including a $1.5 million sub-limit for letters ofcredit. The line expires in March 2007. While it is Forward's and Koszegi'sintention to renew the line through March 2008, the renewal will be at the bank'sdiscretion, subject to the Company's submission of satisfactory financialinformation and other documentation. Forward and Koszegi are required toeliminate borrowings for thirty consecutive days during the term of thefacility and are required to comply with certain financial covenants, includingthe maintenance of current and tangible net worth ratios, as defined. Amountsdrawn under the credit facility bear interest at LIBOR plus 2.5% and aresecured by substantially all of Koszegi's assets and certain assets ofForward.  There were no borrowings or letter of credit obligations under thisfacility during the three-month period ended December 31, 2006. 

In  2003, Forward's wholly-owned Swiss subsidiary, Forward Innovations GmbH(Forward Innovations), established a credit facility with a Swiss bank thatprovides for an uncommitted line of credit in the maximum amount of $400,000. Amounts borrowed under the facility may be structured as a term loan or loans,with a maximum repayment period of 12 months, as a letter of credit facility,or as a guarantee facility, or any combination of the foregoing.  Either partymay terminate the facility at any time; however, such termination would notaffect the stated maturity of any term loans outstanding.  Amounts borrowedother than as a term loan must be settled quarterly or converted into termloans.  In connection with this facility, Forward Innovations agreed to certaincovenants. Amounts drawn under this credit facility bear interest at variablerates established by the bank (5.5% as December 31, 2006).  At December 31, 2006, Forward Innovations is contingently liable to the bank in respect of a letterof credit issued on its behalf in the amount of €224,000 (approximately $296,000as of December 31, 2006) in favor of Forward Innovations' freight forwarder andcustoms agent in connection with its logistics operations in The Netherlands. The effect of the issuance of the letter of credit is to reduce theavailability of the credit line in an amount equal to the face amount of theletter of credit.

NOTE5      OPERATING SEGMENT INFORMATION

The Company operates in asingle segment that provides carrying solutions for portable electronicdevices. This carrying-solution segment designs, markets, and distributesproducts to its customers that include manufacturers of consumer hand heldwireless telecommunications and medical monitoring devices. The carryingsolution segment operates in geographic regions that include primarily the Americas, EMEA and APAC regions. Geographic regions are defined based primarily on thelocation of the customer.  The following table presents net sales related tothese geographic segments:

*                                                                                                         *

|   |  
*(all amounts in thousands of dollars)***Three Months Ended	December 31,**
   
**2006**

** **

**2005**
   
APAC

$3,356

$3,621
   
Americas

2,462

3,399
   
EMEA

1,617

1,650
   
**Total net sales**

**$7,435**

** **

**$8,670**

 

 

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NOTE 6      INCOME TAXES

TheCompany's income tax provision consists of the following United States and foreign components:

**Three Months Ended	December 31,**

U.S. Federal and State

**2006**

**2005**

    Current

$68,000

$411,074

    Deferred

5,000

               129,700
     
Foreign:

    Current

17,000

(8,100)

    Deferred.

--

--

**Income  tax provision**

**$90,000**

** **

**$532,674**

Forthe three-month period ended December 31, 2006, the Company recorded aprovision for income taxes of approximately $90,000. The Company's effectivetax rate does not approximate the statutory United States federal income taxrate primarily due to tax rate differentials in respect of United States stateand foreign taxes.  

Effective June 2001,undistributed earnings of the Company's Swiss subsidiary are considered to bepermanently invested; therefore, in accordance with SFAS No. 109, no provisionfor U.S. Federal and state income taxes on those earnings has been provided. At December 31, 2006, the Company's Swiss subsidiary had approximately $5,166,000of accumulated undistributed earnings.  

NOTE 7      EARNINGSPER SHARE

Basicearnings per share is computed by dividing net income by the weighted-averagenumber of shares of common stock outstanding during each period. When theeffects are not anti-dilutive, diluted earnings per share is computed by dividingour net income by the weighted-average number of common shares outstanding includingthe impact of all dilutive potential common shares, primarily stock options.The dilutive impact of stock options is determined by applying the treasurystock method.

A total of 70,000 common stockequivalents have been excluded from the calculation of earnings per share for thethree-month period ended December 31, 2006, respectively, because theirinclusion would be anti-dilutive. No common stock equivalents were excluded forthe three-month period ended December 31, 2005.

NOTE 8      STOCK BASED COMPENSATION

In November 1996, theCompany's Board of Directors adopted the 1996 Stock Incentive Plan, pursuant towhich up to 4,000,000 shares of common stock might be issued to officers,employees and non-employee directors of the Company upon the exercise ofincentive stock options and nonqualified stock options. This plan was approvedby shareholders in 1997.  The exercise price of the incentive options may notbe less than the fair market value of the common stock at the date the optionis granted. The Company's Compensation Committee establishes the exercise priceof the nonqualified options. Options expire ten years after the date of grantand generally vest in equal proportions over three years. In November, 2006,the 1996 Stock Incentive Plan expired in accordance with the terms thereof.  Expirationof the Plan does not affect the term or exercisability of previously grantedoptions, of which there were 245,000 outstanding and unexercised as of December 31, 2006.

10

NOTE 8      STOCK BASEDCOMPENSATION (CONTINUED)

*Adoption of NewAccounting Guidance and Transition*

Prior to October 1, 2006, the Company accounted for itsplan under the recognition and measurement provisions of Accounting PrinciplesBoard Opinion No. 25,*Accounting for Stock Issued to Employees*, andrelated interpretations, or APB No. 25, as permitted by FASB Statement No. 123,*Accounting for Stock-Based Compensation,*or SFAS No. 123. Under APB No. 25,when the exercise price of our employee stock options equaled or exceeded themarket price of the underlying stock on the date of grant, no compensation costwas recognized. 

Effective October 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123R,*Share-BasedPayments*, and related interpretations, or SFAS No. 123R, which is arevision of SFAS No. 123, using the modified-prospective transition method.Under that method, for the three-month period ended December 31, 2006, theCompany recognized (a) compensation cost for all share-based payments grantedprior to, but not yet vested as of, October 1, 2006, based on the grant datefair value estimated in accordance with the original provisions of SFAS No. 123and (b) compensation cost for all share-based payments granted on or subsequentto October 1, 2006, based on the grant-date fair value estimated in accordancewith the provisions of SFAS No. 123R. As of October 1, 2006, all share-based payments granted prior to October 1, 2006, were fully vested. Additionally,the Company did not grant any share-based payments during the three-monthperiod ended December 31, 2006. As such, no compensation cost was recognizedduring the three-month period ended December 31, 2006.

