Forward Industries Inc.
Annual Report 2007

Plain-text annual report

Morningstar® Document Research℠ FORM 10-KFORWARD INDUSTRIES INC - FORDFiled: November 29, 2007 (period: September 30, 2007)Annual report with a comprehensive overview of the companyThe information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The userassumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot belimited or excluded by applicable law. Past financial performance is no guarantee of future results. UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K(Mark One)[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended September 30, 2007 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission File Number: 0-6669FORWARD INDUSTRIES, INC.(Exact name of registrant as specified in its charter) New York13-1950672 (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 zip code)(954) 419-9544(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:NoneSecurities registered pursuant to Section 12(g) of the Act:Common Stock, $0.01 par value per shareIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.[ ] Yes [ X ] NoIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.[ ] Yes [ X ] NoIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. [ X ] Yes [ ] NoIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the bestof Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form10-K. [X]Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (see definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act).[ ] Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filerIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] NoThe aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equitywas last sold, as of the last business day of the Registrant’s most recently completed second fiscal quarter was: $29,963,694.As of November 15, 2007, 7,855,439 shares of the Registrant’s common stock were outstanding. 1 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc.Table of Contents PART IPage No.Item 1.Business4 Item 1A.Risk Factors12 Item 1B.Unresolved Staff Comments18 Item 2.Properties18 Item 3.Legal Proceedings19 Item 4.Submission of Matters to a vote of Security Holders19 PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities19 Item 6.Selected Financial Data21 Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations22 Item 7A.Quantitative and Qualitative Disclosures About Market Risk34 Item 8.Financial Statements and Supplementary Data35 Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure35 Item 9A.Controls and Procedures35 Item 9B.Other Information35 PART III Item 10.Directors, Executive Officers and Corporate Governance35 Item 11.Executive Compensation36 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters36 Item 13.Certain Relationships and Related Transactions, and Director Independence36 Item 14.Principal Accountant Fees and Services36 PART IV Item 15.Exhibits and Financial Statement Schedules36 Signatures59 2 Note Regarding Use of Certain Terms In this Annual Report on Form 10-K, unless the context otherwise requires, the terms "we", "our", and the "Company" refer to Forward Industries,Inc., a New York corporation, together with its consolidated subsidiaries; “Forward” or “Forward Industries” refers to Forward Industries, Inc.;“common stock” refers to the common stock, $.01 par value per share, of Forward Industries, Inc.; "Koszegi" refers to Forward Industries’ whollyowned 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 Forward Industries’ wholly owned subsidiary Forward Innovations GmbH, aSwiss corporation; “GAAP” refers to accounting principles generally accepted in the United States; “Commission” refers to the United StatesSecurities and Exchange Commission; “Exchange Act” refers to the United States Securities Exchange Act of 1934; “Fiscal 2007” refers to our fiscalyear ended September 30, 2007; “Fiscal 2006” refers to our fiscal year ended September 30, 2006; “Fiscal 2005” refers to our fiscal year endedSource: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.September 30, 2005; “EMEA Region” refers to the geographic area encompassing Europe, the Middle East and Africa; “APAC Region” refers to theAsia Pacific geographic area encompassing Australia, New Zealand, Hong Kong, Taiwan, China, South Korea, Japan, Singapore, Malaysia,Thailand, Indonesia, India, the Philippines and Vietnam; and “Americas” refers to the geographic area encompassing North, Central, and SouthAmerica. 3 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. PART IITEM 1. BUSINESSGeneralWe design, market, and distribute carry solutions for hand held consumer electronics products, including soft-sided carrying cases, bags, clips, handstraps, decorative face plates, and other accessories for cellular telephones, medical monitoring and diagnostic kits, cameras, and other consumer electronicproducts. We sell these products in two primary customer markets. Our principal customer market is original equipment manufacturers, or “OEMs”, ofthese consumer electronic products, who ship our carry solution products as accessories “in box” with their product offerings and to an increasing extent thecontract manufacturing firms of these OEM customers. In Fiscal 2007, 2006, and 2005, sales to OEM customers (or their contract manufacturers) accountedfor approximately 91%, 89%, and 97% of our net sales, respectively.Our second, and much smaller, customer market consists of wholesalers and retailers in the cell phone products aftermarket to whom we primarily sellcarry solutions under a non-exclusive license from Motorola, Inc. Under the Motorola license, we have been granted the rights to market such carry solutionsbearing Motorola’s trademarks in the EMEA Region and in the APAC Region. In Fiscal 2007, Fiscal 2006, and Fiscal 2005 sales of aftermarket productsaccounted for approximately 9%, 11%, and 3% of our revenues, respectively.Our suppliers custom manufacture our carrying cases and related products to our order based on our designs and know-how and to our customers’specifications. Typically, we ship these products to our OEM customers, or to their contract manufacturers, to be packaged with their consumer productsprior to distribution and sale. In the case of sale of carry solutions to our aftermarket customers, predominantly under license, we ship these as stand alonestock units to wholesalers and retailers. We do not manufacture any of the products that we sell and distribute.Corporate History Forward Industries, Inc. was incorporated in 1961 under the laws of the State of New York. Until 1989, our primary business was the manufactureand distribution of advertising specialty and promotional products. In 1989, we acquired Koszegi Industries, Inc., or "Koszegi", an Indiana corporation thatmanufactured soft-sided carrying cases at its South Bend, Indiana, facility. The carrying case business progressively increased to the point where it becamethe predominant part of our business. In September 1997, we sold the assets relating to the production of advertising specialty and promotional products,and ceased operating in that business segment.In May 1994, we formed Koszegi Asia Ltd., or “Koszegi Asia”, as a wholly owned, Hong Kong-based, subsidiary of Forward Industries to facilitate amore nimble and robust carrying case procurement and quality control infrastructure, and to further enhance our foreign sourcing capabilities. With KoszegiAsia’s ability to source quality cases in China on short lead times, we determined that our domestic production capability was unnecessary, and we nowsource all our product supply from Chinese suppliers. See "Product Supply".In recent years we have focused on strengthening our sales and distribution network, and commercial relationships with our key OEM customers. Wehave been responsive to our OEM customers’ distribution requirements. As of September 30, 2007, we have entered into seven distribution hub agreementswith two of our OEM customers at their request to improve their tracking and control of accessory products packaged “in box” with their consumerelectronics. During Fiscal 2006, we began to modify our quality control infrastructure by contracting part of this function away from our Hong Kongdistribution and quality control facility directly to a third party provider. The predominant portion of our quality control function is now conducted in thismanner. In addition, we have sought to strengthen our presence in secondary markets. In May 2001, we formed Forward Innovations GmbH, a wholly ownedSwiss subsidiary of Forward Industries, or “Forward Innovations”, to facilitate distribution of licensed products as well as to further develop our OEMEuropean business presence. Forward Innovations has allowed us to better serve our European customers. See “Marketing and Distribution”. 4 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. ProductsThrough our wholly owned subsidiaries, Koszegi and Forward Innovations, we design and market to our customers’ orders, carry solutions for handheld consumer electronics, including soft-sided carrying cases, bags, clips, hand straps, decorative faceplates, and other accessories made of leather, nylon,vinyl, plastic, PVC and other synthetic fabrics. Our products are used by consumers for carrying or transporting portable electronic products such as cellulartelephones, blood glucose monitoring kits, cameras, and other consumer hand held electronic devices. Our carrying cases are designed to enable these devicesto be stowed in a handbag, briefcase, or backpack, clipped to a belt, or carried in a pocket.Cases for Cellular HandsetsWe sell carrying cases and related accessory products for cellular telephone handsets to OEM handset suppliers and to retailers and wholesalers ofcellular phone products and related accessories (typically bearing our licensor’s trademarks under our license agreements with them). These products includecarry cases for cell phone handsets, cases for handset camera attachments, handset plastic belt clips, carrying case straps and bags, decorative faceplates,wrist straps, digital display cleaning cloths, and other accessory products. Our selling prices for these products vary widely, depending on the specificproduct, terms of the order, quantity ordered, and distribution channel, and generally range from $0.20 or less to $13.00 per unit, with the higher prices in therange generally occurring in the case of licensed product sales. The predominant percentage of products sold to OEM customers as well as under license sellsat the low or lower-middle end of this price range. In the case of sales to OEM customers and their contract manufacturers, the manufacturer or its contractsupplier packages our cases or other accessories “in box” as a custom accessory for the cellular handset. In the case of sales of aftermarket products, we selland ship these products as separately packaged, aftermarket accessories to third party distributors primarily under our license agreement with Motorola.Cases for Medical KitsWe sell our medical monitoring and diagnostic kit carrying cases directly to OEMs (or their contract manufacturers) of electronic blood glucosemonitoring kits for personal use by diabetics. We typically sell these cases at prices ranging from $0.50 to $9.00 per unit. The predominant percentage ofproducts sells at the low to middle area of this price range. The OEM customer or its contract supplier packages the cases “in box” as a custom accessory forits blood glucose testing and monitoring kits. The kits typically include a small, electronic blood glucose monitor, testing strips, lancets for drawing a drop ofblood and our carrying case, customized with the manufacturer’s logo and designed to fit and secure the glucose monitor, testing strips and lancets in separatestraps, pouches, and holders. We believe that users of these monitoring kits may purchase new kits as frequently as every two years, depending on advancesmade in the blood glucose measurement technology and functionality. As the kits and technology change, our carrying case designs change to accommodatethe changes in size, shape and layout of the electronic monitoring device, strips and lancet.Other Carrying Case ProductsWe also sell carrying cases, belt clips, and other carry and storage solutions for a diverse array of other portable electronic and other products,including cases for cameras, MP3 players, retail bar code scanners, and a variety of other products. Our selling prices for these products also vary across abroad range, depending on the size and nature of the product for which we design the carry solution.Product DevelopmentIn our OEM business we typically receive invitations to submit product designs and receive product orders in connection with our customer’sintroduction and rollout to market of a new product which the customer has determined to accessorize and customize with our products. Our OEM customersprovide us with the desired functionality, size and other basic specifications for the carrying case or other product, including the OEM’s identifying logoimprint on the product. Our in-house design and production staff develops detailed design options and more detailed product specifications for our customer’sevaluation, and in conjunction with our customer, we then engage in the process of refinement of design and specifications. Working with our suppliers, wefurnish our customer with product samples. Once our customer approves a product sample for commercial introduction and order, we work with oursuppliers to ensure conformity to the definitive product samples and specifications. Manufacture and delivery of products in production quantities is thencoordinated with our OEM customer’s manufacturing and shipment schedules so our carry solutions can be placed “in box” with the consumer electronicproduct. 5 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. In the case of sales of branded products pursuant to our license agreements, we market carrying cases and related accessory products for cell phonehandsets based on our own designs or designs furnished by our licensor. Our in-house design staff develops detailed design options and productspecifications for the licensor’s evaluation. We work with our licensors to refine design specifications and subsequently submit production samples forapproval. Upon approval, we offer such products to retailers and other distributors in the licensed territory. Licensed products have, to date, beenmanufactured for both inventory and customer order. Research and development costs are not material to our business. From time to time we file applications for and secure copyrights and other statutoryintellectual property protection for carry case and other accessory designs we develop for sale to our customers (or to a much lesser extent for our ownportfolio), but generally intellectual property protection is not significant to our business.Marketing, Distribution, and SalesGeographic Sales DistributionWe sell our products globally. The approximate percentages of net sales to customers by their geographic location for Fiscal 2007, Fiscal 2006 andFiscal 2005 are as follows: Fiscal Years Ended September 30,Geographic Location:2007 2006 2005APAC50% 44% 36%Americas30% 34% 23%EMEA20% 22% 41%Totals100% 100% 100% The variability of percentages of sales to customers by geographic location during these periods, and in particular the increasing importance of the AsiaPacific region, is attributable to fluctuations in order flow from, and the location of, our large OEM customers and, increasingly, the fact that, in certaincases, our OEM customers have outsourced product manufacture to contract manufacturers located in China or elsewhere in Asia. In the case of outsourcingto Asian contract manufacturers, we ship product to, and it is packaged “in box” at, such contract manufacturing facility. If payment to us is due from thecontract manufacturer, we identify the sale to its geographic location rather than that of the OEM customer for whom the contract manufacturer is supplyingproduct together with our cases. See Note 13 to the consolidated financial statements included in Item 8 of this Annual Report.Channels of DistributionWe have two channels of distribution for our products: first, direct to our OEM customers, which package our carry solutions products “in box” withtheir products, although increasingly, we may ship directly to the OEM customer’s contract manufacturer, which similarly packages our products “in box”on behalf of the OEM customer. The second distribution channel is to distributors and retailers to whom we ship our carry solution product accessories(typically bearing our licensor’s trademarks under our license agreements with them), which are separately packaged as stand alone stock units, for sale in theaftermarket. Currently, sales under our Motorola license constitute substantially all sales in the aftermarket channel. These two distribution channelsaccounted for approximately the following percentages of our net sales in Fiscal 2007, Fiscal 2006 and Fiscal 2005: 6 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. Fiscal Year EndedDistribution Channels:2007 2006 2005OEM91% 89% 97%Aftermarket9% 11% 3%Totals100% 100% 100%The Motorola license expires on December 31, 2007. See the information under the caption “Motorola License” below and under “Risk Factors” in Item1A of this Annual Report: “We have to date been unable to conclude a new license agreement with Motorola; we are unable to predict if or when a newor extended agreement will be offered on terms acceptable to us; the absence of a renewal or extended license could have a material and adverse effecton our results of operations and financial condition.”OEM Product SalesOEM products sales for cellular phone handsets, blood glucose monitors, and other products (i.e., other than cases and accessories for blood glucosemonitoring kits and cellular phone handsets) accounted for approximately the following percentages of total net sales in Fiscal 2007, Fiscal 2006 and Fiscal2005: Fiscal Year EndedOEM Product Sales:2007 2006 2005Cell Phone Products27% 40% 67%Diabetic Products49% 37% 23%Other Products15% 12% 7%Totals91% 89% 97%Of our approximately 180 active customers, three customers, including their subsidiaries, affiliates, and contract manufacturers, accounted forapproximately 72% of our net sales in Fiscal 2007. Our principal OEM customers include Lifescan, Inc. (“Lifescan”), a subsidiary of Johnson and Johnson,for carrying cases for diabetic monitoring kits, Motorola Inc. (together with its respective international affiliates, "Motorola") for cellular telephone carryingcases and accessories, and Abbott Laboratories (“Abbott”) for diabetic monitoring kits. A fourth customer, Nokia, has contributed significantly to our netsales in recent fiscal years, but such sales have declined to immaterial or