**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 March 31, 2007.**

**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                                  [   ] Accelerated filer                                [**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 May 1, 2007, was 7,861,438 shares.

1

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**Forward Industries, Inc.**

|          |          |                                                                                                 | **INDEX**  |
|---------------|---------------|------------------------------------------------------------------------------------------------------|------------|
| **PART  I.**  | ** **    | **FINANCIAL  INFORMATION**                                                                           | Page No.   |
|               |               |                                                                                            |            |
|               | **Item  1.**  | **Financial  Statements**                                                                            |            |
|               |               |      - Consolidated Balance Sheets as of March 31, 2007 (unaudited)                   |            |
|               |               |      and September 30, 2006                                                           | 4          |
|               |               |                                                                                                 |            |
|               |               |      - Consolidated Statements of Operations (unaudited) for the Three and Six Months |            |
|               |               | Ended March 31, 2007 and 2006                                                                        | 5          |
|               |               |                                                                                            |            |
|               |               |      - Consolidated Statements of Cash Flows (unaudited) for the Six Months           |            |
|               |               |      Ended March 31, 2007 and 2006                                                    | 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**                                      | 27         |
|               | ** **    | **  **                                                                                     |            |
|               | **Item  4.**  | **Controls  and Procedures**                                                                         | 28         |
|               | ** **    |                                                                                                 |            |
| **PART  II.** | ** **    | **OTHER  INFORMATION**                                                                               | ** ** |
|               | ** **    |                                                                                                 |            |
|               | **Item  1.**  | **Legal  Proceedings**                                                                               | 29         |
|               | ** **    | ** **                                                                                           |            |
|               | **Item  1A.** | **Risk  Factors**                                                                                    | 29         |
|               | ** **    | **  **                                                                                     |            |
|               | **Item  2**   | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                     | 31         |
|               | ** **    | ** **                                                                                           |            |
|               | **Item  3**   | **Defaults  Upon Senior Securities**                                                                 | 31         |
|               | ** **    | **  **                                                                                     |            |
|               | **Item  4.**  | **Submission  of Matters to a Vote of Security Holders**                                             | 31         |
|               | ** **    | **  **                                                                                     |            |
|               | **Item  5.**  | **Other  Information**                                                                               | 31         |
|               | ** **    | **  **                                                                                     |            |
|               | **Item  6.**  | **Exhibits**                                                                                         | 31         |
|               | ** **    | **  **                                                                                     |            |
|               |               | **Signatures**                                                                                       | 32         |
|               |               | **  **                                                                                     |            |
|               |               | **Certifications**                                                                                   | 33         |

**Explanatory Note**The registrant determined, as of September 30, 2006, its most recent fiscal year-end, that it no longer met the definition of a smallbusiness issuer, in accordance with Rule 228.10(a) under the Exchange Act. Accordingly, its Annual Report on Form 10-KSB for the fiscal year ended September30, 2006, was its last annual report filing as a Small Business issuer inexiting the Small Business Disclosure System (until such time as its filingstatus may be reassessed).  This Quarterly Report on Form 10-Q for thequarterly period ended March 31, 2007, pursuant to the Exchange Act of ForwardIndustries, Inc. represents the registrant's  second quarterly filing as anon-accelerated filer on Form 10-Q and in accordance with Regulation S-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;"Koszegi Asia" refers to Forward Industries' wholly owned subsidiary KoszegiAsia Ltd., a Hong Kong corporation; "Forward Innovations" refers to ForwardIndustries' wholly owned subsidiary Forward Innovations GmbH, a Swisscorporation;  "GAAP" refers to accounting principles generally accepted in theUnited States; "Commission" refers to the United States Securities and ExchangeCommission; "Exchange Act" refers to the United States Securities Exchange Actof 1934; the "2007 Quarter" refers to the three months ended March 31, 2007;the "2006 Quarter" refers to the three months ended March 31, 2006; the "2007Period" refers to the six months ended March 31, 2007; the "2006 Period" refersto the six months ended March 31, 2006; "Fiscal 2007" refers to our fiscal yearending 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**

|                                                                                                                                            |                   |        |                         |
|--------------------------------------------------------------------------------------------------------------------------------------------|-------------------|--------------------------------------|-------------------------|
|                                                                                                                                            |                   |                                      |                         |
|                                                                                                                                            | **March 31,**     | ** **                           | **September 30,**       |
|                                                                                                                                            | **2007**          | ** **                           | **2006**                |
| **Assets**                                                                                                                                 | **(Unaudited)**   | ** **                           | ** **              |
| **Current assets:**                                                                                                                        |                   |                                      |                         |
| Cash and cash equivalents                                                                                                                  | $20,799,128       |                                      | $18,609,371             |
| Accounts receivable, net                                                                                                                   | 3,787,868         |                                      | 6,069,058               |
| Inventories, net                                                                                                                           | 2,148,821         |                                      | 2,449,065               |
| Prepaid expenses and other current  assets                                                                                                 | 621,797           |                                      | 329,461                 |
| Deferred tax asset                                                                                                                         | 93,000            |                                      | 83,000                  |
| **Total current assets**                                                                                                                   | 27,450,614        |                                      | 27,539,955              |
|                                                                                                                             |                   |                                      |                         |
| Property, plant, and equipment, net                                                                                                        | 160,490           |                                      | 190,084                 |
| Other assets                                                                                                                               | 50,412            |                                      | 51,932                  |
| **Total Assets**                                                                                                                           | $27,661,516  |                                      |  $27,781,971  |
|                                                                                                                                  |                   |                                      |                         |
| **Liabilities and shareholders' equity**                                                                                                   |                   |                                      |                         |
| Current liabilities:                                                                                                                       |                   |                                      |                         |
|    Accounts payable                                                                                                              | $2,121,406        |                                      |  $ 2,141,191       |
|    Accrued expenses and other current liabilities                                                                                | 251,752           |                                      | 690,413                 |
| **Total current liabilities**                                                                                                              | 2,373,158         |                                      | 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                                                                                                                          | 10,769,316        |                                      | 10,431,325              |
| **Total shareholders' equity**                                                                                                             | 25,288,358        |                                      | 24,950,367              |
| **Total liabilities and shareholders' equity**                                                                                             | $27,661,516       |                                      |  $27,781,971       |

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

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**Forward Industries, Inc.**