Prior to the adoption of SFAS No. 123R, the Companypresented the tax benefit of deductions arising from the exercise of stockoptions as operating cash flows in the Condensed Consolidated Statement of CashFlows. SFAS No. 123R requires that the Company classify the cash flows resultingfrom the tax benefit that arises when the tax deductions exceed thecompensation cost recognized for those options (excess tax benefits) asfinancing cash flows. As the Company did not grant any share-based paymentsduring the three-month period ended December 31, 2006, and all share-based payments granted in prior periods were fully vested as of October 1, 2006, there were no excess tax benefits for the three-month period ended December 31, 2006.

*Pro Forma Information Under SFAS No. 123 for PeriodsPrior to Fiscal 2007*

The fair value of share-based awards used to computepro forma net income per share disclosures is the estimated present value atgrant date using the Black-Scholes option-pricing model with the followingweighted average assumptions: 

** **

**Three-Months Ended	December 31, 2005**

Expected  term (in years)

5.0

Risk-free  interest rate

4.20 - 5.84

Expected  volatility

99.6% - 103.6%

Expected  dividend yield

0%

*Expected Term*:The expected term represents the period over which the share-based awards areexpected to be outstanding.

*Risk-Free Interest Rate*: 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.

*Expected Volatility*: The volatility factor used in the Company's assumptions is based onthe historical price of its stock over the most recent period commensurate withthe expected term of the award.

 

11

NOTE 8      STOCK BASEDCOMPENSATION (CONTINUED)

*Expected Dividend Yield*: The Company does not intend to pay dividends on itcommon stock in the foreseeable future. Accordingly, the Company used adividend yield of zero in its assumptions.

The Company estimated theexpected term and expected volatility of share-based awards based uponhistorical data. There were no awards granted during the three-month periodended December 31, 2006. Forfeitures were recognized as they occurred. 

The tablebelow illustrates the effect on net income and income per share during thefirst quarter of Fiscal 2006 if we had applied the fair value recognitionprovisions of SFAS No. 123. 

** **

**Three-Months Ended	December 31, 2005**

Net  income, as reported      

$774,490

Total share-based employee compensation cost, net of  tax

--

Total share-based employee compensation cost  determined under SFAS No. 123 for all awards, net of tax

--

Pro  forma net income

$774,490
     
Net  income per share:

Basic  - as reported

$0.10

Basic  - pro forma

$0.10
     
Diluted  - as reported

$0.10

Diluted  - pro forma

$0.10

*Valuation and ExpenseInformation under SFAS No. 123R*

As of October 1, 2006, all share-based paymentsgranted prior to October 1, 2006, were fully vested. Additionally, the Companydid not grant any share-based payments during the three-month period ended December 31, 2006. As such, the Company did not recognize compensation cost or a taxbenefit for share-based compensation awards during the three-month period endedDecember 31, 2006.

A summary of the activity under our stock plan during thethree-month period ended December 31, 2006 is presented below: 

**Shares**

** **

**Weighted 	Average  Exercise Price**

** **

**Weighted 	Average  Remaining 	Contractual 	Term (Years)**

** **

** **

**Aggregate 	Intrinsic 	Value**

**Outstanding at September 30, 2006**

**248,750**

** **

**$4.15**

** **

** **

** **

** **

Granted

--

 --

Exercised

--

--

Forfeited

--

--

 

 

Expired

(3,750)

2.00

 

 

**Outstanding at December 31, 2006**

**245,000**

** **

**$4.18**

** **

**3.79**

** **

**$ 427,000**
     
 

 

 

 

Options vested or expected to vest at  December 31, 2006

245,000

$4.18

 

3.79

 

$427,000

Options exercisable at December 31,  2006

245,000

$4.18

 

3.79

 

$427,000

12

NOTE 9      COMMITMENTS ANDCONTINGENCIES

*Royalty Commitments*

TheCompany has licensed the use of certain trademarks of Motorola, Inc. ("Motorola")for the distribution and sale of carry solution products throughout the EMEARegion under a non-exclusive license agreement effective October 1, 2004. The license agreement expires by its terms on December 31, 2007.  Under the terms of the license agreement, the Company is 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 the followingthree contract periods: 

ContractPeriod 1:  October 1, 2004 to December 31, 2005 

Contract Period2:  January 1, 2006 to December 31, 2006 

Contract Period3:  January 1, 2007 to December 31, 2007 

The minimum royaltypayment to Motorola for Contract Period 1 was $375,000, or $300,000annualized.  The minimum royalty payment to Motorola for Contract Period 2was $225,000. Prior to the end of Contract Period 2, the Company and Motorolahad agreed that, at such times, they would establish a new minimum royalty amountfor Contract Period 3.  The Company was unable to reach an agreement atsuch time with Motorola on the minimum royalty payment for Contract Period 3, consequently,the parties have agreed that the minimum royalty payment for Contract Period 3 maynot be less than seventy-five per cent (75%) of the annualized royaltiespayable in respect of actual sales for Contract Period 2, provided, however,that in no event shall the minimum royalty in Contract Period 3 be less thanseventy-five percent (75%) nor more than one-hundred-twenty-five percent (125%)of the amount of Contract Period 2's annualized minimum royalty. 

Pursuant to thisformula, the minimum royalty is expected to be fixed in the amount of $281,000for Contract Period 3. 

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

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

Under the currentlicense agreements with Motorola, the Company recorded royalty expense of approximately$137,000 and $85,000 for the three-month periods ended December 31, 2006 and 2005, respectively, which are included in selling expenses in the accompanyingconsolidated statements of income.  These amounts represent royalties paid inrespect of actual sales and in each case represent an amount in excess (and inlieu) of the minimum royalties otherwise payable to Motorola in those periodsof $69,000 and $75,000, respectively.

 

13

NOTE 9      COMMITMENTS ANDCONTINGENCIES (CONTINUED)

*Bank Guarantee*

In July 2002, Forward Innovations, and its Europeanlogistics provider (freight forwarding and customs agent) entered into aRepresentation Agreement whereby, among other things, the European logisticsprovider agreed to act as such subsidiary's fiscal representative in TheNetherlands for the purpose of providing services in connection with any valueadded tax matters. As part of this agreement, the subsidiary agreed to providean undertaking to the logistics provider with respect to any value added taxliability arising in The Netherlands that the logistics provider paid on thesubsidiary's behalf. In February 2004, such subsidiary entered into a guaranteeagreement with a Swiss bank relating to the repayment of any amount up to €224,000(approximately $296,000 as of December 31, 2006) paid by such bank to thelogistics provider pursuant to a letter of credit that was issued by the bankin favor of the logistics provider in order to satisfy such undertaking. The subsidiary would be required to perform under the guarantee only in theevent that: (i) a value added tax liability is imposed on the Company's salesin The Netherlands, (ii) the logistics provider asserts that it has been calledupon in its capacity as surety by the Dutch Receiver of Taxes to pay such taxes, (iii) the subsidiary or the Company on its behalf fails or refuses to remit the amount of value added tax due to the logistics provider, and (iv) thelogistics provider makes a drawing under the letter of credit. CommencingDecember 31, 2004, and on each anniversary thereafter until December 31, 2009, itis intended that the bank letter of credit will be renewed automatically forone-year periods. The subsidiary has agreed to keep a letter of creditguarantee in place for five years following the date its relationshipterminates with the logistics provider. As of December 31, 2006, the Companyhas not incurred a liability in connection with this guarantee.