insignificant levels. These customers package our cases or other accessories “inbox” with their branded products or use them as promotional items. The approximate percentages of net sales contributed by each of these four customers forFiscal 2007, Fiscal 2006 and Fiscal 2005 are as follows: Fiscal Year EndedCustomer:2007 2006 2005Lifescan32% 17% 12%Motorola *27% 37% 56%Abbott13% 11% 4%Nokia--% 3% 11%Totals72% 68% 83%* Excludes sales of Motorola-branded products to third parties under our license agreement.The loss of any of the above named customers could have a material adverse effect on our business, results of operations and financial condition. SeeItem 1A. “Risk Factors— Our business is characterized by a high degree of customer concentration. Our three largest customers accounted forapproximately 72%, 65% and 79% of net sales in Fiscal 2007, 2006 and 2005, respectively; the loss of, or material reduction in orders from, any ofthese customers could materially and adversely affect our results of operations and financial condition” and “Our business could suffer if the servicesof any of the key personnel we rely on were lost to us.” 7 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. Aftermarket Product SalesWe have entered into non-exclusive licenses with Motorola and SAGEM, each of which grants us the right to sell cell phone carry cases and otheraccessories branded with their respective trademarks in designated territories. The SAGEM license is not material to our revenue or expenses.Aftermarket product sales predominantly consist of sales to third parties of licensed products under the Motorola agreement. These sales accounted forapproximately 9%, 10%, and 3% of our net sales in Fiscal 2007, 2006, and 2005 respectively. We look to diversify aftermarket channels in the near futureby development of our own line of products for sale to distributors and retailers or other initiatives. See the information under “Motorola License”, below, andunder “Risk Factors” in Item 1A. of this Annual Report – “We have to date been unable to conclude a new license agreement with Motorola; we areunable to predict if or when a new or extended agreement will be offered on terms acceptable to us; the absence of a renewal or extended license couldhave a material and adverse effect on our results of operations and financial condition.” and under “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Trends in Results of Operations” in Item 7 of this Annual ReportSales ForceDuring Fiscal 2007, Fiscal 2006 and Fiscal 2005, approximately 100%, 99%, and 95%, respectively, of net sales were made directly by ouremployees, who work on a salaried (plus incentive bonuses) and not a commission basis. Depending on their customer accounts and whether sales are made toOEM customers or in the aftermarket under license, such employees are based in our executive offices in Florida, in Switzerland, or in Hong Kong or otherlocations where the sales employees are based. In Fiscal 2007, Fiscal 2006 and Fiscal 2005 the sales not made by employees were made through independentsales representative organizations, which receive a commission averaging 5% of the net sales amount. See “Risk Factors” in Item 1A. of this Annual Report -“Our business could suffer if the services of any of the key personnel we rely on were lost to us.”Motorola LicenseEffective October 1, 2004, we entered into a license agreement with Motorola pursuant to which we are granted the non-exclusive right to sell cellulartelephone handset carry cases and other carry solutions bearing Motorola trademarks in the EMEA Region.The license expires in accordance with its terms on December 31, 2007. We have sought to initiate discussions with Motorola relating to the renewal orextension of the license on terms acceptable to us. To date, we have received no constructive response upon which to base negotiations for such renewal orextension. See the information under the caption “Risk Factors” in Item 1A of this Annual Report: “We have to date been unable to conclude a new licenseagreement with Motorola; we are unable to predict if or when a new or extended agreement will be offered on terms acceptable to us; the absence of arenewal or extended license could have a material and adverse effect on our results of operations and financial condition.” and under the caption“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Trends in Results of Operations” in Item 7 of this AnnualReport.Under the current agreement we are required to pay royalties to Motorola based on specified percentages of the revenue derived from the sale of licensedproducts to third parties, depending upon the terms of the sale, and we are required to pay Motorola minimum royalty payments over the following threecontract periods relating to the EMEA Region (In July 2005 the license was amended to expand the licensed territory to include the APAC Region inconsideration of payment of additional royalties on actual sales in that territory. The discussion below does not include the minimum royalties payable inrespect of sales in the APAC Region, which are calculated separate and apart from the royalties in respect of EMEA Region sales):Contract Period 1: October 1, 2004 to December 31, 2005Contract Period 2: January 1, 2006 to December 31, 2006Contract Period 3: January 1, 2007 to December 31, 2007 8 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. The minimum royalty payment to Motorola for Contract Period 1 was agreed at $375,000, or $300,000 annualized. The license terms further providethat, prior to the commencement of each subsequent contract period, the parties would attempt to negotiate a new minimum royalty amount for the ensuingcontract period, in the absence of which a default formula would apply. The default formula provides that the minimum royalty payment for the ensuingContract Period may not be less than seventy-five per cent (75%) of the annualized royalties payable in respect of actual sales for the previous Contract Period,provided, however, that in no event may the minimum royalty in such ensuing Contract Period be less than seventy-five percent (75%) nor more than one-hundred-twenty-five percent (125%) of the amount of such prior Contract Period’s annual minimum royalty. The Company and Motorola were unable tonegotiate new minimum royalty payment amounts for Contract Period 2 and Contract Period 3. Consequently, application of the default formula resulted infixing the minimum royalty amounts at approximately $225,000 for Contract Period 2 and approximately $281,000 for Contract Period 3.As to APAC Region royalties, we are required to pay Motorola minimum royalty payments of approximately $75,000 for the contract period January 1,2007 to December 31, 2007. APAC Region sales were de minimis. In addition to other customary terms and conditions typical of agreements of this kind, we may be required to indemnify Motorola in respect of damageto its intellectual property, to cause our designated manufacturers to comply with certain terms of the manufacturing agreement to which they are a partypursuant to the license, or to incur costs and expenses in other respects. See Item 1A. ”Risk Factors - Under our license agreement with Motorola we maybecome liable for certain indemnification or other liabilities and become exposed to certain risks” of this Annual Report for a discussion ofindemnification obligations, manufacturing compliance and certain other risks under the license agreement.OEM Distribution HubsDuring Fiscal 2007 and 2006 we entered into distribution hub agreements with two of our OEM customers. These agreements obligate us to supplycarrying case accessory products to the customer’s distribution hubs at multiple locations where its consumer electronics products are manufactured and/orwarehoused pending sale and where our products are packaged with the OEM customer’s electronics products. These arrangements require us to supplyproduct to their distribution hubs based on our OEM customer’s forecasts. Because product supply lead times may exceed those agreed upon with our OEMcustomers, we may purchase product and stock inventory that ultimately exceeds our OEM customers’ forecasted demand for which they are obligated to us.In particular, this may occur if forecast demand is revised downward during the period while we are purchasing and stocking product for the hub. As aresult, our inventory levels, liquidity, and results of operations may be adversely affected. We ship product to the hub but do not recognize revenue until wehave been advised by our customer that product has been withdrawn from the distribution hub to be placed “in box”. By historical standards in our business,these arrangements have had the general effect of financing our customers’ inventory by extending the time between placement of our orders to our suppliers inorder to supply the hubs and the time that revenue is recognized. The corollary effect is an increase in our inventory levels. See “Risk Factors” in Item 1A. ofthis Annual Report - “Our inventory levels increased during Fiscal 2006 and may remain at historically high levels in future periods, primarily as aresult of the support of hub agreements recently entered into with two large OEM customers.”Credit RiskWe generally sell our products on 30- to 60-day credit terms customary in the industry. We have extended our customary credit terms for certain majorOEM customers, upon their request, up to 90-days. Historically, we have not had significant credit problems with our customers. Our significant OEMcustomers are large, multi-national companies with good credit histories. None of these customers is or has been in default to us, and payments are generallyreceived from them on a timely basis. Two customers, including their international affiliates or their contract manufacturers, accounted for approximately75% of the Company's accounts receivable at September 30, 2007 and 2006, respectively. As part of an ongoing trend, certain of our OEM customers haverequested that we ship product to their designated contract manufacturer and invoice such manufacturers (and not the OEM customer) for the products to beincluded “in box” with the cellular handsets or blood glucose monitors manufactured, assembled and packaged by such contract manufacturers. In thesecases, even though our order flows originate with and depend on our relationship with the OEM, our accounts receivable credit risk lies with the contractmanufacturer. Our OEM customer does not guarantee the credit of the contract manufacturer to whom the OEM requests us to ship our carrying caseproducts, and such orders may be significant in volume from time to time. In most cases, these contract manufacturers are themselves major multinationalenterprises with good credit histories. Any failure of any such customer (or its contract manufacturer) to pay part or all the sums owed to us when due couldhave a material adverse effect on our liquidity, business prospects, and results of operations. See Item 1A. “Risk Factors — Product manufacture isincreasingly being outsourced by our OEM customers to contract manufacturing firms in China and in Southeast Asia” of this Annual Report. 9 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. Foreign Exchange RiskCertain of our OEM customers have established sales and manufacturing operations in China. In addition, as noted above, certain of these or otherOEM customers may outsource manufacturing and packaging of the products with which our carrying case solutions are packaged “in box” to contractmanufacturers that are located in China or in Southeast Asia. Accordingly, our payment and remittance arrangements with such customers may subject thesearrangements to Chinese or other local currency regulations. In the event that any foreign government were to impose regulatory restrictions on the ability toeffect conversion of local currency into U.S. dollars, repatriation of U.S. dollars or other currencies to the United States, or payment in any form to foreignbusiness entities, or were to impose or enforce tighter restrictions on foreign exchange license holders, our receipt or recognition of U.S. dollars in payment,directly or indirectly, of invoices for sales of our products could be delayed or otherwise affected. If this were to affect receipt or recognition of materialamounts of revenues, our liquidity or results of operations could be materially and adversely affected. See Item 1A. “Risk Factors—Payment by or onbehalf of our customers of accounts receivable originated in China or other Asian nations may be subject to local regulations or moratorium thatrestrict the right to convert foreign currencies into U.S. dollars, that prevent, delay, or restrict the ability to repatriate foreign exchange to the UnitedStates or other countries, or that impose costs or intermediaries in order to effect foreign exchange and its repatriation to the United States” of thisAnnual Report.Product SupplyManufacturingThe manufacture of custom carrying cases and other carry solution products generally consists of die cutting fabrics, principally vinyl, nylon, andleather; and heat sealing, gluing, sewing and decorating (affixing logos) by means of silk screening, hot-stamping, embroidering or embossing. The principalmaterials used in the manufacture of our products are vinyl, nylon, leather, metal and plastic parts (such as clips, buckles, loops, and hinges and otherhardware), foam padding and cardboard, all of which are obtained according to our specifications from Chinese suppliers. We do not believe that any of thecomponent materials or parts used by our suppliers in the manufacture of our products is supply constrained. We believe that there are adequate availablealternative sources of supply for all of the materials used to manufacture, package, and ship our products.SuppliersWe procure all our supply of carrying solutions products from independent suppliers, each of which is a Chinese business entity located in China. Wepurchased approximately 69% of our products from seven such suppliers in Fiscal 2007 and approximately 80% and 82% from five such suppliers in Fiscal2006 and Fiscal 2005, respectively. One supplier accounted for approximately 20% and 36% of our product purchases in Fiscal 2007 and 2006. See Note 1to the Consolidated Financial Statements set forth in Item 8 of this Annual Report.We place orders with one or more suppliers at the times we receive firm orders from our OEM customers for a particular product. Depending on theproduct, we may require several different suppliers to furnish component parts or pieces. Accordingly, we do not have minimum supply requirementagreements with these or other suppliers to guarantee us supply of finished product, nor have we made purchase commitments to purchase minimum amountsfrom any of these suppliers. However, from time to time, we may order products from our suppliers in anticipation of receiving a customer order to meetrequired delivery times. If our customer cancels the order or we fail to receive the customer order, we may still be required to pay for the supply order, whichcould result in a loss to us as these are generally custom manufactured products unfit for sale to other customers.With respect to aftermarket products, we estimate the product sell through rates of our distributor and retail customers in order to gauge the timing andsize of inventory stocking orders to our suppliers. 10 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. We believe that other suppliers could provide us similar products on comparable terms. However, a switch to a different supplier could delay shipmentof product resulting in a loss of sales that could affect our operating results and adversely influence our relationship with the affected customer. In addition,under our license agreement with Motorola our selection of a new supplier to manufacture licensed products is subject to Motorola’s approval. Product Sampling and Quality ControlUpon award of an OEM order, our design and production staff works closely with our customer to finalize product designs and specifications andwith our suppliers to coordinate production schedules, conformity to design specifications, and quality control. Depending on the customer’s requirements,the product involved, and time from sampling to commercial order, our production staff, working in conjunction with our marketing department, may submitsamples and refinements thereof to the customer several times per product before approval for production is granted. Once the sampling process is completedfor a specific product, which may range from weeks to many months, commercial orders may be received and accepted. To ensure that product manufacturing by our foreign suppliers meets our quality assurance standards, products are either inspected by contractedthird-parties in China or by our employees in Hong Kong. In Fiscal 2005, in an effort to reduce our inspection, handling, and local freight costs for China-based shipments, we entered into an arrangement with one of our China-based suppliers to reimburse it for expenses incurred in performing in-factoryinspection of our products under our supervision at their factory. Beginning in Fiscal 2006, we expanded and altered this in-factory inspection initiative bycontracting with a third-party quality assurance provider to conduct in-factory inspection services at additional supplier factories, and to operate a separatequality assurance facility in China. These inspections are overseen by Koszegi Asia employees. Currently, the vast majority of our quality assurance functionis performed by a third-party quality assurance provider rather than by our own employees at Koszegi Asia, which historically has been the case. In the courseof transitioning responsibility for the inspection function from our Koszegi Asia facility to the third-party logistics provider, and in the course of itsperformance of its quality control inspection function, certain problems in quality control consistency and standards have from time to time surfaced, and weare working to improve the quality and frequency of the oversight by Koszegi Asia employees in order to bring quality assurance operations to our standardson a consistent basis. See Item 1A. “Risk Factors—Our dependence on foreign manufacturers creates product cost, pricing, availability, quality control,and delivery risks” of this Annual Report.Quality assurance and sourcing related expenses are reflected in cost of goods sold in our results of operations. In March 2007, our Hong Konginspection facility renewed its ISO 9001:2000 quality certification. Once our products are approved for shipment by Koszegi Asia’s inspection and quality control procedures, the products are typically shipped oncontainer carrier vessels. In certain cases, at the customer’s request, we will ship by air freight or transfer products to a customer’s location in Hong Kong.Most ocean-going shipments bound for the Untied States are off-loaded at the port of Los Angeles or San Francisco, but certain customers arrange forshipments to East coast ports, such as Miami or Philadelphia. European shipments generally are routed via Rotterdam, Frankfurt, or London. Disruptions ordelays in off-loading cargo at any of these domestic or foreign ports as a result of labor disputes, physical damage to port facilities or otherwise, or other delaysmay delay shipments to our customers and cause re-routing of containers to ports with open facilities or shipment via air freight. Depending on the cause ofdelay and trade terms with our customer, we may be required in certain cases to bear the additional expense of such alternate routing or reliance on air freight. See “Item 1A..”Risk Factors—Our shipments of products via container freight to customers in the United States and Europe are subject to delays orcancellation at port facilities due to work stoppages or slowdowns, damage caused by weather or terrorism and congestion due to inadequacy ofequipment and other causes” of this Annual Report.We ship our products to our customers by common carrier.Insurance We maintain commercial loss and liability, business interruption, and general claims and other insurance customary for our business. We do notmaintain credit insurance for our trade accounts receivable. 