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                 | **(UNAUDITED)**                  | ** ** | **(UNAUDITED)**                |
|---------------------------------------------------------------------------------|----------------------------------|------------|--------------------------------|
|                                                                                 | **Three Months Ended March 31,** | ** ** | **Six Months Ended March 31,** |
|                                                                                 | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** |
| **Net  sales**                                                                  | $5,875,768                       |            | $6,457,318                     |  | $13,310,190   |  | $15,127,677   |
| **Cost of goods sold**                                                          | 4,575,048                        |            | 5,043,223                      |  | 10,052,760 |  | 11,069,285 |
| **Gross profit**                                                                | 1,300,720                        |            | 1,414,095                      |  | 3,257,430 |  | 4,058,392 |
|                                                                            |                                  |            |                                |  |  |  |  |
| **Operating expenses:**                                                         |                                  |            |                                |  |  |  |  |
| Selling                                                                         | 926,127                          |            | 855,944                        |  | 1,777,038 |  | 1,632,283 |
| General  and administrative                                                     | 664,136                          |            | 632,311                        |  | 1,559,250 |  | 1,327,534 |
| **Total operating expenses**                                                    | 1,590,263                        |            | 1,488,255                      |  | 3,336,288 |  | 2,959,817 |
| **  **                                                                |                                  |            |                                |  |  |  |  |
| **(Loss) income from  operations**                                              | (289,543)                        |            | (74,160)                       |  | (78,858) |  | 1,098,575 |
| ** **                                                                      |                                  |            |                                |  |  |  |  |
| **Other income:**                                                               |                                  |            |                                |  |  |  |  |
| Interest  income                                                                | 252,120                          |            | 194,460                        |  | 493,410 |  | 345,732 |
| Other  income (expense), net                                                    | (4,565)                          |            | 3,620                          |  | 6,168 |  | (13,223) |
| **Total other income**                                                          | 247,555                          |            | 198,080                        |  | 499,578 |  | 332,509 |
| **  **                                                                |                                  |            |                                |  |  |  |  |
| **(Loss) income before provision (benefit) for income  taxes**                  | (41,988)                         |            | 123,920                        |  | 420,720 |  | 1,431,084 |
| **(Benefit) provision for  income taxes**                                       | (7,271)                          |            | 60,405                         |  | 82,729 |  | 593,079 |
| **Net (loss) income**                                                           | $(34,717)                        |            | $63,515                        |  | $337,991   |  | $838,005   |
| **  **                                                                |                                  |            |                                |  |  |  |  |
| **Net (loss) income per common and common equivalent  share**                   |                                  |            |                                |  |  |  |  |
| Basic                                                                           | $0.00                            |            | $0.01                          |  | $0.04 |  | $0.11 |
| Diluted                                                                         | $0.00                            |            | $0.01                          |  | $0.04 |  | $0.10 |
| **  **                                                                |                                  |            |                                |  |  |  |  |
| **Weighted average number of common and common  equivalent shares outstanding** |                                  |            |                                |  |  |  |  |
| Basic                                                                           | 7,861,438                        |            | 7,861,438                      |  | 7,861,438 |  | 7,849,803 |
| Diluted                                                                         | 7,861,438                        |            | 8,014,331                      |  | 7,974,700 |  | 8,018,807 |

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

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**Forward Industries, Inc.**

**CONSOLIDATED STATEMENTS OFCASH FLOWS**

|                                                                                    |  | **(Unaudited)**                   |
|------------------------------------------------------------------------------------|--|-----------------------------------|
|                                                                                    |  | **Six Months Ended March 31,**    |
|                                                                                    |  | **     2007** | **       ** | **2006** |
| **Operating activities:**                                                          |  |                                   |  |  |
| Net  income                                                                        |  | $337,991                          |  | $838,005 |
| Adjustments to reconcile net income to net cash  provided by operating activities: |  |                                   |  |  |
| Provision  for obsolete inventory                                                  |  | 159,861                           |  | 79,647 |
| Depreciation  and amortization                                                     |  | 45,051                            |  | 55,645 |
| Deferred  income taxes                                                             |  | (10,000)                          |  | 76,202 |
| Tax  benefit from exercise of stock options                                        |  | --                                |  | 479,405 |
| Changes  in operating assets and liabilities:                                      |  |                                   |  |  |
| Accounts receivable                                                                |  | 2,281,190                         |  | 7,327,227 |
| Inventories                                                                        |  | 140,383                           |  | (1,573,304) |
| Prepaid expenses and other  current assets                                         |  | (292,336)                         |  | (259,887) |
| Other assets                                                                       |  | 1,520                             |  | -- |
| Accounts payable                                                                   |  | (19,785)                          |  | (1,550,953) |
| Accrued expenses and other  current liabilities                                    |  | (438,661)                         |  | (1,217,463) |
| **Net cash  provided by operating activities**                                     |  | **2,205,214**                     | ** ** | 4,254,524 |
|                                                                               |  |                                   |  |  |
| **Investing activities:**                                                          |  |                                   |  |  |
| Proceeds from sale of  marketable equity securities                                |  | --                                |  | 75,034 |
| Purchases of property,  plant, and equipment                                       |  | (15,457)                          |  | (10,497) |
| **Net cash (used) provided  by investing activities**                              |  | **(15,457)**                      | ** ** | 64,537 |
|                                                                               |  |                                   |  |  |
| **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**                                     |  | 2,189,757                         |  | 4,406,714 |
| **  **                                                                   |  |                                   |  |  |
| **Cash and  cash equivalents at beginning of period**                              |  | 18,609,371                        |  | 15,291,739 |
| ** **                                                                         |  |                                   |  |  |
| **Cash and  cash equivalents at end of period**                                    |  | $20,799,128                  |  | $19,698,453 |
|                                                                               |  |                                   |  |  |
|                                                                                    |  |                                   |  |  |

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 to retailers and wholesalers inEurope, the Middle East and Africa under non-exclusive licenses for certaintrademarks.  

In theopinion of management, the accompanying consolidated financial statements reflectall normal recurring adjustments necessary to present fairly the financialposition and results of operations and cash flows for the interim periodspresented herein, but are not necessarily indicative of the results ofoperations for the full fiscal year ending September 30, 2007. These financial statements should be read in conjunction the Company's consolidatedfinancial statements included in its annual report on Form 10-KSB for thefiscal year ended September 30, 2006, and with the disclosures presentedtherein.

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 therebates.  For the three-month periods ended March 31, 2007 and 2006, the cumulative amounts of such quarterly rebates were approximately $135,000 in eachperiod. For the six-month periods ended March 31, 2007 and 2006, the cumulative amounts of such quarterly rebates were approximately $328,000 and $321,000,respectively. The quarterly rebates are net of amounts allocated to unsoldinventories and are reflected in the accompanying consolidated statements of operationsas a reduction of cost of goods sold.

7

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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 operations. The net gain (loss) from foreign currencytransactions was approximately $(5,000) and $4,000 for the three-month periodsended March 31, 2007 and 2006, respectively. The net gain (loss) from foreigncurrency transactions was approximately $6,000 and $(11,857) for the six-monthperiods ended March 31, 2007 and 2006, respectively.