NOTE 10    LEGAL PROCEDINGS

From time to time, theCompany may become a party to legal actions or proceedings in the ordinarycourse of its business.  As of December 31, 2006, except as described below,there were no such actions or proceedings, either individually or in theaggregate, that, if decided adversely to the Company's interests, the Companybelieves would be material to its business.

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

On November 15, 2006,the Plaintiffs filed a First Amended Complaint that purports to statesubstantially identical claims. The Company has filed a motion to dismiss thecomplaint, as amended, in its entirety for failure to satisfy the pleadingrequirements of the Private Securities Litigation Reform Act of 1995 and Plaintiff'sattorneys have filed a responsive motion and brief.  The Company is expected tofile its response in February 2007.

The Company, as well as eachof the individual defendants, believes that the complaint, as amended, iswholly without merit and intends to vigorously contest this lawsuit.  The Companyhas directors and officers' liability insurance, inding entity coverage. TheCompany has, in the course of defending the complaint, incurred legal and otherexpenses up to the retention amount of $250,000, in its directors and officersliability insurance policy and that incurring expenses not covered by thispolicy may adversely affect its reported results of operations in futureperiods.  While the Company believes that the complaint, as amended, is withoutmerit and the Plaintiff has yet to assert an amount of damages claimed, theoutcome of this lawsuit cannot be predicted and the Company's ultimateliability if this lawsuit is adversely determined cannot currently beascertained and could be material.

 

 

 14

**Forward Industries, Inc.**

**Item 2. Management's Discussion and Analysis of Financial Conditionand Results of Operations  **

*Thefollowing discussion and analysis**shouldbe read in conjunction with our unaudited Consolidated Financial Statements andthe notes thereto and other financial information appearing elsewhere in thisQuarterly Report on Form 10-Q and in our Annual Report on Form 10-KSB for thefiscal year ended September 30, 2006.  This discussion and analysis**comparesour consolidated results of operations for the three months ended December 31,2006 (the "2007 Quarter"), with the three months ended December 31, 2005 (the"2006 Quarter"), and is based on or derived from the Unaudited ConsolidatedFinancial Statements included elsewhere in this Quarterly Report. There havebeen no material changes in critical accounting estimates since September 30,2006.  All figures in the following discussion are presented on a consolidatedbasis. All dollar amounts and percentages presented herein have been rounded toapproximate values.*

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" 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 realized 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, uncertainties,contingencies, and developments, including those discussed in this Management'sDiscussion and Analysis of Financial Condition and Results of Operations andthose identified in "Risk Factors" in our annual report on Form 10-KSB for thefiscal year ended September 30, 2006, could cause our future operating resultsto differ materially from those set forth in any forward looking statement.  Suchfactors include, among other, the following: our success in winning newbusiness from our customers and against competing vendors, whether replacementprograms that we win will be as successful as those that are replaced; levelsof demand and pricing generally for cellular handsets and blood glucosemonitoring devices for which we supply carry solutions; variability in orderflow 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, and the uncertainty as to whether such agreement will be renewed orextended on terms acceptable to us; demographic changes; changes in technology,including developments in cellular handsets or the control of diabetes;increased competition; changes affecting one or more of our principal OriginalEquipment Manufacturer ("OEM") customers; governmental regulations and changesin, or the failure to comply with, governmental regulations; and other factorsincluded elsewhere in this report and our other reports filed with theCommission, including without limitation, those described under the captionRisk Factors contained in our Annual Report on Form 10-KSB for the year endedSeptember 30, 2006.  Accordingly, there can be no assurance that any suchforward looking statement, projection, forecast or estimate can be realized orthat actual returns or results will not be materially lower than those that maybe estimated.

Giventhese uncertainties, 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

This management's discussion and analysis of financialcondition and results of operations are based upon our unaudited consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent liabilities. We base these estimates on our historicalexperience and on various other assumptions that we believe to be reasonableunder the circumstances, and these estimates form the basis for our judgmentsconcerning the carrying values of assets and liabilities that are not readilyapparent from other sources. We periodically evaluate these estimates andjudgments based on available information and experience. Actual results coulddiffer from our estimates under different assumptions and conditions. If actualresults significantly differ from our estimates, our financial condition andresults of operations could be materially impacted. Please refer to "Management'sDiscussion and Analysis-Critical Accounting Policies and Estimates" included inour Annual Report on Form 10-KSB for the year ended September 30, 2006, for further information regarding our critical accounting policies and estimates. 

 

15

**Forward Industries, Inc.**

 

The notes to our consolidated financial statements and"Management's Discussion and Analysis" included in our Annual Report on Form10-KSB for the year ended September 30, 2006, the notes to our consolidatedfinancial statements included in Part I, Item 1 of this Quarterly Report onForm 10-Q and the factors and events described elsewhere in "Management'sDiscussion and Analysis of Financial Condition and Results of Operations,"contain additional information related to our accounting policies and should beread in conjunction with the following discussion and analysis relating to theindividual financial statement captions and our overall financial performance,operations and financial position. 

*Revenue Recognition*

In accordance with therequirements of Staff Accounting Bulletin (SAB) No. 104, *Revenue Recognitionin Financial Statements*, the Company recognizes revenue from product salesto customers when: products that do not require further services by the Companyare shipped; there are no uncertainties surrounding customer acceptance; andcollectibility is reasonably assured.

*AccountsReceivable*

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:  Specifically, we analyze the age of receivablebalances, our historical bad debts write-off experience, and our respectivecustomer's creditworthiness to determine the appropriate allowance for doubtfulaccounts. At December 31, 2006 and September 30, 2006, our allowance fordoubtful accounts was approximately $47,000.  Changes to this account arereflected in the general and administrative expense line of our statement ofincome  Although we consider our allowance for doubtful accounts to be adequateand proper, changes in economic conditions, the assessments of new customers'creditworthiness, changes in customer circumstances, or other factors couldhave a material effect on the required allowance.