11 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. CompetitionThe business in which we engage is highly competitive in terms of product pricing, design, delivery terms, and customer service. In the production ofcarrying cases and related carry solutions for OEM products, we compete with numerous United States and foreign producers and distributors. Some of ourcompetitors are substantially larger than we are and have greater financial and other resources. We believe that we sustain our competitive position throughmaintenance of an effective product design capability, rapid response time to customer requests for proposals and product shipment, competitive pricing,reliable product delivery, and product quality. We believe that our ability to compete based on product quality assurance considerations is enhanced by thelocal presence of our Hong Kong and outsourced Chinese quality control and shipment facilities. See Item 1.A in this Annual Report: “Risk Factors - Thecarrying solutions business is highly competitive and does not pose significant barriers to entry.”EmployeesAt September 30, 2007, we had 49 full-time employees, of whom 3 are employed in executive capacities, 5 are employed in administrative and clericalcapacities, 19 are employed in sales and sales support capacities, and 22 are employed in sourcing, quality control, and warehouse capacities. We considerour employee relations to be satisfactory. None of our employees is covered by a collective bargaining agreement.Since June 2003, we have employed our U.S. employees through a co-employment agreement with ADP Total Source, a Professional EmployerOrganization. The objective of this arrangement is for ADP Total Source to assume many of the legal and administrative responsibilities of human resourcesmanagement, health benefits, workers' compensation, payroll, payroll tax compliance, 401(K) plan administration and unemployment insurance.Regulation and Environmental Protection Our business is subject to various regulations in various jurisdictions, including the United States and member states of the European Community,that restrict the use or importation of products manufactured with compounds deemed to be hazardous. We work with our suppliers to ensure compliancewith such regulations. In addition, from time to time one or more customers may require testing of our products to ensure compliance with applicableconsumer safety rules and regulations. Because we do not engage in the manufacture of products that we sell and distribute, compliance with federal, stateand local laws and regulations pertaining to the discharge of materials into the environment, or otherwise relating to the protection of the environment, has nothad, and is not anticipated to have, any direct material effect upon our capital expenditures, earnings, or competitive position. However, compliance withsuch laws and regulations on the part of our suppliers may result in increased costs of supply to us, particularly if domestic environmental regulation inChina becomes more prevalent and effective. In addition, under our license agreement with Motorola, we may be responsible for ensuring our Chinesesuppliers’ compliance with applicable regulations, including, among others, those relating to worker safety, child labor laws, and environmental protection. This may require us to incur administrative and/or legal expense in working with our suppliers to achieve such compliance.We have not been engaged in any environmental litigation or incurred any material costs related to compliance with environmental or other regulations.ITEM 1A. RISK FACTORSPlease read the note regarding "Cautionary statement for purposes of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of1995" that appears on page 22 of this Annual Report on Form 10-K.We have to date been unable to conclude a new license agreement with Motorola; we are unable to predict if or when a new or extendedagreement will be offered on terms acceptable to us; the absence of a renewal or extended license could have a material and adverse effect on ourresults of operations and financial condition. 12 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. Our license agreement with Motorola, Inc. expires on December 31, 2007. We have sought to initiate discussions with Motorola relating to the renewal orextension of the license on terms acceptable to us. To date, we have received no constructive response upon which to base negotiations for such renewal orextension. Motorola is our second largest customer, as detailed in the risk factor set forth immediately below. We continue to anticipate that Motorola and wewill enter into discussions relating to an extension or new agreement; however, there can be no assurance that we will be able to conclude a new or extendedagreement on terms that we find acceptable, if at all. If we cannot conclude an extension or a new license agreement upon or after the expiration of the currentlicense on December 31, 2007, our rights to sell certain cell phone carry solution cases and accessories bearing the Motorola trademark will expire at that time,except for limited sell-through rights with respect to existing inventory then on hand. The expiration of the license agreement with Motorola without anextension or renewal could have a material and adverse effect on our results of operations and financial condition. In addition to the reduction of revenues as aconsequence of losing aftermarket sales to cell phone retailers and distributors, our profit margins could suffer materially, as currently margins on certainsales of licensed products exceed those in respect of sales of many OEM cell phone sales. See “Management’s Discussion and Analysis of Financial Conditionand Results of Operations—Trends in Results of Operations” in Item 7 of this Annual Report. Further, we are unable to predict the impact, if any, that afailure to extend or renew the license agreement would have on our OEM customer relationship with Motorola, but any such impact could be adverse andmaterial simply because Motorola is and has been a very significant customer for us. Moreover, if the trend in declining OEM revenues from this customerand declining licensed sales under license with this customer continues or further accelerates, as it did in Fiscal 2007, the effect on our results of operationsand financial condition could be material.Our business is and has been characterized by a high degree of customer concentration. Our three largest customers accounted forapproximately 72% , 65% and 79% of net sales in Fiscal 2007, Fiscal 2006 and Fiscal 2005, respectively; the loss of, or material reduction in ordersfrom, any of these customers could materially and adversely affect our results of operations and financial condition.The predominant percentage of our sales revenues is concentrated in three large OEM customers (including their international affiliates and/or theircontract manufacturers). The loss of any of these three key customers (whether as a result of such customers purchasing their carry solution requirementsfrom another vendor, deciding to manufacture their own carrying cases, or eliminating the inclusion of our carrying cases with their products or otherwise)could have a material adverse effect on our financial condition, liquidity and results of operations. Dollars in millions Fiscal 2007 Fiscal 2006 Fiscal 2005 Customer:Net SalesPercentage of Net Sales Net SalesPercentage of Net Sales Net SalesPercentage of Net SalesLifescan$ 7.132% $ 5.317% $ 6.012%Motorola *6.027% 11.337% 29.056%Abbott2.913% 3.311% ****Nokia**** **** 5.711%Totals$16.072% $19.965% $40.779%* Amounts exclude approximately 9%, 11% and 3% of our net sales, or $2.0 million, $3.2 million and $1.5 million of products under our licenseagreement with Motorola for Fiscal 2007, Fiscal 2006 and Fiscal 2005, respectively.** Amount not disclosed because the percentage of net sales was less than 10%.At any time, a significant percentage of our accounts receivable risk may be concentrated in a small number of customers.Two customers accounted for approximately 75% of our accounts receivable at September 30, 2007 and September 30, 2006, respectively. The failureto receive or collect such amounts when, and as, due could have a material adverse effect on our financial condition, liquidity, and results of operations.Our inventory levels increased during Fiscal 2006 and may remain at historically high levels in future periods, primarily as a result of thesupport of hub agreements recently entered into with two large OEM customers. 13 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. In Fiscal 2006 we entered into hub agreements with two of our principal OEM customers, and during Fiscal 2007 entered into additional hubagreements covering additional distribution hubs with these customers. These arrangements require us to supply product to their distribution hubs based onour OEM customer's forecasts. Because product supply and stocking lead times may exceed those agreed upon with our OEM customers, during which timethe customer’s forecasted demand for the period may be reduced, we may purchase and stock inventory that exceeds our OEM customers’ forecasted demandfor which they are obligated to us. As a result, our inventory levels, liquidity, and results of operations may be adversely affected. In addition, certain of thesearrangements include terms of payment by the customer to compensate us in the event inventory stocks are not drawn down from a hub by the customer. Theterms of payment vary and there can be no assurance that these arrangements will not result in a material increase in our inventory allowance, which couldhave a material adverse effect on our results of operations and financial condition.We experienced severe erosion in our OEM product sales margins during Fiscal 2006 and this has continued in Fiscal 2007, and it is not clearwhen these margins will begin to improve. We continue to encounter pressures from certain OEM customers to constrain or even roll back prices.During Fiscal 2006 and Fiscal 2007, we experienced significant pricing pressure from our OEM customers in both cell phone product sales and bloodglucose monitor carrying case sales. We have been unable to extract comparable pricing concessions from our product suppliers across all product lines,which has resulted in the erosion of product sales margins. We anticipate that pressures on our pricing power and shifts in our product mix will continue toexert downward pressure on our gross profit percentage in the fiscal year ending September 30, 2008. Other components of cost of goods sold, such as ourHong Kong/China inspection costs, which traditionally have been relatively fixed, are showing signs of wage-price inflation. We also face higher energy costspassed through to us in freight charges. When calculated on the basis of reduced sales volumes, these pressures are also contributing to reduced gross profitpercentage. We cannot predict when, if at all, our overall product sales margins will begin to improve. If we are unable to renew the license agreement withMotorola on terms acceptable to us, as detailed in the risk factor above, our product sales margins could be subject to further compression, as margins onlicensed aftermarket sales are frequently more advantageous to us than on OEM sales.Our business could suffer if the services of any of the key personnel we rely on were lost to us.We are highly dependent on the efforts and services of certain key sales representatives. Our business could be materially and adversely affected if welost the services of such individuals. If we lost the services of a key sales representative upon whom our relationships with two major OEM customers isdependent, we might experience a reduction in or significant loss of orders from such customers, resulting in a loss of revenues, which could materially andadversely affect our results of operations and financial conditionOur results of operations are subject to the risks of fluctuations in the values of foreign currencies relative to the U.S. Dollar; for example, if therecent trend of appreciation of the Chinese renminbi, in which a significant portion of our suppliers’ costs are denominated, and depreciation of theUS Dollar, in which most of our revenues are denominated, continues, our gross margins will be subject to further pressure.Our results of operations are expressed in U.S. Dollars. When the U.S. Dollar appreciates or depreciates in value against a currency, such as theChinese renminbi, our results will be benefited or adversely affected, respectively. If, for example, China were to permit the renminbi to float to a free marketrate of exchange, it is widely anticipated that the U.S. Dollar would depreciate further in value relative to the renminbi, which could materially increase ourcosts of goods sold (in U.S. dollar terms) and adversely affect our results of operations if we cannot pass those costs along to our customers or if we cannotenter into financial arrangements that hedge or otherwise mitigate this risk. In recent months currency markets have pushed the renminbi up and the U.S.Dollar down, having the effect described above. The opposite relationship would apply to sales revenues or other accounts receivable denominated in a foreigncurrency. When the U.S. Dollar appreciates or depreciates in value against a currency, such as the Euro, in which a significant part of our revenues isdenominated, our results of operations can be adversely affected or benefited, respectively. The significant appreciation of the Euro against the U.S. Dollarsince the beginning of 2003 has had the effect of increasing, in U.S. dollar terms, U.S. Dollar denominated sales on our statement of income in proportion toEuro-denominated sales revenues. A reversal of this trend could adversely affect our results of operations.Future revenues are difficult to predict and are likely to show significant variability as a consequence of customer concentration.Because our sales revenues are highly concentrated in a few large customers, and because the volumes of these customers' order flows to us are highlyvariable, and can fluctuate markedly in a short period of time, our quarterly revenues, and consequently our results of operations, are highly variable andsubject to significant changes over a relatively short period of time. 14 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. Each of these customers launches many different products and may purchase products accessories, such as carrying cases, from many differentcompeting vendors. When we are selected to supply a carry solution for a specific product and launch, we may not be in a position to know the frequency orvolumes of our customers' orders, the duration of such orders (which will depend on the product's life cycle), or the pricing of such orders, all of whichdepend on our customers' ongoing assessments of the product's relative contribution to their businesses, as well as other factors. Our OEM customers maykeep products for which our carry solutions have been selected to be packaged "in-box" in active promotion for many months, or for a very short period oftime, depending on the popularity of the product, product development cycles, new product introductions, and our customers' competitors' product offerings. As the customer's product life and the related "in box" program mature, we may be forced to accept significant price reductions for our carry solutions, whichwill affect the level of our revenue. Short product life cycles are particularly characteristic of the cellular handset market, where new functionality isconstantly introduced, competition between vendors is high, and industry technical standards are subject to continuing change.All of this makes our quarterly revenue levels susceptible to a high degree of variability and difficult to predict more than a quarter into the future. Significant, rapid shifts in our operating results may occur if and when one or more of these customers increase or decrease the size(s) of, or eliminate, theirorders from us by amounts that are material to our business. Our gross margins, and therefore our profitability, vary considerably by customer and therefore across our product lines, and if the relativerevenue contribution from one or more OEM customers changes materially, relative to total revenues, our gross profit percentage may decline.Our gross profit margins vary widely depending on the customer, order size, market in which the customer's products are sold and the types ofcarrying cases sold. In addition, there is a broad range of selling prices within our soft-sided carrying cases product line, and there is also a broad range ofselling prices between, for example, soft-sided carrying cases and other carry solutions such as straps, clips, and camera attachment cases. Because of thebroad variability in price ranges and product types, we anticipate that gross margins, and accordingly net income, will continue to fluctuate depending on therelative revenue contribution by customer of carrying cases for cellular handsets and those for blood glucose monitors, as well as our OEM customers' orderpatterns and preferences for more or less expensive cases to be included as accessories "in box". Such fluctuations may have the effect of masking the impactof fluctuations in unit volume sale trends.Product manufacture is increasingly being outsourced by our OEM customers to contract manufacturing firms in China and in Southeast AsiaSuch firms are performing manufacturing, assembly and product packaging functions, including the bundling of product accessories such as ourswith the OEM customer's product. As a consequence of this trend, we are increasingly selling our carry solution products to the contract manufacturing firm. In these cases, we invoice the contract manufacturing firm and not the OEM customer. Therefore, it is the contract manufacturing firm's credit to which wemust look for payment in such cases and not that of our OEM customer. This may alter the credit profile of our customer base and may involve significantpurchase order volumes. In some, but not all cases, the manufacturing firm is itself a large, multinational entity with significant financial resources.Under our license agreement with Motorola we may become liable for certain indemnification or other liabilities and become exposed to certainrisks.Each manufacturer selected by us to manufacture products for sale pursuant to our license agreement with Motorola is subject to Motorola's approval,and we are responsible for ensuring such manufacturer's compliance with the terms of the Manufacturer's Agreement (as defined in the License Agreement), inparticular the proper use of the Motorola trademarks and compliance with applicable laws in the jurisdiction where the manufacturer is located. Failure of themanufacturer to comply with its obligations under such manufacturing agreement could result in termination of the license agreement, Motorola's demand thatwe enforce the terms of the Manufacturing Agreement against the manufacturer, at our cost and expense, or a claim for damages by Motorola against us, or acombination of the foregoing. 