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

*Recent Accounting Pronouncements*

On July 13, 2006 the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes, (FIN 48). FIN 48, clarifies theaccounting for income taxes by prescribing the minimum recognition threshold atax position is required to meet before being recognized in the financial statements.It also provides guidance on de-recognition, measurement, classification,interest and penalties, accounting in interim periods, disclosure andtransition, and clarifies that income taxes are outside the scope 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.  The Company has not completed its evaluationof FIN 48. However, it does not expect the adoption will have a material impacton 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.

NOTE 4      DEBT

In February 2007,Forward and its wholly-owned U.S. subsidiary, Koszegi Industries, Inc. renewedtheir credit facility with a U.S. bank that provides for a committed line ofcredit in the maximum amount of $3 million, including a $1.5 million sub-limitfor letters of credit, expiring February 2008. Forward and Koszegi are requiredto eliminate 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 outstanding underthis facility during the three or six-month period ended March 31, 2007. 

8

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NOTE 4      DEBT (CONTINUED)

In2003, 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 borrowed otherthan as a term loan must be settled quarterly or converted into term loans.  Inconnection with this facility, Forward Innovations agreed to certain covenants.Amounts drawn under this credit facility bear interest at variable ratesestablished by the bank (5.5% as March 31, 2007).  At March 31, 2007, ForwardInnovations is contingently liable to the bank in respect of a letter of creditissued on its behalf in the amount of €224,000 (approximately $300,000) infavor of Forward Innovations' freight forwarder and customs agent in connectionwith its logistics operations in The Netherlands.  The effect of the issuanceof the letter of credit is to reduce the availability of the credit line in anamount equal to the face amount of the letter of credit.  

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:

*                                                                                                          (allamounts in thousands of dollars)*

|  
**Three Months Ended	March 31,**
   
**Six Months Ended	March 31,**

**2007**
   
**2006**
   
**2007**
   
**2006**

APAC

$2,765
   
$2,431
   
$6,120
   
$6,053

Americas

1,815
   
2,417
   
4,277
   
5,816

EMEA

1,296
   
1,609
   
2,913
   
3,259

**Total net sales**

**$5,876**
   
**$6,457**
   
**$13,310**
   
**$15,128**

NOTE 6      INCOME TAXES

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

**Three Months Ended	March 31,**

** **

**Six Months Ended	March 31,**

U.S. Federal and State

**2007**

**2006**

**2007**

**2006**

    Current.

$ 5,600 

$27,996

$83,600

$439,070 

    Deferred

(5,000)

38,609

(10,000)

168,309
                         
Foreign:

    Current

(7,871)

(6,200)

9,129

(14,300)

    Deferred

--

--

--

--

**Income tax (benefit) provision**

**$(7,271) **

** **

**$60,405**

** **

**$82,729**

** **

**$593,079 **

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

9

NOTE 6      INCOME TAXES(CONTINUED)

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 March 31, 2007, the Company's Swiss subsidiary had approximately $5,129,000of accumulated undistributed earnings.  

NOTE 7      (LOSS) EARNINGSPER SHARE

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

A total of 320,000 and 70,000 commonstock equivalents have been excluded from the calculation of earnings per sharefor the three and six-month periods ended March 31, 2007, respectively, becausetheir inclusion would be anti-dilutive. No common stock equivalents wereexcluded for the three and six-month periods ended March 31, 2006.

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 can 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 March 31, 2007.

*Adoption of NewAccounting Guidance and Transition*

Prior to October 1, 2006, the Company accounted for its stock-based compensation plan (expired November 2006) under therecognition and measurement provisions of Accounting Principles Board OpinionNo. 25,*Accounting for Stock Issued to Employees*, and relatedinterpretations, 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 six-month period ended March 31, 2007, the Companyrecognized (a) compensation cost for all share-based payments granted prior to,but not yet vested as of, October 1, 2006, based on the grant date fair valueestimated in accordance with the original provisions of SFAS No. 123 and (b)compensation cost for all share-based payments granted on or subsequent toOctober 1, 2006, based on the grant-date fair value estimated in accordancewith the provisions of SFAS No. 123R. 

10

NOTE 8      STOCK BASEDCOMPENSATION (CONTINUED)

Prior to the adoption ofSFAS No. 123R, the Company presented the tax benefit of deductions arising fromthe exercise of stock options as operating cash flows in the CondensedConsolidated Statement of Cash Flows. SFAS No. 123R requires that the Companyclassify the cash flows resulting from the tax benefit that arises when the taxdeductions exceed the compensation cost recognized for those options (excess taxbenefits) as financing cash flows. As all share-based payments granted in priorperiods were fully vested as of October 1, 2006, and as the Company did notgrant any share-based payments during the six-month period ended March 31, 2007,there were no excess tax benefits for the Six-month period ended March 31, 2007.

*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 and Six-Months 	Ended March 31, 2006**

Expected  term (in years)

5.0

Risk-free  interest rate

4.20 - 5.84

Expected  volatility

99.6% - 103.6%

Expected  dividend yield

0%

* *

*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.

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

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

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

11

NOTE 8      STOCK BASEDCOMPENSATION (CONTINUED)

** **

**Three-Months Ended	March 31, 2006**

** **

**Six-Months Ended	March 31, 2006**

Net  income, as reported

$63,515

$838,005

Total share-based employee  compensation cost, net of tax

--

--

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

--

--

Pro  forma net income

$63,515

$838,005
     
Net  income per share:

Basic  - as reported

$0.01

$0.11

Basic  - pro forma

$0.01

$0.11
     
Diluted  - as reported

$0.01

$0.10

Diluted  - pro forma

$0.01

$0.10

*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 six-month period ended March31, 2007. As such, the Company did not recognize compensation cost or an excesstax benefit for share-based compensation awards during the six-month periodended March 31, 2007.

A summary of the activityunder our stock plan during the six-month period ended March 31, 2007, ispresented 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 March 31, 2007**

**245,000**
   
**$4.18**
   
**3.55**
   
**$ 427,000**
           
 
   
 

Options vested  or expected to vest at March 31, 2007

245,000
   
$4.18
   
3.55
   
$427,000

Options  exercisable at March 31, 2007

245,000
   
$4.18
   
3.55
   
$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 

ContractPeriod 2:  January 1, 2006 to December 31, 2006 

ContractPeriod 3:  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. At the time of negotiation of the agreement, the Company and Motorolahad agreed that, prior to the commencement of each contract period, they would agreeto establish a new minimum royalty amount, in the absence of which a defaultformula would apply.  The Company was unable to reach an agreement with Motorolaon the minimum royalty payment for Contract Period 3; consequently, the agreementof the parties is 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 its currentlicense agreement with Motorola, the Company recorded royalty expense of approximately$116,000 and $253,000 for the three and six-month periods ended March 31, 2007,respectively, and $155,200 and $240,200 for the three and six-month periodsended March 31, 2006, respectively.  These amounts are included in sellingexpenses in the accompanying consolidated statements of operations.  Theseamounts represent royalties paid in respect of actual sales and in each case representan amount in excess (and in lieu) of the minimum royalties otherwise payable toMotorola in respect of those periods. The minimum royalty for the three andsix-month periods ended March 31, 2007 were $89,000 and $158,000, respectively,and $69,000 and $154,000 for the three and six-month periods ended March 31,2006, respectively.