*InventoryValuation*

Weuse certain estimates and judgments to value our inventory. Our inventory isrecorded at the lower of cost or market. The majority of our inventory consistsof finished goods that are custom made by our suppliers based on firm ordersfrom our OEM customers and held for our account.  We do, however, supplyinventory to our customers' distribution hubs in anticipation of their draw-downsto fulfill orders; we also periodically stock inventory in anticipation oforders from our OEM customers when it appears to us commercially advantageousto do so. We also hold inventory in support of our license agreements. At theend of each fiscal quarter, we evaluate our ending inventories forobsolescence, excess quantities, and otherwise unsaleable product. Thisevaluation includes among other factors analyses of inventory levels,historical loss trends, sales history, and projections of future sales demand.We establish an allowance for inventory that is considered obsolete, slowmoving or otherwise un-saleable and physically dispose of inventory once itsmarketability has been determined to be zero.  Inventory allowances were approximately$0.2 million at December 31, 2006 and September 30, 2006.  The cost of obsoleteinventory is included in cost of goods sold on our statement of income.

16

**Forward Industries, Inc.**

 

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,additional inventory write-downs or reserves may be required and would bereflected 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.

*DeferredIncome Taxes*

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 $88,000 and $83,000 ofdeferred tax assets at December 31 2006, and September 30, 2006, respectively. No valuation allowances were recorded in respect of these deferred taxassets as of such dates.

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

In the event that itshould be subsequently determined that we can not, on a more likely than notbasis, realize all or part of our deferred tax assets, if any, in the future,an adjustment to establish (or record an increase in) the deferred tax assetvaluation allowance would be charged to income in the period in which suchdetermination is made. Changes in our deferred tax assets are reflected in thetax expense (benefit) line of our consolidated statements of income. 

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 highly variable and subject to significant changes over arelatively short period of time.

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 areparticularly characteristic of the cellular handset market, where newfunctionality is constantly introduced, competition among vendors is high, andindustry technical standards are subject to continuing change.  When "in-box"programs end, and to the extent that the introduction of new programs does notinclude our products as an accessory "in-box", or such new programs do includeour products as an accessory "in-box" but do not result in a comparable levelof demand for our products, the level of our OEM product sales is susceptibleto significant and rapid change.  

All ofthis makes our quarterly revenue levels susceptible to a high degree ofvariability and difficult to predict.  Significant, rapid shifts in our operatingresults may occur if and when one or more of these customers increases ordecreases the size(s) of, or eliminates, its orders from us by amounts that arematerial to our business.

17

**Forward Industries, Inc.**

 

TRENDS IN RESULTS OF OPERATIONS
-  *Our customer base has becomemore concentrated.* In Fiscal 2006,four customers, including their subsidiaries, affiliates, or their contractmanufacturers, accounted for approximately 73% of our net sales.  In the 2007Quarter, three of those customers accounted for 76% of our net sales. Sales tothe fourth customer, Bayer Healthcare LLC ("Bayer"), declined to an immaterialamount during the 2007 Quarter as our sole "in-box" program with themterminated. Additionally, Motorola accounted for all of our OEM cell phonesales in the 2007 Quarter as our "in-box" program for Nokia terminated. In Fiscal2006, combined sales to Bayer and Nokia represented approximately $3.3 millionor 11% of our net sales. Although we continue to pursue additionalopportunities with these two customers, as of December 31, 2006, we have not been selected to participate in any new "in-box" programs or successors tothose that were terminated. 
-  *We continue to experience pricingpressure and shifts in product mix to lower priced items in our OEM cell phonecase market*, *which exert downwardpressure on our sales and gross profit.* Although we have been successful incertain cases in reducing our costs of materials/supply in an attempt tomitigate the reduction in prices we receive from Motorola, our only OEM cellphone customer during the 2007 Quarter, this has not been true across allproduct sales.  In addition, we remain vulnerable to rapid shifts in ourproduct mix, which may further impact our gross profit.  Finally, our Hong Kongcosts (quality assurance and sourcing expenses incurred in Hong Kong andChina), which constitutes part of cost of goods sold on our income statement,tend to be relatively fixed and, on a lower revenue base, will act as a drag ongross profit percentage. 
-  *Other income, primarilyinterest income, continues to comprise a majority of our pretax net income*. In the 2007 Quarter, "other income" representedapproximately 55% of our pretax income. If our margins continue to becompressed by pricing pressure, and assuming approximately steady interestrates and no material capital or other expenditures that significantly reduceour cash balances, other income, consisting primarily of interest earned oncash balances, will continue to constitute a significant if not a majoritypercentage of income before taxes*.*
-  *Our inventory remains athistorically high levels primarily as a result of supporting our hub agreementsentered into with two of our largest OEM customers. We expect our inventory toremain at this higher level throughout Fiscal 2007.*  Under these agreements, we are required to sourceand ship our products to our OEM customers' distribution hubs at multiplelocations, but do not invoice the OEM customers until they withdraw our productfrom the hub for sale through their chain of distribution.   The implementationof these arrangements negatively affects our liquidity. 
-  *Our General and AdministrativeExpenses are anticipated to be higher in Fiscal 2007 than Fiscal 2006 as aresult of legal fees incurred in respect of litigation. *We have incurred substantial expenses for legal feesin Fiscal 2007 in order to defend the purported class action complaint that wasserved on us on October 3, 2006. We maintain directors and officers liabilityinsurance, including entity coverage. In the course of defending the complaintwe have incurred legal and other expenses up to the retention amount of$250,000, above which it is our expectation that it is the insurance carrier'sresponsibility to assume under such policy.  We may incur additional legal orother expenses in connection with the defense of this action that are notassumed by the insurance carrier.

 

18
**-  *Product manufacture isincreasingly being outsourced by our OEM customers to contract manufacturingfirms in China and in Southeast Asia*.Such firms are performing manufacturing, assembly and product packaging functions,including the bundling of product accessories such as ours with the OEM customer's product.  As a consequence of this trend, we are increasingly selling our carry solutionproducts to the contract manufacturing firm.  In these cases, we invoice the contractmanufacturing firm and not the OEM customer.  Therefore, it is the contractmanufacturing firm's credit to which we must look for payment in such cases andnot that of our OEM "customer".  A second result of this trend towardorigination of orders from contract manufacturers is that APAC has in recentperiods accounted for, and may continue to account for, a significantpercentage of our sales revenues, as seen in the tables below.   In addition,we believe that the increased reliance on contract manufacturers by our OEM customers is an effort to reduce their costs of supply that may also be increasing pressuregenerally to compress margins in respect of accessory products packaged"in-box" with various consumer electronics.