15 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. The License Agreement expires on December 31, 2007, but both parties have certain rights of termination customary for such agreements prior to suchdate, including, for example, in the case of violation of the agreement, insolvency or bankruptcy of one party, or breach of representations or covenants. Weare required to pay a penalty of an amount equal to up to one year's minimum guaranteed royalty if we terminate the License Agreement under certainconditions as specified in the agreement. In addition, Motorola and we have agreed to certain cross-indemnification provisions, which, as applicable to us,obligate us to indemnify Motorola in respect of all third party suits, actions, claims, damages and liabilities and expense against, or incurred by, Motorolaarising out of or connected with the licensed products, their method of manufacture, sale or distribution, the promotional or packaging of the products, or anybreach by us of the License Agreement. The occurrence of any of the foregoing events, claims, obligations, or demands could subject us to make payment orincur expense, which could be material and adversely affect our results of operations and financial condition.Payment by or on behalf of our customers of accounts receivable originated in China or other Asian nations may be subject to local regulationsor moratorium that restrict the right to convert foreign currencies into U.S. dollars, that prevent, delay, or restrict the ability to repatriate U.S. dollarsto the United States.Our payment and remittance arrangements with certain customers may subject these arrangements to Chinese or other local currency regulations. In theevent that any foreign government were to impose regulatory restrictions on the ability to effect conversion of local currency into U.S. dollars or repatriation ofU.S. dollars to the United States, our receipt or recognition of U.S. dollars in payment, directly or indirectly, of invoices for sales of our products could bedelayed or otherwise affected, including, for example, by a reduction in effective exchange rate to our detriment, imposition of fees or expenses, a discountingof the amount of the account receivable, or a deferral of such accounts receivable into a future reporting period. If this were to affect receipt or recognition ofmaterial amounts of revenues, our liquidity or results of operations could be materially and adversely affected.Our dependence on foreign manufacturers creates product cost, pricing, availability, quality control, and delivery risks.All of our products are manufactured by Chinese manufacturers in China. We do not have any written agreements with any such supplier to guaranteesupply to us of finished product, nor do we have any arrangements for minimum purchase requirements with any such supplier. Our supply arrangementswith these manufacturers are subject to various commercial, economic, foreign exchange, political, and other risks and uncertainties. Among other risks, oursupply arrangements with these manufacturers are subject to the risks of cost increases; restrictions on transfer of funds; export duties, quotas, andembargoes; domestic and international customs and tariffs; foreign exchange risk; changing taxation policies; foreign exchange restrictions; and politicalinstability, domestic political considerations, and governmental regulations. Our reliance on foreign suppliers, manufacturers, and other contractors involvessignificant risks, including reduced control over delivery schedules, quality assurance, manufacturing yields, and costs, the potential lack of adequatecapacity, and potential misappropriation of our designs.In the course of transitioning responsibility for quality assurance inspection of products from our Koszegi Asia facility to a third-party qualityassurance provider and reengineering our quality assurance processes, certain problems in quality control consistency and standards have from time to timesurfaced during Fiscal 2006 and Fiscal 2007. We are working to improve the quality and frequency of the oversight by Koszegi Asia employees of the qualitycontrol activities of this quality assurance provider in order to bring quality assurance operations to our standards on a consistent basis, but there can be noassurance that our efforts will be effective in order to improve to a consistently high standard the work of this logistics firm. Failures on the part thereof, or onthe part of Koszegi Asia to improve the standards of this work, may adversely affect customer relationships and could result in the loss of a key customer,which could have an adverse effect on our results of operations and our business reputation.Our shipments of products via container freight to customers in the United States and Europe are subject to delays or cancellation due to workstoppages or slowdowns, damage to port facilities caused by weather or terrorism, and congestion due to inadequacy of port terminal equipment andother causes. 16 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. Since all of our carrying solutions products are sourced from China, the carrying cases and other products we distribute and sell must be brought toour customers' markets. To the extent that there are disruptions or delays in loading cargo in Hong Kong or Chinese ports or off-loading cargo at ports ofdestination as a result of labor disputes, work-rules related slowdowns, tariff or World Trade Organization-related disputes, physical damage to port terminalfacilities or equipment caused by severe weather or terrorist incidents, congestion in port terminal facilities, inadequate equipment to load, dock and offloadcontainer vessels or energy-related tie-ups or otherwise, or for other reasons, product shipments to our customers will be delayed. In any such case, ourcustomer may cancel or change the terms of its purchase order, resulting in a cancellation or delay of payments to us. A closure or partial closure of HongKong, Chinese, United States or European port facilities or other causes of delays in the loading, importation, offloading or movement of our products couldresult in increased expenses, as we try to avoid such delays, delayed shipments or cancelled orders, or all of the above. Depending on the severity of suchconsequences, this may have an adverse effect on our financial condition and results of operations.The carrying solutions business is highly competitive and does not pose significant barriers to entry.There is intense competition in the sale of carry solutions products to original equipment manufacturers. Since little or no significant proprietarytechnology is involved in the design, production, or distribution of products similar to our products, others may enter the business with relative ease andcompete against us. Such competition may result in the diminution of our market share, the loss of one or more major OEM customers, and adversely affectour net sales, results of operations, and financial condition. Many of our competitors are larger, better capitalized, and more diversified than we are and maybe better able to withstand a downturn in the general economy or in the product areas in which we specialize. These competitors may also have less salesconcentration than we do and be better able to withstand the loss of a key customer or diminution of a large customer's orders.We do not pay dividends on our common stock.We have not paid any cash dividends on our common stock since 1987. The payment in the future of cash dividends by us, if any, will depend uponour results of operations, short-term and long-term cash availability, working capital, working capital needs, and other factors, as determined by our Board ofDirectors. Applicable laws may also restrict the ability of a corporation to pay dividends, for example when such payment would render the corporationinsolvent. We do not anticipate that cash dividends will be paid in the foreseeable future. The absence of dividend payments on a common stock might makesuch stock susceptible to greater market price swings.Because of the control by insiders of 11% of our common stock, your ability to influence actions taken by us may be limited.As of November 15, 2007, our executive officers and members of our Board of Directors, directly or indirectly, beneficially owned 916,627 shares ofcommon stock, including 232,000 shares of common stock subject to currently exercisable stock options, aggregating approximately 11% of our issued andoutstanding common stock on such date. By virtue of their ownership of such common stock and their positions as executive officers, such executive officersand directors or their affiliates may, collectively, be deemed to control Forward Industries through the exercise of sufficient voting power to effectively control(or, at least, exercise a significant influence upon) the election of our Board, direct the appointment of our officers and, in general, significantly influence theoutcome of any corporate transaction or other matter submitted to our shareholders for approval, including mergers, consolidations and the sale of all orsubstantially all of our assets, and to prevent or cause a change in the control of Forward. 17 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. We have in place anti-takeover measures that may prevent a hostile or unwanted effort to acquire Forward.Our Board of Directors is authorized to issue up to 4,000,000 shares of "blank check" preferred stock. Our Board of Directors has the authority,without shareholder approval, to issue such preferred stock in one or more series and to fix the relative rights and preferences thereof including theirredemption, dividend and conversion rights. Our ability to issue the authorized but unissued shares of preferred stock could be used to impede takeovers ofour company. Under certain circumstance, the issuance of the preferred stock could make it more difficult for a third party to gain control of Forward,discourage bids for the common stock at a premium, or otherwise adversely affect the market price of our common stock. Such provisions may discourageattempts to acquire Forward. Applicable laws that impose restrictions on, or regulate the manner of, a takeover attempt may also have the effect of deterringany such transaction. We are not aware of any attempt to acquire Forward.If the license agreement with Motorola is renewed, we may be obligated to pay substantial minimum royalties without a guarantee of minimumsales.Currently, under the terms of our license agreement with Motorola, we have committed to pay Motorola minimum royalties for the sale of Motorolatrademarked products. Motorola has not guaranteed to us a minimum amount of sales or revenues from the sale of those trademarked products. There can beno assurance that we will generate sufficient revenues to recoup the minimum royalty payments that we are obligated to pay to Motorola. We may incur similarobligations without guarantee of minimum revenues if a new agreement is concluded, as to which there can be no assurance.If our common stock were to be de-listed from the NASDAQ SmallCap Market, the existing market prices for and liquidity of our common stockmay decline.The National Association of Securities Dealers' listing requirements require, among other things, that all issuers of securities listed on the NASDAQSmallCap Market maintain a continued minimum bid price per share of such securities of $1.00. In October 2002, NASDAQ advised us that our commonstock did not meet the requirements for continued listing on the NASDAQ SmallCap Market under the NASDAQ Marketplace Rules and that our commonstock would be de-listed for failing to maintain a minimum bid price of $1.00 in accordance with Marketplace Rule 4310(c)(4). After a hearing in December2002 requested by us to review NASDAQ's determination, NASDAQ reversed its delisting determination, and we maintained our NASDAQ listing withoutinterruption. As of November 26, 2007, we believe that the Company complies with the NASDAQ Marketplace Rules in all material respects.ITEM 1B. UNRESOLVED STAFF COMMENTS Not Applicable ITEM 2. PROPERTIESWe lease approximately 10,000 square feet of office and warehouse space at 1801 Green Road, Pompano Beach, Florida, through Koszegi IndustriesInc., our wholly owned subsidiary. Under the terms of the lease, which expires in May 2012, the monthly rent is approximately $12,000. We use this officespace as our executive office and our United States sales office.We lease approximately 9,000 square feet of warehouse and office space in Hong Kong, at a monthly rental of approximately $12,000 through KoszegiAsia Ltd., our wholly owned subsidiary, under a lease that expires in November 2009. We use this space as a sourcing, quality assurance, and logisticsfacility for products purchased from our China suppliers.Forward Innovations, our Swiss subsidiary, leases approximately 2,000 square feet of office space in Cham, Switzerland, at a monthly rental ofapproximately $2,000. This lease is on a month-to-month basis and can be cancelled by us with a six-months’ notice. Our landlord cannot cancel the leaseprior to October 2008. We use this facility as our EMEA sales and administrative office. 18 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. We believe that each of the foregoing leased properties is adequate for the purposes for which it is used. All leases are with independent third parties. Webelieve that the loss of any lease would not have a material adverse effect on our operations as we believe that we could identify and lease comparable facilitiesupon approximately equivalent terms.ITEM 3. LEGAL PROCEEDINGSFrom time to time, the Company may become a party to legal actions or proceedings in the ordinary course of its business. As of September 30, 2007,there were 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 September 14, 2007, the United States District Court for the Southern District of Florida issued an order granting the Company’s motion todismiss the purported class action complaint in the matter captioned “Lynn Finkelstein & Company, Inc., on behalf of certain of its clients as attorney-in-factand all other similarly situated, Plaintiff, vs. Jerome E. Ball, Douglas W. Sabra, Michael Schiffman, and Forward Industries, Inc., Defendants” (Case No.06-21922-Civ), brought in the District Court for the Southern District of Florida and filed July 31, 2006. The complaint alleged that the Company during apurported class period July 25, 2005, to February 2, 2006, made certain misrepresentations of fact, or failed to disclose certain material facts, and violatedcertain generally accepted accounting principles in the presentation of its financial statements included in its periodic reports filed with the Commissionpursuant to the Exchange Act. The Court’s order dismissed the complaint with prejudice for failure to satisfy the pleading requirements of the Private Securities Litigation Reform Actof 1995. In addition, plaintiff’s motion for oral argument was denied. Plaintiff elected not to appeal the Court’s orders within the required thirty-day period. Accordingly, this proceeding has been resolved in the Company’s favor without liability to the Company or the individual defendants.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSNo matter was submitted to a vote of our security holders in our fiscal fourth quarter of 2007. We anticipate that the annual meeting of shareholders inrespect of the fiscal year ended September 30, 2007, will be held in February 2008.PART IIITEM 5. MARKET FOR COMMON STOCK, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESMarket for Common StockThe principal market for our common stock is the NASDAQ SmallCap Market. Our common stock is traded under the symbol "FORD". Thefollowing table sets forth the high and low closing bid quotations for our common stock on the NASDAQ SmallCap Market for each quarter in the last twofiscal years. Bid Price Information for Common Stock* Fiscal 2007 Fiscal 2006 High BidLow Bid High BidLow Bid First Quarter$ 6.09$ 4.10 $ 26.35 $ 8.90 Second Quarter$ 5.30$ 4.06 $ 11.83$ 8.05 Third Quarter$ 4.25$ 3.21 $ 11.45$ 4.00 Fourth Quarter$ 3.61$ 2.61 $ 7.27$ 4.01 _______________________________*High and low bid price information as furnished by The NASDAQ Stock Market Inc. On November 15, 2007, the closing bid quotation for our common stock was $2.77. 