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 $300,000 as of March 31, 2007) 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. Commencing December 31, 2004, and on each anniversary thereafter until December 31, 2009, it is intended that the bank letter of credit will be renewed automatically for one-yearperiods. The subsidiary has agreed to keep a letter of credit guarantee inplace for five years following the date its relationship terminates with thelogistics provider. As of March 31, 2007, the Company has not incurred aliability 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 March 31, 2007, except as described below, therewere no such actions or proceedings, either individually or in the aggregate,that, if decided adversely to the Company's interests, the Company believeswould 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 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 filed a responsive motion and brief.  The Company filed its brief in responsein February 2007.  The parties to this action anticipate attendance at a May2007 hearing called by the judge assigned to hear this case at which a schedulefor discovery and motion practice may be proposed.

The Company, as wellas each of the individual defendants, believes that the complaint, as amended,is wholly without merit and intends to vigorously contest this lawsuit.  TheCompany has directors and officers' liability insurance, including entitycoverage. The Company has, in the course of defending the complaint, incurredlegal and other expenses up to the retention amount of $250,000, in itsdirectors and officers liability insurance policy and that incurring expensesnot covered by this policy may adversely affect its reported results ofoperations in future periods.  While the Company believes that the complaint,as amended, is without merit and the Plaintiff has yet to assert an amount ofdamages claimed, the outcome of this lawsuit cannot be predicted and theCompany's ultimate liability if this lawsuit is adversely determined cannotcurrently be ascertained 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.  The following discussion and analysis**comparesour consolidated results of operations for the three months ended March 31,2007 (the "2007 Quarter"), with the three months ended March 31, 2006 (the"2006 Quarter"), and the six months ended March 31, 2007 (the "2007 Period"),with the six months ended March 31, 2006 (the "2006 Period), and is based on orderived from the Unaudited Consolidated Financial Statements included elsewherein this Quarterly Report. There have been no material changes in criticalaccounting estimates since September 30, 2006.  All figures in the followingdiscussion are presented on a consolidated basis. All dollar amounts andpercentages presented herein have been rounded to approximate values.*

Cautionary statement for purposes of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 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 differ materially from those set forthin any forward looking statement.

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.

 

15

**Forward Industries, Inc.**

 

CRITICALACCOUNTING POLICIES AND ESTIMATES

This management's discussion and analysis of financialcondition and results of operations is 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 judgments concerningthe carrying values of assets and liabilities that are not readily apparentfrom other sources. We periodically evaluate these estimates and judgmentsbased on available information and experience. Actual results could differ fromour estimates under different assumptions and conditions. If actual resultssignificantly differ from our estimates, our financial condition and results ofoperations could be materially impacted. Please refer to "Management'sDiscussion and Analysis-Critical Accounting Policies and Estimates" included inour Annual Report on Form 10-KSB for the fiscal year ended September 30, 2006,for further information regarding our critical accounting policies andestimates. 

The notes to our audited consolidated financialstatements and "Management's Discussion and Analysis" included in our AnnualReport on Form 10-KSB for the year ended September 30, 2006, the notes to ourconsolidated financial statements included in Part I, Item 1 of this QuarterlyReport on Form 10-Q and the factors and events described elsewhere in"Management's Discussion and Analysis of Financial Condition and Results ofOperations," contain additional information related to our accounting policiesand should be read in conjunction with the following discussion and analysisrelating to the individual financial statement captions and our overallfinancial 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 March 31, 2007 and September 30, 2006, our allowance for doubtfulaccounts was approximately $47,000.  Changes to this account are reflected inthe general and administrative expense line of our statement of operations. Although we consider our allowance for doubtful accounts to be adequate andproper, changes in economic conditions, the assessments of new customers'creditworthiness, changes in customer circumstances, or other factors couldhave a material effect on the recorded allowance.

 

 

16

**Forward Industries, Inc.**

*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, and weestablish an allowance for inventory that is considered obsolete, slow movingor otherwise un-saleable.  This evaluation includes among other factors analysesof inventory levels, historical loss trends, sales history, and projections offuture sales demand.  We physically dispose of inventory once its marketabilityhas been determined to be zero.  Inventory allowances were approximately $0.2million at March 31, 2007, and September 30, 2006.  The cost of obsoleteinventory is included in cost of goods sold on our statement of operations.

The vastmajority of our production is made to customer specifications.  If a customerelects not to accept delivery or defaults on a purchase order or commitment,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 deviated significantlyfrom 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 $93,000 and $83,000 ofdeferred tax assets at March 31, 2007, 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 it shouldbe subsequently determined that we can not, on a more likely than not basis,realize all or part of our deferred tax assets, if any, in the future, anadjustment 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 operations. 

Variability of Revenues and Results of Operation

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

17

**Forward Industries, Inc.**

 

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

All 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.

TRENDS IN RESULTS OF OPERATIONS
-  *Our customer base is becoming moreconcentrated.* In the 2007 Period,three customers, including their subsidiaries, affiliates, or their contractmanufacturers, accounted for 75% of our net sales.  In Fiscal 2006, four such customersaccounted for approximately 73% of our net sales.  Sales to the fourthcustomer, Bayer Healthcare LLC ("Bayer"), declined to an immaterial amountduring the 2007 Period as our sole "in-box" program with them concluded.  Additionally,Motorola accounted for all of our net sales in our OEM cell phone product line inthe 2007 Period as our Fiscal 2005-2006 "in-box" program for Nokia ended. InFiscal 2006, combined sales to Bayer and Nokia represented approximately $3.3million or 14% of our net sales, compared to $0.1 million and less than 1% inthe 2007 Period. Although we continue to pursue additional opportunities withthese two customers, as of March 31, 2007, we have not been selected toparticipate in any new "in-box" programs or successors to those that were concluded. 
-  *Revenue from our largestcustomer, Motorola, has trended down on a comparable quarter basis since thesecond quarter of Fiscal 2006 and we anticipate that this trend will continuethrough the third fiscal quarter of 2007 as well.*  We believe that the revenue trend in recent quartersis broadly the result of a cell phone launch cycle, which has seen certain of Motorola'svery successful models (for which we have supplied accessories in-box), afteran extended time on the market, make a pricing transition to mid- andlower-tier phones.  As part of the economics accompanying this transition, webelieve that the inclusion of accessories in-box has been reduced withconsequent revenue loss for us. Currently, we foresee no imminent new in-boxprograms or developments to reverse this trend.  We believe that sales underour license agreement with Motorola are being similarly affected as consumersare less inclined to purchase relatively high cost cases and other accessoriesfor mature, lower-tier phones. * *Notwithstanding this development, webelieve that our cell phone accessory supply relationship with Motorola remainsstrong and continue to work closely with Motorola to ensure we are consideredfor future in-box opportunities. 
-  *While our gross profit continuesto be pressured by a difficult pricing environment for both our cell phonecarry solution product line (OEM and licensed sales) and also our blood glucosecarry case product line, reduction in volume demand has become the mostsignificant factor in the level of gross profit, as noted in the previousparagraph.*  
-  *Our business incurred a lossthat would have been significantly larger but for the substantial level ofother income consisting primarily of interest income on cash balances. *Absent any significant reductions in selling, general,and administrative expense or improvements to our gross profit in the near term,we will continue to incur a loss from operations.