RESULTS OF OPERATIONS FOR THE 2007 QUARTER COMPARED TO THE 2006QUARTER

Net income in the2007 Quarter was $0.4 million compared to net income of $0.8 million in the 2006Quarter, a decrease of approximately $0.4 million or 52%.  The decrease wasprimarily due to lower sales of OEM cell phone carry solution products combinedwith lower margins on such sales.  In addition, net income was adverselyaffected by an increase in selling, general and administrative expenses primarilyresulting from higher professional fees incurred in the course defending thepurported class action litigation and higher royalty expenses under theMotorola license agreement. However, the increase in our operating expenses wasoffset in part by an increase in our other income due to higher interest incomeresulting from higher average cash balances and higher yields on those cashbalances. Basic and diluted earnings per share were $0.05 for the 2007 Quarter,compared to basic and diluted earnings per share of $0.10 in the 2006 Quarter.The decrease in earnings per share in the 2007 Quarter was due to the decreasein net income.

*NetSales*

Net sales decreased $1.2 million or 14% to $7.4million in the 2007 Quarter compared to $8.7 million in the 2006 Quarter due toa decline of $1.9 million in sales of OEM cell phone products, and to a muchlesser extent, lower sales of other products. These declines were offset inpart by a $0.4 million increase in sales of licensed products under theMotorola license agreement and by a $0.4 million increase in sales of cases fordiabetic products.   Net sales of OEM cell phone carry solution products wereadversely affected due to price reductions, shifts in product mix to lowerpriced items, and a decline in demand from our sole OEM cell phone customer, Motorola,during the 2007 Quarter. Nokia contributed to OEM cell phone sales in the 2006Quarter but not in the 2007 Quarter.  The tables below set forth approximatesales by product line and geographic location of our customers for the periodsindicated.

 

 

 

19

**Forward Industries, Inc.**

 

**Net Sales for 2007 Quarter	3 Months ended December 31, 2006	(millions of dollars)**

** **

**Americas**

**EMEA**

**APAC**

Total

Cell Phone Products

$1.05 

$1.28 

$1.90 

$4.23 

Diabetic Products

0.80 

0.31 

1.36

2.47 

Other Products

0.61

0.02

0.10

0.73

**Total***

**$2.46**

**$1.61**

**$3.36**

**$7.43**

                               

**Net Sales for 2006 Quarter 	3 Months ended December 31, 2005	(millions of dollars)**

** **

**Americas**

**EMEA**

**APAC**

Total

Cell Phone Products

$ 1.57

$ 1.36

$ 2.76

$ 5.69

Diabetic Products

 1.04

 0.28

0.78

 2.10

Other Products

0.79

--

0.09

0.88

**Total***

**$3.40**

**$1.64**

**$3.63**

**$8.67**

* Tables maynot total due to rounding.

*Cell Phone Product Sales*

Our cell phone carrysolutions products include carrying cases for handsets and camera attachments,plastic belt clips, carrying case straps and bags, screen cleaners, decorativefaceplates, and other attachments used to carry or enhance the appearance ofcellular telephone handsets.  

We design to the orderof and sell these products directly to cell phone handset original equipmentmanufacturers including Motorola.  Our cases are packaged as an accessory"in-box" with the handsets that are sold by our OEM customers. In addition, under our license agreements with Motorola and SAGEM, wedistribute our products as separately packaged accessories directly to thirdparty wholesalers and retailers in the EMEA Region and, under the Motorolalicense, the APAC Region. Cell phone product sales consisted of OEM "in-box"sales to Motorola and Nokia and sales under our license agreements. 

Total sales of cellphone products decreased $1.5 million, or 26%, to $4.2 million in the 2007Quarter from $5.7 million in the 2006 Quarter. Sales to Motorola, our only OEMcell phone customer for the 2007 Quarter, decreased $1.9 million from the 2006Quarter due to reduced demand and increased pricing pressure for certain of ourproducts, as well as a shift in demand to our lower priced products. Themajority of OEM sales to Motorola related to one "in-box" program (consistingof cases and other accessories) that has continued from Fiscal 2005.  Duringthe 2007 Quarter, we experienced no demand from Nokia, which was our only otherOEM cell phone customer in Fiscal 2006, representing approximately 3% of ourtotal sales for that period

Sales to third partiesunder our license agreement with Motorola totaled approximately $0.8 million inthe 2007 Quarter compared to $0.4 million in the 2006 Quarter, an increase of$0.4 million, or 126%, which we believe is inversely related to the sales ofcarry solutions products included "in-box" by our OEM customers.

Sales of carrysolutions for cell phone products represented approximately 57% of our totalnet sales in the 2007 Quarter compared to 66% for in 2006 Quarter.

 

 

20

**Forward Industries, Inc.**

The Motorola licenseagreement expires on December 31, 2007.  We anticipate that we will enterdiscussions with Motorola in order to renew the license agreement or to enterinto a different agreement.  However, there can be no assurance that we will besuccessful in reaching agreement with respect to a renewal or differentagreement upon mutually acceptable terms, if at all.  Any failure to renew thelicense agreement or enter into a different agreement upon terms acceptable tous would have a material adverse affect on our results of operations andfinancial condition. In addition, while we believe that our commercialrelationship with Motorola is good, if we are unable to renew the licenseagreement or enter into a different agreement upon terms acceptable to us, wecan not predict how this would affect OEM sales to Motorola.  See "PartII. Item 1A. Risk Factors" of this Quarterly Report on Form 10-Q: "*Ourlicense agreement with Motorola expires on December 31, 2007, and the failure to extend or renew this agreement would have a material, adverse effect onour results of operations and financial condition"*.

*Diabetic Product Sales*

We design to the orderof and sell directly to OEMs carrying cases used by diabetics to carry theirpersonal electronic, blood glucose monitoring kits. In the 2007 Quarter, OEMcustomers for these carrying cases included Abbott Labs, Bayer, Lifescan (includingits subsidiaries, affiliates and contract manufacturers), and RocheDiagnostics. Our carrying cases are packaged as an accessory "in-box"with the monitoring kits that are sold by our OEM customers.

Sales of cases for bloodglucose monitoring kits increased approximately $0.4 million, or 17%, to $2.5million in the 2007 Quarter from $2.1 million in the 2006 Quarter. Sales toLifescan, our largest OEM customer for these cases, were approximately $0.8million, or 101%, higher in the 2007 Quarter compared to the 2006 Quarterresulting from the introduction of several new products. The higher sales toLifescan were offset, in part, by a decline in sales to Bayer of approximately$0.5 million. Fluctuations in diabetic product sales to other customers wereimmaterial.

Sales of carrying casesfor blood glucose monitoring kits represented 33% of our total net sales in the2007 Quarter compared to 24% of our total net sales in the 2006 Quarter.