19 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. See Item 1A. “Risk Factors—If our common stock were to be de-listed from the NASDAQ SmallCap Market, the existing market prices for andliquidity of our common stock may decline” of this Annual Report..Holders of common stock. As of November 15, 2007, there were approximately 120 holders of record of our common stock, excluding approximately 5,700 beneficial holderswhose shares are held in street name.DividendsWe have not paid any cash dividends on our common stock since 1987 and do not plan to pay cash dividends in the foreseeable future. The paymentof dividends in the future, if any, will depend upon our results of operations, as well as our short-term and long-term cash availability, working capital,working capital needs, and other factors, as determined by our Board of Directors. Currently, except as may be provided by applicable laws, there are nocontractual or other restrictions on our ability to pay dividends if we were to decide to declare and pay them.Recent sales of unregistered securitiesDuring Fiscal 2007, we did not issue and sell any shares of common stock, or securities exercisable for or exchangeable into common stock, or anyother securities that were not registered under the Securities Act of 1933.Securities authorized for issuance under equity compensation plans.For information relating to this topic, see Item 12. “Security Ownership of Certain Beneficial Owners and Management and related StockholderMatters” incorporated in this Annual Report on Form 10-K by reference to our Proxy Statement.Purchase of Equity Securities In September 2002, the Company announced a corporate stock buyback program and authorized the repurchase of up to 400,000 shares of ourcommon stock. The program was amended in January 2004 to increase the amount of shares authorized for repurchase to 486,200 shares. We repurchased70,000 shares of our common stock in the open market in the fiscal third and fourth quarters of 2007 for approximately $232,000 under the program. Norepurchases of common stock were made in the open market under the program or otherwise during Fiscal 2006 or Fiscal 2005. We repurchased 36,400shares of our common stock in the open market during the first three quarters of Fiscal 2004 and since the inception of the program we have purchased a totalof 172,603 shares at an aggregate cost of approximately $403,000. Amounts in thousands (except per share amounts) Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or ProgramsJuly 1, 2007 – July 31, 2007 -- -- -- --August 1, 2007 – August 31, 2007 10,000 $2.75 10,000 313,600September 1, 2007 to September 30, 2007 -- -- -- --Totals 10,000 $2.75 10,000 313,600 20 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. Performance Measurement Comparison of Shareholder ReturnThe graph below compares the cumulative 5-year total return of our common stock with the cumulative total returns of the Dow Jones WilshireMicroCap index, and a customized peer group of four companies that includes: Forward Industries Inc., Jaclyn Inc., Tandy Leather Factory Inc. and WirelessXcessories Group Inc. The graph tracks the performance of a $100 investment in our common stock, in the peer group, and the index (with the reinvestmentof all dividends) from 9/30/2002 to 9/30/2007. Fiscal 2002Fiscal 2003Fiscal 2004Fiscal 2005Fiscal 2006Fiscal 2007 Forward Industries Inc 100.00297.50285.002933.75640.00385.00Dow Jones Wilshire MicroCap 100.00173.09202.36238.31251.32275.21Peer Group 100.00159.24178.58612.34294.95265.55Data Source: Research Data Group, Inc., San Fransisco, CAITEM 6. SELECTED FINANCIAL DATAThe following table sets forth selected financial data as of and for the five fiscal years ended September 30, 2007. Such data has been derived from ouraudited consolidated financial statements for the relevant periods. The following financial data should be read in conjunction with our “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” and our “Financial Statements and Supplementary Data” in Items 7 and 8,respectively, of this Annual Report. 21 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. Amounts in thousands (except per share data) For the Fiscal Year Ended September 30, 2007 2006 2005 2004 2003Operating Data: Net Sales $22,151 $30,608 $51,869 $20,073 $18,889(Loss) Income ($553) $1,541 $9,434 $1,939 $1,445 Earnings (Loss) Per Common and Common Equivalent Share: Basic ($0.07) $0.20 $1.37 $0.32 $0.25Diluted ($0.07) $0.19 $1.26 $0.30 $0.24 Balance Sheet Data: Total Assets $26,632 $27,782 $29,907 $10,189 $7,180Long-term Liabilities -- -- -- -- --Dividends Declared -- -- -- -- -- ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following discussion and analysis should be read in conjunction with our audited Consolidated Financial Statements and the notes theretoand other financial information appearing elsewhere in this Annual Report on Form 10-K as Item 8. This discussion and analysis compares ourconsolidated results of operations for the fiscal year ended September 30, 2007 ("Fiscal 2007"), with those of the fiscal year ended September 30, 2006("Fiscal 2006"), and our consolidated results of operations for Fiscal 2006 with those of the fiscal year ended September 30, 2005 (“Fiscal 2005”)and is based on or derived from the audited Consolidated Financial Statements included elsewhere in this Annual Report. All figures in the followingdiscussion are presented on a consolidated basis. All dollar amounts and percentages presented herein have been rounded to approximate values.Cautionary statement for purposes of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995The following “management’s discussion and analysis” includes forward-looking statements that are not based on historical fact and that involveassessments of certain risks, developments, and uncertainties in our business. Such forward looking statements, within the meaning of the Private SecuritiesLitigation Reform Act of 1995, can be identified by the use of forward-looking terminology such as “may”, “will”, “should”, “expect”, “anticipate”,estimate”, “intend”, “continue”, or “believe”, or the negatives or other variations of these terms or comparable terminology. Forward looking statements mayinclude projections, forecasts, or estimates of future performance and developments. Forward looking statements contained in this Report are based uponassumptions and assessments that we believe to be reasonable at the time such forward looking statements are made. Whether those assumptions andassessments will be realized will be determined by future factors, developments, and events, which are difficult to predict and may be beyond our control. Actual results, factors, developments, and events may differ materially from those assumed and assessed. Such risk factors, uncertainties, contingencies,and developments, including those discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and thoseidentified in “Risk Factors” in Item 1A of this Annual Report, could cause our future operating results to differ materially from those set forth in any forwardlooking statement. Such factors include, among others, the following: our ability to maintain constructive commercial relationships with our key OEMcustomers, including during periods of economic downturns generally or in their business environments; our success in winning new business from ourcustomers and against competing vendors; whether replacement programs that we win will be more or less successful or profitable than those that are replaced;levels of demand and pricing generally for cellular handsets and blood glucose monitoring devices sold by our customers for which we supply carry solutions;variability in order flow from our OEM customers; the ability to retain or the loss of one or more key sales employees upon whom relationships with keyOEM customers depend; general economic and business conditions, nationally and internationally in the countries in which we do business; the expiration ofour license agreement with Motorola by its terms on December 31, 2007, and the uncertainty as to whether such agreement will be renewed or extended on termsacceptable to us; the need to add materially to our inventory allowance, including the impact on inventory levels or saleability of inventory arising out of hubagreements we have entered into with two of our OEM customers; demographic changes; changes in technology, including developments affecting cellularhandsets; developments in the treatment or control of diabetes that affect the incidence of use and replacement rates of handheld blood glucose monitors bydiabetics; increased competition in the business of distribution of carry solutions for handheld electronic devices generally or increased competition to includecarry solutions with products manufactured by our EOM customers in particular; changes affecting the business or business prospects of one or more of ourprincipal Original Equipment Manufacturer (“OEM”) customers; governmental regulations and changes in, or the failure to comply with, governmentalregulations; and other factors included elsewhere in this Annual Report and our other reports filed with the Commission. Accordingly, there can be noassurance that any such forward looking statement, projection, forecast or estimate can be realized or that actual returns, results, or business prospects willnot differ materially from those set forth in any forward looking statement. 22 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims anyobligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflectfuture results, events or developments.Critical Accounting Policies and EstimatesWe have identified the accounting policies and significant estimation processes below as critical to our business operations and the understanding of ourresults of operations. The listing is not intended to be a comprehensive list. In many cases, the accounting treatment of a particular transaction is specificallydictated by accounting principles generally accepted in the United States, with no need for management’s judgment of a particular transaction. In other cases,management is required to exercise judgment in the application of accounting principles with respect to particular transactions. The impact and any associatedrisks related to these policies on our business operations is discussed throughout this “Management’s Discussion and Analysis of Financial Condition andResults of Operations” where such policies affect reported and expected financial results. For a detailed discussion of the applications of these and otheraccounting policies, refer to Item 8. “Financial Statements and Supplementary Data” in this Annual Report. Our preparation of our consolidated financialstatements requires us to make estimates and assumptions that are believed to be reasonable under the circumstances. There can be no assurance that actualresults will not differ from those estimates and such differences could be significant.Revenue RecognitionIn accordance with the requirements of Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition in Financial Statements, we recognize revenuefrom product sales to customers when: products that do not require further services by us are delivered in accordance with the sales terms; there are nouncertainties surrounding customer acceptance; and collectibility is reasonably assured.Accounts ReceivableWe record an allowance for doubtful accounts for all receivables judged by us to be unlikely to be collected. The effect of the allowance is to reduce theaccounts receivable reported on our balance sheet to an amount that we believe will actually be collected. Significant management judgments and estimatesmust be made and used in connection with establishing this valuation account, based on a combination of factors: Specifically, we analyze the age ofreceivable balances, our historical bad debts write-off experience, and our respective customer’s creditworthiness to determine the appropriate allowance fordoubtful accounts. At September 30, 2007 and September 30, 2006, our allowance for doubtful accounts was approximately $47,000. Changes to thisaccount are reflected in the general and administrative expense line of our statement of operations. Although we consider our allowance for doubtful accounts tobe adequate and proper, changes in economic conditions, the assessments of new customers’ creditworthiness, changes in customer circumstances, or otherfactors could have a material effect on the recorded allowance.Inventory ValuationWe use certain estimates and judgments to value our inventory. Our inventory is recorded at the lower of cost or market. Our inventory consistsprimarily of finished goods that are custom made by our suppliers based on firm orders from our OEM customers and held for our account. We also supplycustom manufactured inventory to our customers’ distribution hubs in anticipation of their draw-downs to fulfill orders; we also periodically stock inventoryin anticipation of orders from our OEM customers when it appears to us commercially advantageous to do so. We also hold inventory in support of ouraftermarket business. At the end of each fiscal quarter, we evaluate our ending inventories, and we establish an allowance for inventory that is consideredobsolete, slow moving or otherwise un-saleable. This evaluation includes among other factors analyses of inventory levels, historical loss trends, saleshistory, and projections of future sales demand. We physically dispose of inventory once its marketability has been determined to be zero. Inventoryallowances were approximately $0.6 million and $0.2 million at September 30, 2007 and September 30, 2006, respectively. The cost of obsolete inventory(approximately $0.6 million and $0.2 million at September 30, 2007 and 2006, respectively) is included in cost of goods sold on our statement of operations. 23 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. The vast majority of our production is made to customer specifications and thus not fit for sale in the general market. If a customer elects not to acceptdelivery, or defaults on a purchase order or commitment, or returns inventory from a hub without payment in accordance with the hub arrangements,additional inventory write-downs or reserves may be required and would be reflected in cost of goods sold in the period the revision is made. Historically,actual inventory valuation results have not deviated significantly from those previously estimated by us. However, our experience with our customers’distribution hub arrangements is limited and may inhibit our ability to anticipate developments that may result in changes to our reserves.Deferred Income TaxesIn the preparation of our consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we are subjectto taxation. This process involves estimating current income tax expense as well as future tax assets and liabilities resulting from temporary differences betweenthe financial statement and income tax bases of assets and liabilities, and tax net operating loss carryforwards. These deferred tax assets and liabilities, areincluded in our consolidated balance sheet to the extent that realization of these benefits are more likely than not. Management evaluates the realizability of our deferred tax assets on a quarterly basis and assesses the need for valuation allowances. Our deferred taxassets are evaluated by considering historical levels of income, estimates of future taxable income, and the impact of our tax planning strategies. We record avaluation allowance to reduce deferred tax assets when it is determined, on a more likely than not basis, that we will not be able to use all or part of ourdeferred tax assets. No valuation allowances were recorded in respect of these deferred tax assets as of September 30, 2007 and 2006.In the event that it should be subsequently determined that we can not, on a more likely than not basis, realize all or part of our deferred tax assets, ifany, in the future, an adjustment to establish (or record an increase in) the deferred tax asset valuation allowance would be charged to income in the period inwhich such determination is made. Changes in our deferred tax assets are reflected in the tax expense (benefit) line of our consolidated statements of operations.We had approximately $0.3 million and $83,000 of deferred tax assets at September 30, 2007, and September 30, 2006, respectively.Variability of Revenues and Results of OperationBecause our sales revenues are highly concentrated in a few large customers, and because the volumes of these customers’ order flows to us are highlyvariable, with short lead times, our quarterly revenues, and consequently our results of operations, are susceptible to significant variability over a relativelyshort period of time.We depend for the predominant proportion of our sales revenues on OEM orders from our three largest customers, each of which is a large,multinational corporation. Each of these customers launches many different products and purchases products accessories, such as carrying cases, frommany different vendors. When we are selected to supply a carry solution “in-box” for a specific product and launch, we may not be in a position to know thefrequency or volumes of our customers’ orders, or the duration of such orders (which will depend on the OEM customer product’s life cycle), all of whichdepend on our customers’ ongoing assessments of the product’s relative contribution to their businesses, as well as other factors. Our OEM customers maykeep products for which our carry solutions have been selected to be packaged “in-box” in active promotion for many months, or for a very short period oftime, depending on the popularity of the product, product development cycles and new product introductions, and our customers’ competitors’ productofferings. Short product life cycles and/or significant variability in product pricing are particularly characteristic of the cellular handset market, where newfunctionality is constantly introduced, competition among vendors is high, and industry technical standards are subject to continuing change. When “in-box”programs end, and to the extent that the introduction of new programs does not include our products as an accessory “in-box”, or such new programs doinclude our products as an accessory “in-box” but do not result in a comparable level of demand for our products, the level of our OEM product sales issusceptible to significant and rapid change. 