18
**
**Forward Industries, Inc.**

 
-  *Our inventory remains athistorically high levels primarily as a result of supporting hub agreementsentered into with two of our largest OEM customers.  We expect our inventory toremain at this higher level or perhaps trend slightly higher through Fiscal2007.*  Under these agreements, we arerequired to source and ship our products to our OEM customers' distributionhubs at multiple locations, but do not invoice the OEM customers until they withdraw our product from the hub for sale through their chain ofdistribution. The implementation of these arrangements negatively affects ourliquidity. In the 2007 Quarter, we entered into three new hub arrangements,bringing the total to six hub agreements.  We anticipate that in the course ofstocking these new hubs, inventory levels may trend higher than the levelexperienced in the 2007 Period unless our customers in whole or in part stockthe new hubs with product withdrawn from existing hubs. 
-  *Product manufacture, in manycases, has been outsourced by our OEM customers to contract manufacturing firmsin China and in Southeast Asia*. Suchfirms are performing manufacturing, assembly and product packaging functions,including the bundling of product accessories such as ours with the OEM customer's product. As a consequence, we are selling our carry solution products to the contractmanufacturing firm. In these cases, we invoice the contract manufacturing firmand not the OEM customer.  Therefore, it is the contract manufacturing firm'scredit to which we must look for payment in such cases and not that of our OEM"customer".  In addition, in recent periods APAC has accounted for asignificant percentage of our sales revenues, as seen in the tables below.   Webelieve that the 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

We incurred a netloss of $35,000 in the 2007 Quarter compared to net income of $64,000 in the 2006Quarter. The decrease in our results of operations was predominantly due tolower gross profit due to lower sales of cell phone products, as detailedbelow, combined with an increase in selling, general and administrativeexpenses primarily resulting from higher personnel costs.  The deterioration inoperating results was offset in part by an increase in other income due to higherinterest income resulting from higher average cash balances and higher yieldson those cash balances. Basic and diluted net loss per share for the 2007Quarter was $0.00 compared to basic and diluted net income per share of $0.01in the 2006 Quarter. 

*NetSales*

Net sales decreased $0.6 million or 9% to $5.9million in the 2007 Quarter compared to $6.5 million in the 2006 Quarter due todeclines of $0.8 million in sales of cell phone products and $0.1 million insales of other products, offset in part by a $0.3 million increase in sales ofcases for diabetic products.   Net sales of cell phone products declinedprimarily as a result of lower OEM volume demand from Motorola, our only OEMcell phone customer during the 2007 Quarter, as well as lower sales volumes oflicensed products to retailers and distributors under our license agreementwith Motorola. In the 2006 Quarter Nokia contributed $0.2 million to OEM cellphone sales but none in the 2007 Quarter.  The tables below set forth sales byproduct line and geographic location of our customers for the periods indicated.

 

 

19

**Forward Industries, Inc.**

 

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

** **

**Americas**

**EMEA**

**APAC**

Total

Cell Phone Products

$0.4	

$0.8	

$0.7	

$1.9	

Diabetic Products

0.7	

0.5	

2.0

3.2	

Other Products

0.7

--

0.1

0.8

**Total***

**$1.8**

**$1.3**

**$2.8**

**$5.9**

                               

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

** **

**Americas**

**EMEA**

**APAC**

Total

Cell Phone Products

$0.6	

$1.1	

$0.9	

$2.6	

Diabetic Products

1.2	

0.5	

1.2

2.9	

Other Products

0.6

--

0.3

0.9

**Total***

**$2.4**

**$1.6**

**$2.4**

**$6.5**

* 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 consist of OEM "in-box"sales to Motorola and (in the 2006 Quarter only) Nokia and sales under ourlicense agreements. 

Total sales of cellphone products decreased $0.8 million, or 30%, to $1.9 million in the 2007Quarter from $2.6 million in the 2006 Quarter. Sales to Motorola, our only OEMcell phone customer for the 2007 Quarter, decreased $0.3 million from the 2006Quarter due to reduced demand.  Most OEM sales to Motorola related to two "in-box"programs (consisting of cases and other accessories) that have continued fromFiscal 2005 and 2006, but at lower levels than in the 2006 Quarter.  During the2007 Quarter, we experienced no demand from Nokia, which was our only other significantOEM cell phone customer in Fiscal 2006, representing approximately 7% of ourtotal sales for that period.

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

Sales of carrysolutions for cell phone products represented approximately 32% of our totalnet sales in the 2007 Quarter compared to 40% 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 change in the overall relationship might affect OEMsales to Motorola, if at all.  See "Part II. Item 1A. Risk Factors" ofthis Quarterly Report on Form 10-Q: "*Our license agreement with Motorolaexpires on December 31, 2007, and the failure to extend or renew this agreementwould have a material, adverse effect on our results of operations and financialcondition"*.

*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 $0.3 million, or 10%, to $3.2million in the 2007 Quarter from $2.9 million in the 2006 Quarter. Sales toLifescan, our largest OEM customer for these cases, increased $0.8 million, or 68%,to $2.0 million in the 2007 Quarter compared to $1.2 million in the 2006Quarter resulting primarily from increased sales in an existing in-box programcontinued from Fiscal 2006 and from the first time revenue contribution from anew program launched in the 2007 Quarter. The increases in these two programsmore than offset revenue declines in two other in-box programs with Lifescan. Inaddition, sales to Abbott increased $0.1 million, due to increased volumes atlower margins, and sales to Roche increased $0.1 million.  These higher saleswere offset, in part, by the decline in sales to Bayer of approximately $0.8million resulting from the winding down of the one substantial in-box programfrom Fiscal 2006.

Sales of carrying casesfor blood glucose monitoring kits represented 55% of our total net sales in the2007 Quarter compared to 45% 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 ofother products decreased $0.1 million, or 13%, to $0.8 million in the 2007Quarter from $0.9 million in the 2006 Quarter due primarily to the winding downof a program with a significant customer.