*OtherProduct Sales*

We design and sell anumber of other carrying solutions for items such as cameras, portable oxygentanks, bar code scanners, MP3 players, and other carrying solutions for anassortment of products on a made-to-order basis that are customized to meet theindividual needs of our smaller OEM customers.  By the nature of ourdistribution in this market, sales of these customized products to order intheir product category vary from period to period without necessarilyreflecting a significant trend in overall demand for these items. Sales of otherproducts decreased approximately $0.2 million, or 17%, to $0.7 million in the2007 Quarter from $0.9 million in the 2006 Quarter.

*GrossProfit*

Grossprofit decreased $0.7 million, or 26%, to $2.0 million in the 2007 Quarter from$2.6 million in the 2006 Quarter primarily as a result of lower sales revenues dueto lower demand and pricing pressures primarily from our only OEM cell phone customer,Motorola. In addition, we continue to experience a shift in demand from thisOEM customer to lower margin products, which further adversely affected ourgross profit. Gross profit as a percentage of net sales decreased to 26.3% in the2007 Quarter from 30.5% in the 2006 Quarter. Although we have been successfulin certain cases in reducing our costs of materials/supply to mitigate pricingpressure, this was not true across all product sales.  Additionally, the costof operating our Hong Kong facility, which constitutes part of cost of goodssold on our income statement, was relatively fixed and, on a lower revenuebase, tends to act as a drag on our gross profit percentage. Finally, our shippingcosts increased in the 2007 Quarter as a result of increased reliance on airfreight to satisfy a customer's requirements to substitute new, non-defectiveproducts for products shipped by our vendors found to be defective. We are indiscussions with these factories to recover these costs, but there can be noguarantee that we will be successful.  All these factors combined to erode ourgross profit percentage.

21

*Selling,General, and Administrative Expenses*

Selling, general, andadministrative expenses increased approximately $0.2 million to $1.7 million inthe 2007 Quarter from $1.5 million in the 2006 Quarter. This increase was to $0.25million of increased legal and other professional fees incurred in the courseof defending the purported class action litigation, and to a lesser extent,higher royalty, travel and entertainment, and other general and administrativeexpenses.

*Other Income(Expense)*

Other income increased87% to $0.3 million in the 2007 Quarter compared to $0.1 million in the 2006Quarter due to higher interest income due to higher average rates on higheraverage cash balances. Other income accounted for 55% of pretax income in the2007 Quarter compared to 10% in the 2006 Quarter.  

*PretaxIncome*

Pretax income decreased$0.8 million or 65% to $0.5 million in the 2007 Quarter from $1.3 million in the2006 Quarter as a result of the decrease in gross profit as described above,offset in small part by the increase in other income. 

*IncomeTaxes*

Our effective incometax rate was 19.5% in the 2007 Quarter compared to 40.7% in 2006 Quarter as aresult of the relative contribution of taxable income from the EMEA Region,which is taxed at a lower rate than United States revenues, which weresignificantly lower in the 2007 Quarter compared to 2006 Quarter.  This had adisproportionate impact on an overall smaller revenue base.  Our effective tax rate does not approximate the United States statutory federal income tax rate primarilydue to tax rate differentials in respect of United States state and foreigntaxes, to which income recorded by Forward Innovations is subject.  Provisionfor income taxes decreased $0.4 million in the 2007 Quarter to approximately $90,000compared to $0.5 million in the 2006 Quarter due to lower taxable income.  Theprovision consists primarily of estimated U.S. federal income taxes, and to alesser extent, current state and foreign income taxes.  See Note 6 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 December 31, 2006, those cumulative earnings wereapproximately $5.2 million.  

LIQUIDITY AND CAPITAL RESOURCES

During the 2007 Quarter,we generated $2.5 million of cash from operations compared to $2.8 million inthe 2006 Quarter. Our operating cash flows in the 2007 Quarter consisted of netincome of $0.4 million, increased by $71,000 for non-cash items, and $2.1million for net changes in working capital items,  consisting primarily of changesin accounts receivable and accounts payable of $0.9 million and $1.6 million,respectively, offset, in part, by changes in accrued expenses and other currentliabilities, inventories and prepaid expenses and other current assets of $0.3million, $71,000 and 54,000, respectively. The change in accounts receivable inthe 2007 Quarter is attributable to lower levels of sales in the 2007 Quarter.The changes in inventory and accounts payable in the 2007 Quarter result fromincreased purchases in support of existing sales orders and slower payments toour largest suppliers. The change in accrued expenses is primarily a result ofaccrued remuneration that was subsequently paid in the 2007 Quarter. No suchaccrual for remuneration was required as of December 31, 2006.

Our operating cash flowsin the 2006 Quarter consisted of net income of $0.8 million, increased by $0.6million for non-cash items. These cash flows were increased by net changes inworking capital items of $1.4 million, consisting primarily of a change inaccounts receivable of $5.8 million, which was offset, in part, by changes in inventoriesand accounts payable, and accrued expenses of $0.4 million, $2.9 million, and$1 million, respectively.

 

22

**Forward Industries, Inc.**

Investing activities used$5,000 in the 2007 Quarter for purchases of property, plant and equipment,primarily computer and telecommunications hardware and software. In the 2006Quarter, net investing activities generated $75,000 from the sale of marketableequity securities and used $6,000 for purchases of property, plant andequipment, primarily computer and telecommunications hardware and software.

There were no financingactivities during the 2007 Quarter. In the 2006 Quarter, net financingactivities generated $88,000 in cash from the issuance of common stock upon theexercise of stock options to purchase approximately 27,900 shares of commonstock under our 1996 Stock Incentive Plan.

At December 31, 2006, our current ratio (current assets divided by current liabilities) was 7.06; ourquick ratio (current assets less inventories divided by current liabilities) was6.46; and our working capital (current assets less current liabilities) was $25.1million.  As of such date, we had no short- or long-term debt balancesoutstanding. 

Our primary sources ofliquidity are cash on hand, our operating cash flow, and our bank creditfacilities. The primary demands on our working capital are: our accounts payablearising in the ordinary course of business, the most significant of which arisewhen our customers place orders and we order from our suppliers; and ourcommitments under our license agreement with Motorola. 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 ensuing fiscal year will be adequate to manageour financial requirements.