24 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. All of this makes our quarterly revenue levels susceptible to a high degree of variability and difficult to predict. Significant, rapid shifts in ouroperating results may occur if and when one or more of these customers increases or decreases the size(s) of, or eliminates, its orders from us by amounts thatare material to our business.Trends in Results of OperationsWe foresee a continuation of weak results from our major OEM customers. While revenues from Lifescan, now our largest customer, havetrended higher, gross margin on these sales is relatively narrow. Revenue from Motorola, historically our largest customer, has trended down on acomparable quarter basis since the first quarter of Fiscal 2006 through the end of Fiscal 2007. Moreover, this downtrend accelerated in the third andfourth quarters of Fiscal 2007. We believe as part of the economics accompanying our customer’s cell phone launch cycle, in which certain verysuccessful models (for which we have supplied accessories in-box), after an extended time on the market, make a pricing transition to mid- and lower-tier phones, that Motorola has reduced and/or eliminated the inclusion of accessories in-box, with consequent revenue loss for us. Currently, we foreseeno imminent new “in-box” programs or developments to reverse this trend in the immediate future. We believe that sales under our license agreementwith Motorola are being, and will continue to be, similarly affected as consumers may be less inclined to purchase relatively high cost cases and otheraccessories for mature, lower-tier phones. Absent a reversal of this trend, which we do not foresee in the immediate future, and absent a materialincrease in sales revenues from other product markets, we will incur an operating loss, and possibly a net loss, in respect of the first fiscal quarter of2008.We anticipate that gross profit and gross profit percentage will continue to be impacted by several factors. First, reduction in volume demand inFiscal 2007 was, and we anticipate for the foreseeable future likely will be, the most significant factor in the level of gross profit. Second, we anticipatethat our gross profit will continue to be pressured by a difficult pricing environment for both our cell phone carry solution product line (OEM andlicensed sales) and also our blood glucose carry case product line. Third, margins on certain higher volume blood glucose monitoring programs arealready narrow and if revenue from these programs account for an overall higher percentage of our revenue mix, we believe our gross profit percentagemay deteriorate further. Fourth, and perhaps most significantly, our license with Motorola expires on December 31, 2007. To date, we have received noconstructive response upon which to base negotiations for such renewal or extension. Our gross margin in aftermarket sales tend to be more favorablefor our results of operations than OEM sales. The impact of any loss of some or all aftermarket sales under the Motorola license would likely have amaterial and adverse effect on our gross margin. Such an outcome would make it more difficult to return to profitability in our operating results. We believe that recent, macro-economic developments in or affecting China’s economy will contribute to rising costs of goods sold, which willpressure gross profit. We face rising labor costs (particularly in South China, where we source the majority of our products), higher fuel costs, andthe rising value of the Renminbi in comparison to the U.S. dollar. We believe that currently we have relatively little ability to pass these higher costs onto our larger customers.Our customer base is becoming more concentrated. In Fiscal 2007, three customers, including their subsidiaries, affiliates, or their contractmanufacturers, accounted for 72% of our net sales. In Fiscal 2006, these customers accounted for 65% of our net sales. Sales to a fourth customer,Bayer Healthcare LLC (“Bayer”), declined to an immaterial amount during Fiscal 2007 as our sole “in-box” program with them concluded. In Fiscal2006, sales to Bayer represented 8% of our net sales. Although we continue to pursue additional opportunities with Bayer (as well as other OEMsuppliers of handheld devices), as of September 30, 2007, we have not been selected to participate in any new “in-box” programs or successors tothose that concluded. 25 Forward Industries, Inc. Our Fiscal 2007 operating results led to a pre- tax net loss that would have been significantly larger but for the substantial level of “otherincome”, which consists primarily of interest income on cash balances. We anticipate that these conditions will likely persist in the foreseeablefuture absent any significant reductions in selling, general, and administrative expense or improvements to our gross profit.Our inventory remains at historically high levels primarily as a result of supporting hub agreements entered into with two of our largest OEMcustomers. We expect inventory to remain at this higher level in the foreseeable future in large part because of the recent entry into additionalhub agreements with these customers. Under these agreements, we are required 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 our liquidity. In Fiscal 2007, we entered into several new hub arrangements,Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.bringing the total to seven active hub agreements.Results of Operations for Fiscal 2007 compared to Fiscal 2006Net income (loss)We recorded a net loss in Fiscal 2007 of $0.6 million compared to net income of $1.5 million in Fiscal 2006, a decrease of $2.1 million. The decreasewas primarily due to a $3.0 million, or 39%, reduction in gross profit, due primarily to a $7.5 million decline in sales of cell phone carry solution products.In addition to lower gross profit, net income was adversely affected by an increase in selling, general and administrative expenses of $0.5 million, or 8%,primarily due to higher professional fees, personnel costs and insurance costs. These declines were offset in small part by a change in tax benefit of $1.2million and by an increase in other income of $0.2 million. Basic and diluted per share data was ($0.07) for Fiscal 2007, compared to $0.20 and $0.19 forFiscal 2006. The decrease in earnings per share in Fiscal 2007 was due to the decrease in net income.Net SalesNet sales decreased $8.4 million, or 27%, to $22.2 million in Fiscal 2007 compared to $30.6 million in Fiscal 2006 due primarily to lower sales of cellphone products, which declined $7.5 million, or 48%, and, to a much lesser extent, lower sales of carry cases for diabetic products, which declined $0.5million, or 4%, and lower sales of cases for other products, which declined $0.5 million, or 12%. The tables below set forth approximate sales by productline and geographic location of our customers for the periods indicated. 26 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. Net Sales for Fiscal 2007 (millions of dollars) APACAmericasEMEATotalCell Phone Products$ 3.3$2.0$2.8$ 8.1Diabetic Products7.22.11.610.9Other Products0.42.60.13.1Totals*$10.9$6.7$4.5$22.1 Net Sales for Fiscal 2006 (millions of dollars) APACAmericasEMEATotalCell Phone Products$ 6.7$ 3.7$5.2$15.6Diabetic Products5.74.11.611.4Other Products0.92.60.13.6Totals*$13.3$10.4$6.9$30.6* Tables may not total due to rounding.Cell Phone Product SalesOur cell phone carry solutions products include carrying cases for handsets and camera attachments, plastic belt clips, carrying case straps and bags,screen cleaners, decorative faceplates, and other attachments used to carry or enhance the appearance of cellular telephone handsets. We design to the order of and sell these products directly to cell phone handset original equipment manufacturers, including Motorola. Our cases arepackaged as an accessory "in-box" with the handsets that are sold by our OEM customers. In addition, under our license agreement with Motorola wedistribute our products as separately packaged accessories directly to third party wholesalers and retailers in the EMEA and APAC Regions. Cell phoneproduct sales consisted of OEM “in-box” sales to Motorola and sales under our license agreements. See “Risk Factors” in Item 1A of this Annual Report: “Wehave to date been unable to conclude a new license agreement with Motorola; we are unable to predict if or when a new or extended agreement will beoffered on terms acceptable to us; the absence of a renewal or extended license could have a material and adverse effect on our results of operationsand financial condition.”Total sales of cell phone products decreased $7.5 million, or 48%, to $8.1 million in Fiscal 2007 from $15.6 million in Fiscal 2006. “In-box” sales toMotorola, our only OEM cell phone customer for Fiscal 2007, decreased $5.3 million from Fiscal 2006 due to an overall reduction in demand for ourproducts.Sales to third party distributors and retailers under our license agreement with Motorola totaled $1.9 million in Fiscal 2007 compared to $3.2 million inFiscal 2006, a decrease of $1.3 million, or 41%. We believe that sales under our license agreement with Motorola are being, and will continue to be, adverselyaffected as consumers may be less inclined to purchase relatively high cost cases and other accessories for mature, lower-tier phones accessorized by ourproducts. We believe that the decline may also be attributable to the licensor’s direct sales in the EMEA Region to one or more distributors.Sales of carry solutions for cell phone products represented 37% of our total net sales in Fiscal 2007 compared to 51% in 2006 Period, due primarily tothe decline in cell phone sales that was proportionately greater than the decline in sales of diabetic products.Diabetic Product SalesWe design to the order of and sell directly to OEMs carrying cases used by diabetics to carry their personal electronic, blood glucose monitoring kits.OEM customers for these carrying cases include Abbott, Bayer, Lifescan (a subsidiary of Johnson & Johnson) and Roche Diagnostics. Our carrying casesare packaged as an accessory "in-box" with the monitoring kits that are sold by our OEM customers. 27 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. Sales of cases for blood glucose monitoring kits decreased $0.5 million, or 4%, to $10.9 million in Fiscal 2007 from $11.4 million in Fiscal 2006.This decrease was primarily due to a decline in sales to Bayer of $2.3 million, or 95%, due to the winding down of a significant program with this customerby the beginning of Fiscal 2007, and to a much lesser extent, a decline in sales to Abbott of $0.4 million, or 13%. These declines were partially offset by highersales to Lifescan, our largest OEM customer for these cases, and Roche, with increases of $1.8 million, or 34%, and $0.4 million, or 291%, respectively. The increase in Lifescan sales was due primarily to two “in-box” programs that have continued from Fiscal 2006. Fluctuations in diabetic product sales toother customers were immaterial.Sales of carrying cases for blood glucose monitoring kits represented 49% of our total net sales in Fiscal 2007 compared to 37% of our total net sales inFiscal 2006.Other Product SalesWe design and sell a number of other carrying solutions for items such as cameras, portable oxygen tanks, bar code scanners, MP3 players, and othercarrying solutions for a wide assortment of products on a made-to-order basis that are customized to meet the individual needs of our smaller OEM customers. By the nature of our distribution in this market composed of many niche products, sales of these customized products to order in their product category varyfrom period to period without necessarily reflecting a significant trend in overall demand for these items. Sales of other products decreased $0.5 million, or12%, to $3.1 million in Fiscal 2007 from $3.6 million in Fiscal 2006 due primarily to the winding down of a program with one customer in this product lineby the beginning of Fiscal 2007.Gross ProfitGross profit decreased $3.0 million, or 39%, to $4.8 million in Fiscal 2007 from $7.8 million in Fiscal 2006 due primarily to the lower sales volumesacross all three product lines. Gross profit percentage was also adversely affected by a shift in our product mix as sales of cases for blood glucose monitoringkits, which typically have narrow margins, accounted for an overall higher percentage of our sales in Fiscal 2007 given the decline in sales of cell phoneproducts. In addition, to lower sales volumes of cell phone products, our margins have narrowed on “in-box” sales of these products during Fiscal 2007 as wecontinue to be affected by a difficult pricing environment and increases in our costs of materials, as well as labor and other costs at our Chinese vendors’facilities. Finally, our gross profit was adversely affected by an increase of $0.4 million in our cost of obsolete inventory.Gross profit as a percentage of net sales decreased to 21.7% in Fiscal 2007 from 25.6% in Fiscal 2006 due to the factors discussed above.Selling, General, and Administrative ExpensesSelling, general, and administrative expenses increased $0.5 million, or 8%, to $6.6 million in Fiscal 2007 from $6.1 million in Fiscal 2006. Thisincrease was due to $0.3 million of increased legal and other professional fees, most of which were incurred in the course of defending a purported class actionlitigation against the Company that was subsequently dismissed, $0.2 million in increased personnel expenses, due to changes in personnel and remuneration,and $0.1 million of increased insurance costs. These increases were offset in small part by a decline in royalty expense of $0.1 million due to lower sales oflicensed products. No bonus compensation was paid to executive officers in Fiscal 2007 or Fiscal 2006.Other Income (Expense)Other income increased 32% to $1.0 million in Fiscal 2007 compared to $0.8 million in Fiscal 2006 resulting primarily from higher interest income dueto higher average rates on higher average cash balances.Pre-tax IncomePre-tax income decreased $3.3 million to a pre-tax loss of $0.8 in Fiscal 2007 from $2.5 million of pre-tax income in Fiscal 2006 as a result of thechanges as described above. 28 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. Income TaxesOur effective income tax rate was 31% in Fiscal 2007 compared to 38% in Fiscal 2006 as a result of the higher relative contribution of taxable income(loss) from the EMEA Region, which is taxed at a lower rate than United States taxable income (loss). This had a disproportionate impact on an overallsmaller taxable loss base. Our effective tax rate does not approximate the United States statutory federal income tax rate primarily due to tax rate differentials inrespect of state and foreign taxes, to which income recorded by Forward Innovations is subject. Provision (Benefit) for income taxes decreased $1.2 million inFiscal 2007 to a benefit from income taxes of $0.2, compared to income tax expense of $1.0 million in Fiscal 2006. The income tax benefit consists primarilyof estimated U.S. federal income taxes, and to a lesser extent, current state and foreign income taxes. See Note 9 to the Financial Statements in Item 8 of thisAnnual Report.We consider the earnings of our foreign subsidiaries indefinitely invested and, accordingly, have not recorded a provision for U.S. income taxes on theirun-repatriated earnings. At September 30, 2007, those cumulative earnings were $4.8 million.Results of Operations for Fiscal 2006 compared to Fiscal 2005Net IncomeNet income in Fiscal 2006 was $1.5 million compared to net income of $9.4 million in Fiscal 2005, a decrease of $7.9 million or 84%. The decreasewas due to significantly lower gross profit in Fiscal 2006, as a result of the decrease in OEM cell phone carrying case revenue and sharply reduced margins onsuch reduced revenue. Other income increased $0.6 million in Fiscal 2006, which offset, in small part, the decline in operating income. Basic and dilutedearnings per share were $0.20 and $0.19, respectively, for Fiscal 2006, compared to basic and diluted earnings per share of $1.37 and $1.26 respectively, forFiscal 2005.Net Sales Net sales decreased $21.3 million or 41% to $30.6 million in Fiscal 2006 compared to $51.9 million in Fiscal 2005. As described in greater detailunder “Cell Phone Product Sales” below, the decrease in net sales was due to lower sales volumes of cell phone carrying case solutions products, whichdecreased $21.0 million or 57%, and, to a much lesser extent, lower sales of carrying cases for blood glucose monitoring kits for diabetics, which decreased$0.4 million or 3%. The tables below set forth approximate sales by product line and geographic locations of our customers for the periods indicated. Net Sales for Fiscal 2006(millions of dollars) APACAmericasEMEATotalCell Phone Products$6.7$3.7$5.2$15.6Diabetic Products5.74.11.611.4Other Product Sales0.92.60.13.6Totals*$13.3$10.4$6.9$ 30.6 Net Sales for Fiscal 2005(millions of dollars) APACAmericasEMEATotalCell Phone Products$12.7$5.0$18.9$ 36.6Diabetic Products5.73.72.411.8Other Product Sales0.53.0--3.5Total*$18.9$11.7$21.3$ 51.9* Tables may not total due to rounding. 29 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. Cell Phone Product Sales:Total sales of cell phone products decreased $21.0 million or 57%, to $15.6 million in Fiscal 2006 from $36.6 million in Fiscal 2005. OEM cellphone product sales decreased $22.5 million or 65% in Fiscal 2006 from $34.8 million in Fiscal 2005. Sales to Motorola (excluding sales under license)declined $17.7 million to $11.3 million in Fiscal 2006 from $29.0 million in Fiscal 2005. Nokia revenues declined $4.7 million to $1.0 million in Fiscal2006 from $5.7 million in Fiscal 2005. In general, the decline in OEM cell phone sales was the result of reduced volumes in demand from Motorola andNokia for products included “in-box” for three major programs that drove sales to exceptional levels during Fiscal 2005 (two of which substantially terminatedin Fiscal 2006), sharply reduced margins on such reduced volumes as a result of pricing pressure experienced from these OEM customers, and the absence ofrobust, new “in box” business from these customers to compensate for the impact of the declines in such three programs. With respect to the largest of those programs, consisting of cases and cleaning cloths sold “in box” with a popular Motorola cell phone (the V3 Razr)and which alone accounted for 47% of all net sales in Fiscal 2005, sales from this program declined $19.3 million, or 79%, to $5.0 million in Fiscal 2006from $24.3 million in Fiscal 2005. To a much lesser extent, our OEM cell phone revenue was adversely affected by adoption of a sourcing, billing, and payment arrangement in China inplace during Fiscal 2006 for one OEM customer’s products in which, due to the terms of the arrangement and accounting principles generally accepted in theUnited States we were required to recognize revenue only to the extent of the related gross profit on sales to this customer. This arrangement was in placeduring latter part of Fiscal 2005. Had we not implemented this arrangement, our OEM cell phone revenues would have been $1.1 million higher in Fiscal2006.Sales to third parties under our license agreement with Motorola totaled $3.2 million in Fiscal 2006 compared to $1.5 million in the Fiscal 2005, anincrease of $1.7 million, or 113%, which we believe is inversely related to the sales of carry accessories included “in-box” by our OEM customers.Diabetic Product Sales:Sales of cases for blood glucose monitoring kits decreased $0.4 million or 3%, to $11.4 million in Fiscal 2006 from $11.8 million in Fiscal 2005. Thedecrease was due primarily to $0.5 million in lower sales to Roche, a 78% decrease from Fiscal 2005, and decreases in sales to Lifescan, our largest OEMcustomer for these cases, and Bayer, of $0.2 million and $0.3 million, or 3% and 13%, respectively. These decreases more than offset a $0.8 million increasein sales to Abbot and other customers. OEM sales of carrying cases for blood glucose monitoring kits represented 37% of our net sales in Fiscal 2006compared to 23% of net sales in Fiscal 2005, the result of the decline in cell phone product sales revenues in Fiscal 2006.Other Product Sales:Sales of other products increased $0.1 million or 3% to $3.6 million in Fiscal 2006 from $3.5 million in Fiscal 2005.Gross ProfitGross profit decreased $10.8 million, or 58%, to $7.8 million in Fiscal 2006 from $18.6 million in Fiscal 2005 primarily as a result of lower salesrevenues due to lower sales volumes and pricing pressures from OEM customers with respect to certain programs. In addition, we experienced a rapid shift inour product mix to lower margin items, which further adversely affected our gross profit. Gross profit as a percentage of net sales decreased to 25.6% in Fiscal2006 from 35.8% in Fiscal 2005. Although we have been successful in certain cases in reducing our costs of materials/supply to mitigate pricing pressure,this was not true across all product sales. Additionally, the cost of operating our Hong Kong facility, which constitutes part of cost of goods sold on ourincome statement, was relatively fixed and, on a lower revenue base, acted as a drag on our gross profit percentage. Finally, our shipping costs increased inFiscal 2006 as a result of increased reliance on air freight to meet product shipping deadlines, and this further eroded our gross profit percentage. 