*GrossProfit*

Grossprofit decreased $0.1 million, or 8%, to $1.3 million in the 2007 Quarter from$1.4 million in the 2006 Quarter primarily as a result of lower sales revenues dueto lower demand.  Reduced prices received from customers on sales was a lesserfactor. Our gross profit percentage was approximately 22% for the 2007 and 2006Quarters.

*Selling,General, and Administrative Expenses*

Selling, general, andadministrative expenses increased 7% to $1.6 million in the 2007 Quarter comparedto $1.5 million in the 2006 Quarter. Increases in personnel expenses of $0.1million, part of which increase was due to one-time factors, were offset in partby decreases in royalty and commission (due to lower sales of licensedproducts), and several other smaller components of selling, general, andadministrative expenses.

21

**Forward Industries, Inc.**

*Other Income(Expense)*

Other income increased$50,000 to $250,000 in the 2007 Quarter from $200,000 in the 2006 Quarter dueto higher interest income resulting from higher average rates on higher averagecash balances. Other income accounted for all of our pretax income in the 2007and 2006 Quarters, as we incurred losses from operations in both periods.

*Pretax (Loss)Income*

Pretax (loss) income decreased$160,000 or 134% to approximately $(40,000) in the 2007 Quarter from $120,000 inthe 2006 Quarter as a result of the changes as described above.

*IncomeTaxes*

We recorded a benefitfrom income taxes of $7,000 in the 2007 Quarter compared to a provision forincome taxes of $60,000 in the 2006 Quarter due to lower taxable income.  Oureffective tax  rate does not approximate the United States statutory federalincome tax rate primarily due to tax rate differentials in respect of state andforeign taxes, to which income recorded by Forward Innovations is subject. The (benefit)provision consists primarily of estimated U.S. federal income taxes, and to alesser extent, current state and foreign income taxes.  See Note 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 March 31, 2007, those cumulative earnings wereapproximately $5.1 million.  

Results of Operations for the 2007 PERIOD compared to the 2006PERIOD

Net income in the2007 Period was $0.3 million compared to net income of $0.8 million in the 2006Period, a decrease of $0.5 million, or 60%.  The decrease was primarily due to a$0.8 million, or 20%, reduction in gross profit, due primarily to lower salesof OEM cell phone carry solution products, and to a lesser extent a $0.4million, or 13%, increase in selling, general and administrative expenses,primarily resulting from higher professional fees and personnel costs.  Theseresults were offset by an increase in our other income and a decrease in ourprovision for income taxes. Basic and diluted earnings per share were $0.04 forthe 2007 Period, compared to basic and diluted earnings per share of $0.11 and$0.10, respectively, for the 2006 Period. The decrease in earnings per share inthe 2007 Period was due to the decrease in net income.

*NetSales*

Net sales decreased $1.8 million or 12% to $13.3million in the 2007 Period compared to $15.1 million in the 2006 Period due todeclines of $2.4 million in sales of OEM cell phone products, and $0.3 millionin sales of other products. These declines were offset in part by a $0.7 millionincrease in sales of cases for diabetic products and a $0.1 million increase insales of licensed products under the Motorola license agreement. Net sales ofOEM cell phone carry solution products were lower due to a $1.6 million declinein demand from our sole OEM cell phone customer, Motorola, during the 2007Period combined with the absence of contribution by Nokia in the 2007 Period,compared to a contribution to revenues by Nokia of $0.9 million in the 2006Period.  The tables below set forth approximate sales by product line andgeographic location of our customers for the periods indicated.

22

**Forward Industries, Inc.**

 

**Net Sales for 2007 Period	6 Months ended March 31, 2007	(millions of dollars)**

** **

**Americas**

**EMEA**

**APAC**

Total

Cell Phone Products

$1.5	

$2.1	

$2.5	

$6.1	

Diabetic Products

1.5	

0.8	

3.4

5.7	

Other Products

1.3

--

0.2

1.5

**Total***

**$4.3**

**$2.9**

**$6.1**

**$13.3**

                               

**Net Sales for 2006 Period 	6 Months ended March 31, 2006	(millions of dollars)**

** **

**Americas**

**EMEA**

**APAC**

Total

Cell Phone Products

$2.2	

$2.5	

$3.6	

$8.3	

Diabetic Products

2.3	

0.8	

2.0

5.0	

Other Products

1.4

--

0.4

1.8

**Total***

**$5.8**

**$3.3**

**$6.1**

**$15.1**

* Tables may not total due to rounding.

*Cell Phone Product Sales*

Total sales of cellphone products decreased $2.3 million, or 27%, to $6.1 million in the 2007Period from $8.3 million in the 2006 Period. Sales to Motorola, our only OEMcell phone customer for the 2007 Period, decreased $1.6 million from the 2006Period due to an overall reduction in demand for our products. The majority ofOEM sales to Motorola related to two "in-box" programs (consisting of cases andother accessories) that have continued from Fiscal 2005-2006.  The rest of theperiod-over-period decline resulted from the absence of revenue contribution inthe 2007 Period from Nokia, which accounted for $0.9 million in revenues in the2006 Period. Nokia represented 6% of our total sales in the 2006 Period. 

Sales to third partydistributors and retailers under our license agreement with Motorola totaled$1.5 million in the 2007 Period compared to $1.4 million in the 2006 Period, anincrease of $0.1 million, or 7%.  As noted above in the discussion of the 2007Quarter, licensed sales weakened in the second half of the 2007 Period. 

Sales of carrysolutions for cell phone products represented approximately 46% of our totalnet sales in the 2007 Period compared to 55% in 2006 Period.

See the discussion ofthe 2007 Quarter Compared to the 2006 Quarter for information relating to thescheduled expiration of the license agreement with Motorola. 

*Diabetic Product Sales*

Sales of cases for bloodglucose monitoring kits increased $0.7 million, or 13%, to $5.7 million in the2007 Period from $5.0 million in the 2006 Period. Sales to Lifescan, ourlargest OEM customer for these cases, were $1.4 million, or 69%, higher in the2007 Period compared to the 2006 Period resulting from the contribution torevenues of a new in-box program and increased sales from an in-box program thathas continued from Fiscal 2006. The higher sales to Lifescan were offset, inpart, by a decline in sales to Bayer of approximately $1.2 million. Sales toAbbott Labs, our second largest customer for these cases, increased $0.3million, or 21%, in the 2007 Period, to $2.0 million from $1.6 million in the2006 Period. Fluctuations in diabetic product sales to other customers wereimmaterial.

Sales of carrying casesfor blood glucose monitoring kits represented 43% of our total net sales in the2007 Period compared to 33% of our total net sales in the 2006 Period.