In March 2006, Forwardand Koszegi renewed their credit facility with a U.S. bank that provides for acommitted line of credit in the maximum amount of $3.0 million, including a$1.5 million sub-limit for letters of credit. The line expires in March 2007.While it is Forward's and Koszegi's intention to renew the line through March2008, the renewal will be at the discretion of the bank, subject to oursubmission of satisfactory financial information and other documentation.Forward and Koszegi are required to eliminate borrowings for thirty consecutivedays during the term of the facility and are required to maintain certainfinancial covenants including the  maintenance of current and tangible networth ratios, as defined. Amounts drawn under the credit facility bear interestat LIBOR plus 2.5% and are secured by substantially all of Koszegi's assets andcertain assets of Forward Industries.  At December 31, 2006, there were no outstanding borrowings or letter of credit obligations under this facility.   SeeNote 4 to the unaudited consolidated Financial Statements set forth in Item 1.

In February 2003,Forward Innovations established a credit facility with a Swiss bank thatprovides 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 quarterly 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 (5.5% as December 31, 2006). At December 31, 2006 Forward Innovations is contingently liable to the bank undera letter of credit issued on its behalf in the amount of €224,000(approximately $296,000 as of December 31, 2006) in favor of ForwardInnovations' freight forwarder and customs agent in connection with itslogistics operations in The Netherlands.  The effect of the issuance of theletter of credit is to reduce the availability of the credit line in an amountequal to the face amount of the letter of credit.  See Note 4 to the unauditedconsolidated Financial Statements set forth in Item 1.

On September 27, 2002, our Board of Directors authorized the repurchase of up to 400,000 shares of ouroutstanding common stock, or approximately 7% of the number of shares thenoutstanding. On January 21, 2004, our Board increased the amount of sharesauthorized for repurchase to 486,200. Under that authorization, as of December 31,2006, we had repurchased an aggregate of 102,600 shares at a cost ofapproximately $0.2 million, but none during the 2007 or 2006 Quarters.

 

23

**Forward Industries, Inc.**

 

CONTRACTUAL OBLIGATIONS ANDCOMMERCIAL COMMITMENTS

The Company has entered into various contractual obligationsand commercial commitments that, under accounting principles generally acceptedin the United States, are not recorded as a liability.   The following is asummary of such contractual cash obligations as of December 31, 2006:

**Contractual  Obligation or Commitment**

**Jan 07 - Dec 07**

**Jan 08- Dec 09**

**Jan 10 - Dec 11**

**Thereafter**

Employment & Consulting Agreements

$     875,000

$  225,000

$            --

$             --

Operating Leases

192,000

292,000

319,000

72,000

License Agreements**

356,000

--

--

--

**Totals**

**$1,423,000**

**$517,000**

**$319,000**

**  $   72,000**

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

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

**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

Weare exposed to certain market risks arising from transactions in the normalcourse of business, principally risks associated with interest rate and foreigncurrency fluctuations.  We have not engaged in interest rate swaps, foreigncurrency hedges or other derivative transactions designed to mitigate theserisks.

*Interest Rate Risk*

Apredominant portion of our cash is invested in money market funds and overnightinterest rate sensitive securities.  The values of these investments do notfluctuate due to their short term nature and are not subject to interest raterisks; however, the income we earn on our invested cash will fluctuate withchanges in interest rates.  Our credit facilities in the United States and Switzerland are also based on variable interest rates.  Although we have not hadany borrowings under these facilities in several years, and did not have anyborrowings outstanding as of December 31, 2006, any such borrowings would besubject to interest rate risk if we decide to borrow against these creditlines.  Given the lack of borrowings, our current cash position and the dollaramount of these credit lines we do not believe a change in interest rates wouldbe material to our financial results.

*Foreign Currency Risk*

Wetransact certain portions of our business in foreign currencies and are exposedto financial market risk resulting from fluctuations in foreign currencyexchange rates, particularly the Euro, Swiss Franc, and to a much lesserextent, the Great British Pound ("GBP").  These transactions may result in again or loss of earnings to us.   In Fiscal 2006, and in the 2007 Quarter,approximately 10% and 11% of our sales were denominated in Euros.  In addition,certain operating expenses of our Swiss subsidiary are be paid in Euros orSwiss Francs.  Because we have determined that the US dollar is the functionalcurrency of that foreign subsidiary, the gains and losses resulting fromconverting these transactions to the U.S. dollar for financial statementpresentation purposes are included in our results of operations as a componentof our net income. 

Wepurchase substantially our entire inventory from China and although thesetransactions are denominated in U.S. dollars, our suppliers may pay theirexpenses in Chinese Yuan.   If the rate of the Yuan to the U.S. dollarfluctuates our suppliers are likely to change the prices they charge to usfurther subjecting our operating results to foreign currency risk.

24

**Forward Industries, Inc.**

 

If foreign exchangerates of the Euro and Hong Kong Dollar were to change unfavorably by 20% ineach of the foreign currencies in which we record assets or liabilities, wewould incur a loss of approximately $71,000 and $37,000, respectively, resultingfrom a decrease in fair value of such assets or liabilities. See "Notes toConsolidated Financial Statements, Note 2 -Foreign Currency Transactions" for adescription of our foreign currency accounting policies. 

Our analysis methodsused to assess and mitigate risk discussed above should not be consideredprojections of future risks.

**Item 4. Controls and Procedures**

EVALUATION OF DISCLOSURECONTROLS AND PROCEDURES

Our management is responsible for establishing andmaintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e))under the Exchange Act) that is designed to ensure that information required tobe disclosed by the Company in the reports that we file or submit under theExchange Act is recorded, processed, summarized and reported, within the timeperiods specified 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 performingsimilar functions, 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 the Company'sdisclosure controls and procedures as of the end of the period covered by thisQuarterly Report. Based on that evaluation, the Company's Chief ExecutiveOfficer and Chief Financial Officer concluded that the Company's disclosurecontrols and procedures were effective, as of the end of the period covered bythis Quarterly Report, to provide reasonable assurance that informationrequired to be disclosed in the Company's reports filed or submitted under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Commission's rules and forms. 

CHANGES IN INTERNAL CONTROLS

Our management, with the participation our Chief Executive Officer and Chief Financial Officer, performed an evaluation as to whether any change in our internal controls over financial reporting  occurred during the 2007 Quarter.  Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that no change occurred in the Company's internal controls over financial reporting during the 2007 Quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.

 

 

 

25

**Forward Industries, Inc.**

 

**PART II.   OTHER INFORMATION**

**Item 1. Legal Proceedings**

From time to time, wemay become a party to legal actions or proceedings in the ordinary course ofour business.  As of December 31, 2006, except as described below, there wereno such actions or proceedings, either individually or in the aggregate, that,if decided adversely to our interests, we believe would be material to ourbusiness.