30 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. Selling, General, and Administrative ExpensesSelling, general, and administrative expenses decreased $0.1 million, or 2%, to $6.1 million in Fiscal 2006 from $6.2 million in Fiscal 2005 dueprimarily to lower personnel expenses and professional fees, offset in part by higher expenses in other categories. Personnel expenses decreased $0.5 million,or 13%, to $3.5 million from $4.0 million primarily as a result of lower performance-based bonuses paid to executive officers and lower payroll taxesassociated with the exercise of fewer stock options. Professional fees decreased $0.1 million to $0.3 million due primarily to lower legal fees. These decreaseswere offset in part by increases of $0.2 million in “other” general and administrative expense, which consists primarily of directors and officers liabilityinsurance, general liability insurance, and directors fees, and royalty expenses, which increased $0.1 million, or 35%, to $0.5 million in Fiscal 2006 fromFiscal 2005 on higher sales of licensed products, as well as increases in other categories of expense. Changes in other selling, general, and administrativeaccounts were not material. See Item 10. “Executive Compensation” of this Annual Report.Other Income Other income increased $0.6 million or 300% to $0.8 million in Fiscal 2006 compared to $0.2 million in Fiscal 2005 as a result of increased interestincome on higher cash balances. In Fiscal 2006 we incurred a small loss in foreign exchange transactions compared to a gain in Fiscal 2005, when we alsorecorded a gain on property disposal.Pretax IncomePretax income decreased $10.0 million or 80% to $2.5 million in Fiscal 2006 from $12.5 million in Fiscal 2005 as a result of the decrease in grossprofit as described above, offset in small part by the increase in other income.Income TaxesOur effective income tax rate was 38% in Fiscal 2006 versus 25% in Fiscal 2005. Notwithstanding significantly reduced revenues and gross profit inFiscal 2006 compared to Fiscal 2005, our effective tax rate increased in Fiscal 2006 because the relative contribution of revenues from the EMEA Region,which are taxed at a lower rate than United States revenues, was significantly lower in Fiscal 2006 compared to Fiscal 2005. This had a disproportionateimpact on an overall smaller revenue base. Our effective tax rate does not approximate the United States statutory federal income tax rate primarily due to taxrate differentials in respect of United States state and foreign taxes, to which income recorded by Forward Innovations is subject. Provision for income taxesdecreased $2.1 million in Fiscal 2006 to $1.0 million compared to $3.1 million in Fiscal 2005 due to lower taxable income. The provision in Fiscal 2006consists primarily of estimated U.S. federal income taxes, and to a lesser extent, current state and foreign income taxes. See Note 5 to the FinancialStatements.We have in the past considered the earnings of our foreign subsidiaries indefinitely invested and, accordingly, have not recorded a provision for U.S.income taxes on their un-repatriated earnings. At September 30, 2006, those cumulative earnings were $5.0 million. Liquidity and Capital ResourcesDuring Fiscal 2007, we generated $1.9 million of cash from operations compared to $3.2 million in Fiscal 2006. Our operating cash flows in Fiscal2007 consisted of a net loss of $0.6 million, offset by $0.6 million for non-cash items, and $1.8 million for net changes in working capital items, consistingprimarily of changes in accounts receivable and inventories of $1.9 million and $0.8 million, respectively, offset, in part, by changes in accounts payable,accrued expenses and other current liabilities, and prepaid expenses and other assets of $0.2 million, $0.4 million and $0.3 million, respectively. The changesin accounts receivable, inventory, and accounts payable in Fiscal 2007 are attributable to the lower levels of sales and related purchases in Fiscal 2007. Thechange in accrued expenses is primarily a result of remuneration and taxes that were accrued in Fiscal 2006 that were subsequently paid in Fiscal 2007. Nosuch accruals were required as of September 30, 2007. The change in prepaid expenses and other current assets is primarily due to an increase in estimated taxpayments made for the 2007 Fiscal year and customs and duties payments made in the course of shipping our products for which we expect to be reimbursed. 31 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. Our operating cash flows in Fiscal 2006 consisted of net income of $1.5 million, increased by $0.5 million for non-cash items. These cash flows weredecreased by net changes in working capital items of $1.2 million, consisting primarily of a change in accounts receivable of $6.6 million, which was offset,in part, by changes in inventories and accounts payable, and accrued expenses of $1.6 million, $3.0 million, and $0.7 million, respectively.Investing activities used $60,000 in Fiscal 2007 for purchases of property, plant and equipment, primarily computer and telecommunications hardwareand software. In Fiscal 2006, investing activities generated $75,000 from the sale of marketable securities and used $49,000 for purchases of property, plantand equipment, primarily computer and telecommunications hardware and software.Financing activities used $232,000 to purchase 70,000 shares of the Company’s common stock in open market purchases during Fiscal 2007 andgenerated $93,000 from the issuance of common stock upon the exercise of stock options to purchase 53,000 shares under our 1996 Stock Incentive Plan. InFiscal 2006, net financing activities generated $88,000 in cash from the issuance of common stock upon the exercise of stock options to purchase 27,900shares under our 1996 Stock Incentive Plan.At September 30, 2007, our current ratio (current assets divided by current liabilities) was 11.95; our quick ratio (current assets less inventoriesdivided by current liabilities) was 11.46; and our working capital (current assets less current liabilities) was $24.2 million. As of such date, we had no shortor long-term debt outstanding.Our primary sources of liquidity are cash on hand, our operating cash flow, and our bank credit facilities. Currently, the primary demands on ourworking capital are: loss from operations, our accounts payable arising in the ordinary course of business, the most significant of which arise when ourcustomers place orders and we order from our suppliers; and our commitments under our license agreement with Motorola. If the license agreement withMotorola is not renewed or extended on terms acceptable to us, we will no longer incur such minimum royalty commitments, but the demands on our workingcapital from operating losses may increase. See Item 1A “Risk Factors” in this Annual Report: “We have to date been unable to conclude a new licenseagreement with Motorola; we are unable to predict if or when a new or extended agreement will be offered on terms acceptable to us; the absence of arenewal or extended license could have a material and adverse effect on our results of operations and financial condition”. Historically, our sources ofliquidity have been adequate to satisfy working capital requirements arising in the ordinary course of business. We anticipate that our liquidity and financialresources for the ensuing fiscal year will be adequate to manage our financial requirements.In February 2007, Forward and Koszegi renewed their credit facility with a U.S. bank that provides for a committed line of credit in the maximumamount of $3.0 million, including a $1.5 million sub-limit for letters of credit, expiring March 2008. Forward and Koszegi are required to eliminateborrowings for thirty consecutive days during the term of the facility and are required to maintain certain financial covenants including the maintenance ofcurrent and tangible net worth ratios, as defined. Amounts drawn under the credit facility bear interest at LIBOR plus 2.5% and are secured by substantiallyall of Koszegi’s assets and certain assets of Forward Industries. At September 30, 2007, there were no outstanding borrowings or letter of credit obligationsunder this facility. See Note 5 to the consolidated Financial Statements set forth in Item 8 of this Annual Report. 32 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Forward Industries, Inc. In February 2003, Forward Innovations established a credit facility with a Swiss bank that provides for an uncommitted line of credit in the maximumamount 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, or asa guarantee facility, or any combination of the foregoing. Either party may terminate the facility at any time; however, such termination would not affect thestated maturity of any term loan outstanding under the facility. Amounts borrowed other than as a term loan must be settled quarterly or converted into termloans. In connection with this facility, Forward Innovations has agreed to certain financial covenants. Amounts drawn under this credit facility bear interest atvariable rates established by the bank (5.5% as September 30, 2007). At September 30, 2007 Forward Innovations is contingently liable to the bank under aletter of credit issued on its behalf in the amount of €224,000 ($315,000) in favor of Forward Innovations' freight forwarder and customs agent in connectionwith its logistics operations in The Netherlands. The effect of the issuance of the letter of credit is to reduce the availability of the credit line in an amountequal to the face amount of the letter of credit. See Notes 5 and 6 to the consolidated Financial Statements set forth in Item 8 of this Annual Report.On September 27, 2002, our Board of Directors authorized the repurchase of up to 400,000 shares of our outstanding common stock, or 7% of thenumber of shares then outstanding. On January 21, 2004, our Board increased the amount of shares authorized for repurchase to 486,200. Under thatauthorization, as of September 30, 2007, we had repurchased an aggregate of 172,603 shares at a cost of $0.4 million, including 70,000 shares at a cost of$0.2 million during Fiscal 2007, but none during Fiscal 2006.Contractual Obligations and Commercial CommitmentsThe Company has entered into various contractual obligations and commercial commitments that, under accounting principles generally accepted in theUnited States are not recorded as a liability. The following is a summary of such contractual cash obligations as of September 30, 2007: Contractual Obligation or CommitmentOct 07 – Sep 08Oct 08- Sep 10Oct 10 – Sep 12ThereafterEmployment & Consulting Agreements$494,000$206,000$ -- $ -- Operating Leases318,000462,000241,000--License Agreements**89,000------Totals$901,000$668,000$241,000 $ -- ** The amount shown as license agreement obligation represents the minimum amount the Company would incur as a royalty expense under the present termsof its Motorola license agreement. Such royalty would be incurred in respect of the period October 1, 2007 – December 31, 2007. The license agreement expiresDecember 31, 2007, and if not renewed or extended, no future obligations will be incurred thereunder for other future periods shown in the table.The Company has not guaranteed the debt of any unconsolidated entity and does not engage in derivative transactions or maintain any off-balance sheetspecial purpose entities. 33 ITEM 7A. Quantitative and Qualitative Disclosures About Market RiskWe are exposed to certain market risks arising from transactions in the normal course of business, principally risks associated with interest rate andforeign currency fluctuations. We have not engaged in interest rate swaps, foreign currency hedges or other derivative transactions designed to mitigate theserisks. We do not enter into market sensitive instruments for trading purposes.Interest Rate RiskThe predominant portion of our cash and equivalents is invested in money market funds and overnight interest rate sensitive securities. The values ofthese investments do not fluctuate materially due to their short term nature and are not subject to interest rate risks; however, the income we earn on ourinvested cash will fluctuate 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 had any borrowings under these facilities in several years, and did not have any borrowings outstanding as of September 30, 2007, anysuch borrowings would be subject to interest rate risk if we decide to borrow against these credit lines. Given the lack of borrowings, our current cash positionand the dollar amount of these credit lines we do not believe a change in interest rates would be material to our financial results.Foreign Currency RiskAs a result of our global operating activities, we are exposed to changes in foreign currency exchange rates that may adversely affect our results ofoperations and financial condition. Our exposure is concentrated in the Euro, Swiss Franc, and Hong Kong dollar. In Fiscal 2007, approximately 11% of oursales were denominated in Euros. In addition, certain operating expenses of our Swiss subsidiary are paid in Euros or Swiss Francs, whereas, certainoperating expenses of our Hong Kong subsidiary are paid in the Hong Kong dollar. Because we have determined that the US dollar is the functional currencyof our foreign subsidiaries, the gains and losses resulting from converting these transactions to the U.S. dollar for financial statement presentation purposesare included in our results of operations as a component of our net income (loss). See “Notes to Consolidated Financial Statements, Note 2 –AccountingSource: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.are included in our results of operations as a component of our net income (loss). See “Notes to Consolidated Financial Statements, Note 2 –AccountingPolicies – Foreign Currency Transactions” in Item 8. of this Annual Report for a description of our foreign currency accounting policies. We estimate that an adverse movement of 20% in these foreign currencies exchange rates would have decreased our results of operations byapproximately $0.9 million, before taxes, for the fiscal year ended September 30, 2007.We purchase substantially all our entire inventory from China and although these transactions are denominated in U.S. dollars, our suppliers may paytheir expenses in Chinese Yuan. If the rate of the Yuan to the U.S. dollar fluctuates our suppliers are likely to change the prices they charge to us furthersubjecting our operating results to foreign currency risk. 34 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe consolidated financial statements and notes thereto and supplementary data included in this Annual Report may be found at pages 38 to 58 ofthis Annual Report.ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENoneITEM 9A. CONTROLS AND PROCEDURESOur management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e)) underthe Exchange Act) that is designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the ExchangeAct is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Disclosure controls andprocedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that itfiles or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer or officers andprincipal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.In accordance with Exchange Act Rule 13a-15(b), our management, under the supervision and with the participation of our Chief Executive Officer andChief Financial Officer, performed an evaluation of the effectiveness of the Company's disclosure controls and procedures as of the end of the period coveredby this Report (the fourth fiscal quarter of Fiscal 2007 in the case of this Annual Report on Form 10-K). Based on that evaluation, the Company's ChiefExecutive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective, as of the end of the periodcovered by this Report (the fourth fiscal quarter of Fiscal 2007 in the case of this Annual Report on Form 10-K), to provide reasonable assurance thatinformation required to be disclosed in the Company's reports filed or submitted under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in the Commission's rules and forms.Changes in internal controlsOur management, with the participation our Chief Executive Officer and Chief Financial Officer, performed an evaluation required by Rule 13aa-15(d)of the Exchange Act as to whether any change in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurredduring the last fiscal quarter of Fiscal 2007. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that no changeoccurred in the Company's internal controls over financial reporting during the last fiscal quarter of Fiscal 2007 that has materially affected, or is reasonablylikely to materially affect, the Company's internal controls over financial reporting.ITEM 9B. OTHER INFORMATIONNonePART IIIITEM 10. DIRECTORS, EXECUTIVE AND CORPORATE GOVERNANCEThe information required by this item regarding directors is incorporated by reference to our Definitive Proxy Statement to be filed with the Securitiesand Exchange Commission in connection with the Annual Meeting of Stockholders to be held in 2008 (the “2008 Proxy Statement”) under the heading“Election of Directors.” Information regarding executive officers is set forth in Item 1 of Part I of this Report under the caption “Executive Officers.” Theinformation regarding our code of ethics is incorporated by reference to the 2008 Proxy Statement under the heading “Code of Ethics.” 