 

23

**Forward Industries, Inc.**

 

*Other Product Sales*

Sales of other productsdecreased approximately $0.3 million, or 15%, to $1.5 million in the 2007Period from $1.7 million in the 2006 Period due primarily to the winding downof a program with a significant customer in this product line.

*GrossProfit*

Grossprofit decreased $0.8 million, or 20%, to $3.3 million in the 2007 Period from$4.1 million in the 2006 Period primarily as a result of lower sales revenues dueto lower demand and, to a lesser extent, pricing pressures. Gross profit as apercentage of net sales decreased to 24.5% in the 2007 Period from 26.8% in the2006 Period due to product pricing compression, offset in part by the declinesin the 2007 Quarter of freight, duties, and customs and Hong Kong costs aspercentages of sales. 

*Selling,General, and Administrative Expenses*

Selling, general, andadministrative expenses increased approximately $0.4 million to $3.3 million inthe 2007 Period from $3.0 million in the 2006 Period. This increase was due to$250,000 of increased legal and other professional fees incurred in the courseof defending the purported class action litigation, $140,000 in increasedpersonnel expenses, and to a lesser extent higher other general andadministrative expenses.

*Other Income(Expense)*

Other income increased 50%to $0.5 million in the 2007 Period compared to $0.3 million in the 2006 Perioddue to higher interest income due to higher average rates on higher averagecash balances. Other income accounted for all of our pre-tax income in the 2007Period compared to 23% of pre-tax income in the 2006 Period.  

*Pre-taxIncome*

Pre-tax income decreased$1.0 million or 71% to $0.4 million in the 2007 Period from $1.4 million in the2006 Period as a result of the changes as described above.

*IncomeTaxes*

Our effective incometax rate was 20% in the 2007 Period compared to 41% in 2006 Period as a resultof the relative contribution of taxable income from the EMEA Region, which istaxed at a lower rate than United States taxable income, which was significantlylower in the 2007 Period compared to the 2006 Period.  This had adisproportionate impact on an overall smaller taxable income base.  Oureffective tax  rate does not approximate the United States statutory federalincome tax rate primarily due to tax rate differentials in respect of state andforeign taxes, to which income recorded by Forward Innovations is subject. Provision for income taxes decreased $0.5 million in the 2007 Period toapproximately $0.1 million compared to $0.6 million in the 2006 Period due tolower taxable income.  The provision consists primarily of estimated U.S. federal income taxes, and to a lesser extent, current state and foreign income taxes. See Note 6 to the Financial Statements.

We considerthe earnings of our foreign subsidiaries indefinitely invested and, accordingly,have not recorded a provision for U.S. income taxes on their un-repatriatedearnings.  At March 31, 2007, those cumulative earnings were approximately $5.1million. 

LIQUIDITY AND CAPITAL RESOURCES

During the 2007 Period,we generated $2.2 million of cash from operations compared to $4.3 million inthe 2006 Period. Our operating cash flows in the 2007 Period consisted of netincome of $0.3 million, increased by $0.2 million for non-cash items, and $1.7million for net changes in working capital items, consisting primarily of changesin accounts receivable and inventories of $2.3 million and $0.1 million,respectively, offset, in part, by changes in accrued expenses and other currentliabilities and prepaid expenses of $0.4 million and $0.3 million,respectively. The change in accounts receivable and inventory in the 2007 Periodis attributable to the lower levels of sales in the 2007 Period. The change inaccrued expenses is primarily a result of remuneration and taxes that wereaccrued in Fiscal 2006 that were subsequently paid in the 2007 Period. No suchaccruals were required as of March 31, 2007. The change in prepaid expenses andother current assets is primarily due to an increase in estimated tax payments madefor the 2007 Fiscal year and customs and duties payments made in the course ofshipping our products for which we expect to be reimbursed.

24

**Forward Industries, Inc.**

 

Our operating cash flowsin the 2006 Period consisted of net income of $0.8 million, increased by $0.7million 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 $7.3 million, which was offset, in part, by changes in inventoriesand accounts payable, and accrued expenses of $1.6 million, $1.6 million, and $1.2million, respectively.

Investing activities used$15,000 in the 2007 Period for purchases of property, plant and equipment,primarily computer and telecommunications hardware and software. In the 2006 Period,net investing activities generated $65,000 from the sale of marketable equity securitiesand used $11,000 for purchases of property, plant and equipment, primarilycomputer and telecommunications hardware and software. 

There were no financingactivities during the 2007 Period. In the 2006 Period, net financing activitiesgenerated $88,000 in cash from the issuance of common stock upon the exerciseof stock options to purchase approximately 27,900 shares of common stock underour 1996 Stock Incentive Plan.

At March 31, 2007, our current ratio (current assets divided by current liabilities) was 11.78; ourquick ratio (current assets less inventories divided by current liabilities) was10.86; and our working capital (current assets less current liabilities) was $25.1million.  As of such date, we had no short or long-term debt outstanding.

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 accountspayable arising in the ordinary course of business, the most significant ofwhich arise when our customers place orders and we order from our suppliers;and our commitments under our license agreement with Motorola. Historically,our sources of liquidity have been adequate to satisfy working capitalrequirements arising in the ordinary course of business. We anticipate that ourliquidity and financial resources for the ensuing fiscal year will be adequateto manage our financial requirements.

In February 2007,Forward and Koszegi renewed their credit facility with a U.S. bank thatprovides for a committed line of credit in the maximum amount of $3.0 million,including a $1.5 million sub-limit for letters of credit, expiring February2008. Forward and Koszegi are required to eliminate borrowings for thirtyconsecutive days during the term of the facility and are required to maintaincertain financial covenants including the  maintenance of current and tangiblenet worth 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 March 31, 2007, 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 March 31, 2007). At March 31, 2007 Forward Innovations is contingently liable to the bank under aletter of credit issued on its behalf in the amount of €224,000 (approximately$300,000) in favor of Forward Innovations' freight forwarder and customs agent in connection with its logistics operations in The Netherlands.  The effect of theissuance of the letter of credit is to reduce the availability of the creditline in an amount equal to the face amount of the letter of credit.  See Note 4to the unaudited consolidated Financial Statements set forth in Item 1.

25

**Forward Industries, Inc.**

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 March 31, 2007, we had repurchased an aggregate of 102,600 shares at a cost ofapproximately $0.2 million, but none during the 2007 or 2006 Periods.