On October 3, 2006, wewere served with a summons and purported class action complaint that was filedJuly 31, 2006 in a matter captioned Lynn Finkelstein & Company, Inc., onbehalf of certain of its clients as attorney-in-fact and all others similarlysituated, Plaintiff, vs. Forward Industries, Inc. and certain of its executiveofficers, in their individual capacities, Defendants, brought in the UnitedStates District Court for the Southern District of Florida.  The complaintalleges that the Company during the purported class period July 25, 2005 toFebruary 2, 2006 made certain misrepresentations of fact, or failed to disclosecertain material facts, and violated certain generally accepted accountingprinciples in the presentation of its financial statements included in itsperiodic reports filed with the Commission pursuant to the Exchange Act. 

On November 15, 2006,the Plaintiffs filed a First Amended Complaint that purports to statesubstantially identical claims. We have filed a motion to dismiss the complaint,as amended, in its entirety for failure to satisfy the pleading requirements ofthe Private Securities Litigation Reform Act of 1995 and Plaintiff's attorneyshave filed a responsive motion and brief.  We expect to file our response inFebruary 2007.

We believethat the complaint, as amended, is wholly without merit and intend to vigorouslycontest this lawsuit.  We have directors and officers' liability insurance,including entity coverage. In the course of defending the complaint, we have incurredlegal and other expenses up to the retention amount of $250,000, in ourdirectors and officers liability insurance policy and that incurring expensesnot covered by this policy may adversely affect our reported results ofoperations in future periods.  While we believe that the complaint, as amended,is without merit and the plaintiff has yet to assert an amount of damagesclaimed, the outcome of this lawsuit cannot be predicted and our ultimateliability if this lawsuit is adversely determined cannot currently beascertained and could be material.

**Item 1A.Risk Factors**

This "Risk Factors" section providesupdated information in certain areas from the "Risk Factors" set forth in ourAnnual Report on Form 10-KSB for the fiscal year ended September 30, 2006. Setforth below are certain risk factors that have been expanded or updated fromour Annual Report on Form 10-KSB, but the factors below do not constitute allthe risk factors that pertain to our business.  Please review our Annual Reporton Form 10-KSB for a complete listing of "Risk Factors" that pertain to our business.Please read the note regarding "Additional Forward Looking Information"that appears on page 15 of this Quarterly Report on Form 10-Q.

*Ourlicense agreement with Motorola expires on December 31, 2007, and the failure to extend or renew this agreement would have a material, adverse effect onour results of operations and financial condition.* 

Ourlicense agreement with Motorola, Inc. expires on December 31, 2007.  Motorola is our single largest customer, as detailed in the next risk factor.  Weanticipate that Motorola and we will initiate discussions relating to anextension or new agreement in the near future, but there is no guarantee thatwe will be able to successfully hold such discussions or achieve an extensionor new agreement on terms that we find acceptable. If we cannot conclude anextension or a new license agreement beyond December 31, 2007, our rights to sell certain cell phone carry solution cases and accessories bearing theMotorola trademark will expire at that time, except for limited sell-throughrights with respect to existing inventory then on hand.  The expiration of thelicense agreement with Motorola without an extension or renewal would have amaterial and adverse effect on our results of operations and financialcondition.  In addition to the reduction of revenues as a consequence of losingaftermarket sales to cell phone retailers and distributors, we would expectthat our profit margins could suffer materially, as currently margins oncertain sales of licensed products exceed those in respect of sales of many OEMcell phone sales.  Further, we are unable to predict the influence, if any,that a failure to extend or renew the license agreement would have on our OEMcustomer relationship with Motorola, but it could be adverse and material.

26
 
**Forward Industries, Inc.**

 

*Our business is characterized by a highdegree of customer concentration.  Two significant customers accounted for 57%of net sales in Fiscal 2006. The same two customers accounted for 67% of netsales in the 2007 Quarter; the loss of, or material reduction in orders from,any of these customers would materially and adversely affect our results ofoperations and financial condition*

The predominant percentage of our salesrevenues is concentrated in two large OEM customers.  In the 2007 Quarter,direct sales to Motorola, together with its international affiliates, accountedfor approximately 46% of our net sales, or approximately $3.4 million (which amountexcludes approximately 11% of our net sales, or $0.8 million, of products underour license agreement with Motorola).  Lifescan accounted for approximately 21%of our net sales, or approximately $1.6 million. The loss of any of these twokey customers or one additional OEM customer who accounted for 9%, of net salesin the 2007 Quarter (whether as a result of such customers purchasing theircarry solution requirements from another vendor, deciding to manufacture theirown carrying cases or eliminating the inclusion of our carrying cases withtheir products) would have a material adverse effect on our financialcondition, liquidity and results of operations. In addition, sales to a fourth customer, who represented 7% of our salesin Fiscal 2006 declined to an immaterial amount during the 2007 Quarter as oursole "in-box" program with them terminated.

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

*At any time, a significant percentage of our accounts receivablerisk may be concentrated in a small number of customers*

Two customers accounted for approximately 70%and 74% of our accounts receivable at December 31, 2006 and September 30, 2006. The failure to receive or collect such amounts when, and as, due couldhave a material adverse effect on our financial condition, liquidity, andresults of operations.

*We have incurred substantial expenses for legal fees in defending thepurported class action litigation that has been filed against us. *

On October 3, 2006, the Company was served with a summons and purported classaction complaint, as described in Item 1. of Part II of this Quarterly Report,"Legal Proceedings."  We maintain directors and officers' liabilityinsurance, including entity coverage. We have incurred legal and other expensesup to the retention amount of $250,000, above which it is our expectation thatit is the insurance carrier's responsibility to assume under such policy.  Wemay incur additional legal or other expenses that are not covered by thispolicy, and this may adversely affect our reported results of operations in futureperiods.

*While the purported class action that has been filed against us isin its early stages, the ultimate liability of the action is not predictablebut may be material*

Whilewe believe that the complaint is without merit and will vigorously contest thisaction, and the plaintiff has yet to assert a specific amount in its claim fordamages, the outcome of this lawsuit cannot be predicted and the Company'sultimate liability if this lawsuit is adversely determined cannot currently beascertained and could be material.

 

27
 
**Forward Industries, Inc.**

 

**Item 2. Unregistered Sales of Equity Securities andUse of Proceeds**

None.

**Item 3.Defaults Upon Senior Securities**

None.

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

None.

**Item 5.Other Information**

None.

**Item 6. Exhibits**

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

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

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

 

 

 

 

 

 

28
 
**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:  February 7, 2007

FORWARDINDUSTRIES, INC.(Registrant)

 

By:/s/ Jerome E. Ball                                          

JeromeE. BallChairmanand Chief Executive Officer

 

By:/s/Douglas W. Sabra                                   

DouglasW. SabraVicePresident, Chief Financial Officer andPrincipalAccounting Officer

 

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