CONTRACTUAL OBLIGATIONS ANDCOMMERCIAL COMMITMENTS

The Company has entered into various contractualobligations and commercial commitments that, under accounting principlesgenerally accepted in the United States, are not recorded as a liability.   Thefollowing is a summary of such contractual cash obligations as of March 31, 2007:

**Contractual  Obligation or Commitment**

**Apr 07 - Mar 08**

**Apr 08- Mar 10**

**Apr 10 - Mar 12**

**Thereafter**

Employment & Consulting Agreements

$225,000

$          --

$          --

$         --

Operating Leases

168,000

295,000

323,000

29,000

License Agreements**

267,000

--

--

--

**Totals**

**$660,000**

**$295,000**

**$323,000**

**    $29,000**

**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.  

 

 

26
****
**Forward Industries, Inc.**

**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 materially due to their short term nature and are not subject tointerest rate risks; however, the income we earn on our invested cash willfluctuate with changes 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 March 31, 2007, 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*

Asa result of our global operating activities, we are exposed to changes inforeign currency exchange rates that may adversely affect our results ofoperations and financial condition. We actively manage this foreign currencyexchange exposure through our regular operating activities. Our exposure isconcentrated in the Euro, Swiss Franc, and Hong Kong dollar. In Fiscal 2007,approximately 11% of our sales were denominated in Euros.  In addition, certainoperating expenses of our Swiss subsidiary are paid in Euros or Swiss Francs,whereas, certain operating expenses of our Hong Kong subsidiary are paid in the Hong Kong dollar. Because we have determined that the US dollar is thefunctional currency of our foreign subsidiaries, the gains and losses resultingfrom converting these transactions to the U.S. dollar for financial statementpresentation purposes are included in our results of operations as a componentof our net income (loss). See "Notes to Consolidated Financial Statements, Note2 -Accounting Policies - Foreign Currency Transactions" for a description ofour foreign currency accounting policies.

Weestimate that an adverse movement of 20% in these foreign currencies exchangerates would have decreased our results of operations by approximately $500,000,before taxes, for the six-month periods ended March 31, 2007.

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. dollar fluctuatesour suppliers are likely to change the prices they charge to us furthersubjecting our operating results to foreign currency risk.

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

 

27

**Forward Industries, Inc.**

**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 Rule13a-15(e)) under the Exchange Act) that is designed to ensure that informationrequired to be disclosed by the Company in the reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported, withinthe time periods specified in the Commission's rules and forms. Disclosurecontrols and procedures include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed by an issuer inthe reports that it files or submits under the Exchange Act is accumulated andcommunicated to the issuer's management, including its principal executiveofficer or officers and principal financial officer or officers, or personsperforming similar functions, as appropriate to allow timely decisionsregarding required disclosure.

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

28

**Forward Industries, Inc.**

**PART II.   OTHER INFORMATION**

**Item 1. Legal Proceedings**

From time to time, we maybecome a party to legal actions or proceedings in the ordinary course of ourbusiness.  As of March 31, 2007, except as described below, there were no suchactions or proceedings, either individually or in the aggregate, that, ifdecided 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 to February 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 state substantiallyidentical claims. We filed a motion to dismiss the complaint, as amended, inits entirety for failure to satisfy the pleading requirements of the PrivateSecurities Litigation Reform Act of 1995 and Plaintiff's attorneys have filed aresponsive motion and brief.  We filed our brief in response in February 2007. The parties to this action anticipate attendance at a May 2007 hearing calledby the judge assigned to hear this case at which a schedule for discovery andmotion practice may be proposed.

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.* 

29

**Forward Industries, Inc.**

 

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.

*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 and a third customeraccounted for 75% of net sales in the 2007 Period; the loss of, or materialreduction in orders from, any of these customers would materially and adverselyaffect our results of operations and financial condition.*

The predominant percentage of our salesrevenues is concentrated in three large OEM customers.  In the 2007 Period,direct sales to Motorola, together with its international affiliates, accountedfor approximately 35% of our net sales, or approximately $4.6 million (which amountexcludes approximately 11% of our net sales, or $1.5 million, of products underour license agreement with Motorola).  Lifescan accounted for approximately 25%of our net sales, or approximately $3.3 million. Abbott Labs accounted forapproximately 15% of our net sales or $2.0 million. The loss of any of these threekey customers or one additional OEM customer who accounted for 15%, of netsales in the 2007 Period (whether as a result of such customers purchasingtheir carry solution requirements from another vendor, deciding to manufacturetheir own carrying cases or eliminating the inclusion of our carrying caseswith their 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 oursales in Fiscal 2006 declined to an immaterial amount during the 2007 Period asour sole "in-box" program with them concluded.

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 71%and 74% of our accounts receivable at March 31, 2007 and September 30, 2006.The failure to receive or collect such amounts when, and as, due could have amaterial adverse effect on our financial condition, liquidity, and results ofoperations.

*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 infuture periods.

*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.*

30

**Forward Industries, Inc.**

 

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.

**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**

Inconnection with its review of various corporate governance matters, the Companyhas decided to change the date of its 2008 Annual Meeting of Shareholders andfuture meetings by more than 30 days from the 2007 Annual Meeting Date (May 2,2007), in order to hold its annual meetings closer in time to its fiscal yearend of September 30.

The AnnualMeeting of Shareholders in 2008 (in respect of the fiscal year ending September 30, 2007) will be held on February 6, 2008.  In our proxy statement released inMarch 2007, we indicated that our 2008 annual meeting would be held in April2008-this should now be disregarded.

Shareholderproposals intended to be considered for inclusion in the proxy statement andform of proxy for presentation at the 2008 annual meeting of shareholders inaccordance with the procedures set forth in Rule 14a-8 under the Exchange Actmust be sent to our offices at 1801 Green Road, Suite E, Pompano Beach, Florida33064, addressed to the attention of our Corporate Secretary/Annual Meeting,and must be received not later than October 2, 2007.  All proposals must complywith applicable Securities and Exchange Commission rules and regulations.

Outside theprocesses of Rule 14a-8 under the Exchange Act, our by-laws establish anadvance notice procedure for shareholders to make nominations of candidates forelection of director or to bring other business before our annual meeting.  Ingeneral, under these procedures, a shareholder that proposes to nominate acandidate for director or propose other business at an annual meeting ofshareholders must give us written notice of such  nomination  or  proposal  notless  than 60 days and not more than 90 days prior to the anniversary date ofthe prior year's annual meeting.  However, if the meeting date in 2008 changes by 30days or more from the 2007 meeting date, proposals must be submitted by thelater of 60 days prior to such changed date in 2008 or the tenth day followingthe date such changed date is first publicly announced or disclosed.   Therefore,the advance notice date for submissions under our by-laws is December 8, 2007.   

**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

31

**Forward Industries, Inc.**

 

**SIGNATURES**

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

Dated:  May 1, 2007

FORWARDINDUSTRIES, INC.              (Registrant)

 

By:/s/ Jerome E. Ball                             JeromeE. BallChairmanand Chief Executive Officer(PrincipalExecutive Officer)

By:/s/Douglas W. Sabra                      DouglasW. SabraVicePresident, Chief Financial Officer and(PrincipalFinancial and Accounting Officer)

                                                                               

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