35 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ITEM 11. EXECUTIVE COMPENSATIONThe information required by this item is incorporated by reference to the 2008 Proxy Statement under the heading “Executive Compensation andRelated Information.”ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND management AND RELATED STOCKHOLDER MATTERSThe information required by this item is incorporated by reference to the 2008 Proxy Statement under the heading “Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters.”ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this item is incorporated by reference to the 2008 Proxy Statement under the heading “Certain Relationships, DirectorIndependence, and Related Transactions.”ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information required by this item is incorporated by reference to the 2008 Proxy Statement under the heading “Principal Accountant Fees andServices.”PART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESa. Financial Statements and SchedulesReport of Independent Registered Public Accounting Firm (Kaufman, Rossin & Co., P.A..)Consolidated Balance Sheets Consolidated Statements of IncomeConsolidated Statements of Shareholders EquityConsolidated Statements of Cash FlowsNotes to Consolidated Financial StatementsFinancial statement schedules other than those listed above have been omitted because they are either not required, not applicable or the information isotherwise included in the notes to the consolidated financial statements.b. Exhibits3.ARTICLES OF INCORPORATION AND BY-LAWS 3.1Certificate of Incorporation of the Company as amended (incorporated by reference to Exhibit 2(a) to the Form 10-SB) 3.2By-Laws (incorporated by reference to Exhibit 2(b) to the Form 10-SB) 3.3Amendment to By-Laws (Article I, Section 2) (incorporated by reference to Exhibit 3(c) to the Company's Registration Statement onForm SB-2 filed November 13, 1995 (Reg. No. 33-99338) (the "1995 SB-2 Registration Statement") 3.4Certificate of Amendment of Certificate of Incorporation filed by the New York Department of State on August 22, 1997 (incorporatedby reference to the Company's Annual Report on Form 10-KSB for the period ended September 30, 1997)10.MATERIAL CONTRACTS 10.1License Agreement, effective as of October 1, 2004, between Motorola, Inc. and the Company (incorporated by reference to Exhibit 10.1to the Company’s Current Report on Form 8-K, filed October 18, 2004. 10.21996 Stock Incentive Plan of Forward Industries, Inc. (incorporated by reference to Exhibit 4 to the Registration Statement on Form S-8 of the Company, as filed on April 25, 2003). 10.3Amendment One to Employment Agreement effective as of July 12, 2005 between the Company and Douglas W. Sabra (incorporatedby reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 12, 2005). 10.4Employment Agreement effective as of October 1, 2005 between the Company and Jerome E. Ball (incorporated byreference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on December 28, 2005). 36 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 10.5Employment Agreement effective as of October 1, 2005 between the Company and Michael M. Schiffman (incorporated by reference toExhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 28, 2005). 10.6Employment Agreement effective as of October 1, 2005 between the Company and Douglas W. Sabra (incorporated by reference toExhibit 10.3 to the Company’s Current Report on Form 8-K filed on December 28, 2005). 10.7Forward Industries, Inc. 2007 Equity Incentive Plan (incorporated by reference to Exhibit 4.2 to the RegistrationStatement on Form S-8 of the Company, as filed on July 10, 2007). 10.8Consulting Agreement, dated August 15, 2007, between Jerome E. Ball and Forward Industries, Inc. (incorporated byreference to Exhibit 99.2 to the Current Report on Form 8-K of the Company as filed on August 16, 2007).21.SUBSIDIARIES OF THE REGISTRANT 21.1List of Subsidiaries of Forward Industries, Inc.23. CONSENT OF EXPERTS AND COUNSEL 23.1Consent of Kaufman, Rossin & Co., P.A. relating to 1996 Stock Incentive Plan31. CERTIFICATIONS PURSUANT TO RULE 13a-14(a) (Section 302 of Sarbanes-Oxley) 31.1Certification of Jerome E. Ball 31.2Certification of Douglas W. Sabra32. CERTIFICATIONS PURSUANT TO RULE 13a-14(b) (Section 906 of Sarbanes-Oxley) 32.1Certifications of Jerome E. Ball and Douglas W. Sabra 37 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of Forward Industries, Inc. We have audited the accompanying consolidated balance sheets of Forward Industries, Inc. and subsidiaries (the Company) as of September 30, 2007and 2006, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended September30, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financialstatements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ForwardIndustries, Inc. and subsidiaries at September 30, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the periodended September 30, 2007, in conformity with accounting principles generally accepted in the United States of America. KAUFMAN, ROSSIN & CO., P.A. Miami, FloridaNovember 29, 2007 38 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FORWARD INDUSTRIES, INC.CONSOLIDATED BALANCE SHEETSSEPTEMBER 30, 2007 AND 2006 September 30, September 30, 2007 2006Assets Current assets: Cash and cash equivalents$20,267,791 $18,609,371Accounts receivable, net4,135,117 6,069,058Inventories, net1,072,360 2,449,065Prepaid expenses and other current assets628,786 329,461Deferred tax asset279,741 83,000Total current assets26,383,795 27,539,955 Property, plant, and equipment, net160,644 190,084Deferred tax asset29,898 --Other assets57,538 51,932Total Assets$26,631,875 $27,781,971 Liabilities and shareholders’ equity Current liabilities: Accounts payable$1,904,946 $ 2,141,191 Accrued expenses and other current liabilities303,185 690,413Total current liabilities2,208,131 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,8,488,932 and 8,424,931 shares issued, respectively (including 633,493 and 563,493 held intreasury, respectively ) 84,889 84,249Capital in excess of par value.15,546,046 15,287,952Treasury stock, 633,493 and 563,493 shares at cost, respectively(1,085,057) (853,159)Retained earnings9,877,866 10,431,325Total shareholders' equity24,423,744 24,950,367Total liabilities and shareholders’ equity$26,631,875 $27,781,971 The accompanying notes are an integral part of the consolidated financial statements. 39 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FORWARD INDUSTRIES, INC.CONSOLIDATED STATEMENTS OF OPERATIONS For the Fiscal Years Ended September 30, 2007 2006 2005Net sales$22,150,513 $30,607,843 $51,868,962Cost of goods sold17,346,913 22,772,938 33,282,203Gross profit4,803,600 7,834,905 18,586,759 Operating expenses: Selling3,641,000 3,563,570 3,517,088General and administrative2,977,660 2,545,848 2,731,284Total operating expenses6,618,660 6,109,418 6,248,372 (Loss) income from operations(1,815,060) 1,725,487 12,338,387 Other income: Interest income1,001,091 779,647 130,719Other income (expense), net11,130 (11,966) 19,948Total other income1,012,221 767,681 150,667 (Loss) income before provision (benefit) for income taxes (802,839) 2,493,168 12,489,054(Benefit) provision for income taxes(249,380) 952,000 3,054,615Net (loss) income$ (553,459) $1,541,168 $9,434,439 Net (loss) income per common and common equivalent share Basic$ (0.07) $ 0.20 $ 1.37Diluted$ (0.07) $ 0.19 $ 1.26 Weighted average number of common and common equivalent shares outstanding Basic7,844,376 7,855,637 6,873,217Diluted7,844,376 8,005,111 7,482,510 The accompanying notes are an integral part of the consolidated financial statements. 40 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FORWARD INDUSTRIES, INC.CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYFOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2007, 2006, AND 2005 Common Stock Treasury Stock Total Number of SharesPar ValueAdditional Paid-in Capital(Accumulated Deficit) Retained EarningsNumber of SharesAmountBalance at September 30, 2004$7,618,7976,789,931$67,899$ 8,948,339 ($544,282)563,493$ (853,159)Disgorgement of short-swing profits – net of taxes of $95,000161,363----161,363------Commons stock issued upon exercise of stock options3,542,3911,607,10016,0713,526,320------Tax benefit from exercise of stock options2,085,150----2,085,150------Net income9,434,439------9,434,439----Balance at September 30, 200522,842,1408,397,03183,97014,721,1728,890,157563,493(853,159)Common stock issued upon exercise of stock options87,65927,90027987,380------Tax benefit from exercise of stock options479,400----479,400------Net income1,541,168------1,541,168----Balance at September 30, 200624,950,3678,424,93184,24915,287,95210,431,325563,493(853,159)Common stock issued upon exercise of stock options92,75053,00053092,220------Share-based compensation165,98411,001-110165,874------Repurchases of common stock(231,898)--------70,000(231,898)Net loss(553,459)------(553,459)----Balance at September 30, 2007$24,423,744)8,488,932$84,889$15,546,046$9,877,866633,493($1,085,057) 41 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FORWARD INDUSTRIES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS For the Fiscal Years Ended September 30, 2007 2006 2005Operating activities: Net (loss) income($553,459) $1,541,168 $9,434,439 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Provision for obsolete inventory613,109 262,937 107,632Share-based compensation165,984 -- --Deferred income taxes(226,639) 132,647 470,965Depreciation and amortization89,955 102,662 123,850Gain on marketable equity securities-- -- (75,034)Loss on sale of property, plant and equipment-- -- 4,000Provision for bad debt expense-- 7,700 25,787Changes in operating assets and liabilities: Accounts receivable1,933,941 6,631,926 (9,124,912)Inventories763,596 (1,598,845) (409,095)Prepaid expenses and other current assets(299,325) (115,449) (23,936)Other assets(5,606) (7,465) 500Accounts payable(236,245) (3,017,830) 3,345,478Accrued expenses and other current liabilities(387,228) (735,612) 3,233,549 Net cash provided by operating activities1,858,083 3,203,839 7,113,223 Investing activities: Purchases of property, plant, and equipment(60,515) (48,900) (108,653)Proceeds from sale of marketable equity securities-- 75,034 --Proceeds from sale of property, plant and equipment-- -- 1,000Net cash (used) provided by investing activities(60,515) 26,134 (107,653) Financing activities: Purchases of treasury stock(231,898) -- --Proceeds from exercise of stock options92,750 87,659 3,542,391Proceeds from disgorgement of short-swing profits-- -- 256,363Net cash (used) provided by financing activities(139,148) 87,659 3,798,754 Net increase in cash and cash equivalents1,658,420 3,317,632 10,804,324 Cash and cash equivalents at beginning of period18,609,371 15,291,739 4,487,415 Cash and cash equivalents at end of period$20,267,791 $18,609,371 $15,291,739 Supplemental Disclosures of Cash Flow Information: Cash paid during the fiscal year for: Interest$ -- $ -- $ --Income Taxes$ 239,079 $ 630,000 $ 34,700 The accompanying notes are an integral part of the consolidated financial statements. 42 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FORWARD INDUSTRIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 OVERVIEW Forward Industries, Inc. was incorporated under the laws of the State of New York and began operations in 1961. The Company is engaged in thedesign, marketing, and distribution of custom-designed, soft-sided carrying cases and other carry solutions products made from leather, nylon, vinyl, andother synthetic fabrics. The cases and other products are used primarily for the protection and transport of portable electronic devices such as cellular phonesand medical devices. The Company markets products as a direct seller to original-equipment-manufacturers in the EMEA Region (meaning the geographic areaencompassing Europe, the Middle East and Africa), the APAC Region (meaning the Asia Pacific Region, encompassing Australia, New Zealand, Hong Kong,Taiwan, China, South Korea, Japan, Singapore, Malaysia, Thailand, Indonesia, India, the Philippines and Vietnam) and the Americas (meaning thegeographic area, encompassing North, Central and South America) and as a seller to retailers and wholesalers in Europe, the Middle East and Africa undernon-exclusive licenses for certain trademarks.NOTE 2 ACCOUNTING POLICIESAccounting EstimatesPreparing the Company's consolidated financial statements in conformity with accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities atthe date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from thoseestimates.Basis of PresentationThe accompanying consolidated financial statements include the accounts of Forward Industries, Inc. ("Forward") and its wholly owned subsidiaries(together, the "Company"). All significant intercompany transactions and balances have been eliminated in consolidation.Cash EquivalentsCash and cash equivalents consist primarily of cash on deposit and highly liquid money market accounts with contractual maturities of threemonths or less. The Company minimizes its credit risk associated with cash and cash equivalents by investing in high quality, investment grade instrumentsand by periodically evaluating the credit quality of the primary financial institution issuers of such instruments. The Company holds cash and cashequivalents at major financial institutions, which often exceed FDIC insured limits. Historically, the Company has not experienced any losses due to suchcash concentrations.Accounts ReceivableAccounts receivable consist of unsecured trade accounts with various customers. The Company performs ongoing credit evaluations of its customersand believes that adequate allowances for any uncollectible receivables are maintained. Credit terms to the majority of our customers are generally net thirty (30)to net sixty (60), however, certain customers, particularly the Company’s largest, have extended payment terms up to 90 days. The Company has nothistorically experienced significant losses in extending credit to customers. At September 30, 2007 and 2006, the allowance for doubtful accounts wasapproximately $47,000. 43 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. NOTE 2 ACCOUNTING POLICIES (CONTINUED)InventoriesInventories consist primarily of finished goods and are stated at the lower of cost (determined by the first-in, first-out method) or market. TheCompany periodically evaluates its inventories and records a provision to reduce slow moving, obsolete, or otherwise un-saleable inventories to net realizablevalue. The Company physically disposes of inventory once its marketability has been determined to be zero. At September 30, 2007 and 2006, the allowancefor obsolete inventory was approximately $558,000 and $227,000, respectively.Property, Plant and EquipmentProperty, plant and equipment consist of furniture, fixtures and equipment, and leasehold improvements and are recorded at cost. Expenditures formajor additions and improvements are capitalized, and minor replacements, maintenance, and repairs are charged to expense as incurred. When property,plant and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or lossis included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. The estimated useful life for furniture, fixtures and equipment ranges from three to ten years. Amortization ofleasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of theimprovements.Income TaxesThe Company accounts for its income taxes in accordance with the provisions of Statement of Financial Accounting Standard (SFAS) No. 109,Accounting for Income Taxes (SFAS 109), which requires, among other things, recognition of future tax benefits and liabilities measured at enacted ratesattributable to temporary differences between financial statement and income tax bases of assets and liabilities and to tax net operating loss carryforwards to theextent that realization of these benefits is more likely than not. The Company periodically evaluates the realizability of its net deferred tax assets.Revenue RecognitionIn accordance with the requirements of Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition in Financial Statements, the Companyrecognizes revenue from product sales to customers when: products that do not require further services by the Company are shipped, there are no uncertaintiessurrounding customer acceptance, and collectibility is reasonably assured.Supplier RebatesEmerging Issues Task Force (EITF) Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from aVendor, permits recognition of a rebate or refund of a specified amount of cash consideration that is payable if the customer completes a specified cumulativelevel of purchases. The Company has entered into agreements with several of its 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 the Company generally receives a credit memo. The Company reduces accountspayable to the supplier and cost of goods sold each quarter as the Company earns the rebates. For the fiscal years ended September 30, 2007, 2006 and 2005the cumulative amounts of such quarterly rebates were approximately $504,000 and $659,000 and $1,242,000, respectively. The quarterly rebates are net ofamounts allocated to unsold inventories and are reflected in the accompanying consolidated statements of operations as a reduction of cost of goods sold.Shipping and Handling CostsThe Company expenses shipping and handling costs as a component of cost of goods sold. 44 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. NOTE 2 ACCOUNTING POLICIES (CONTINUED)Advertising ExpensesAdvertising costs, consisting primarily of sample expense and product brochures, are expensed as incurred. Advertising costs are included in sellingexpenses in the accompanying consolidated statements of operations and amounted to approximately $80,000, $78,000 and $66,000 for the years endedSeptember 30, 2007, 2006 and 2005, respectively. Foreign Currency TransactionsThe functional currency of each of the Company's wholly owned foreign subsidiaries is the U.S. dollar. Transactions denominated in a foreigncurrency may generate receivables or payables that are fixed in terms of the amount of the foreign currency that will be received or paid. Fluctuations inexchange rates between the functional currency and the currency in which a transaction is denominated increases or decreases the expected amount offunctional currency cash flows upon settlement of the transaction. These increases or decreases in expected functional currency cash flows are foreigncurrency transaction gains or losses that are included in “other income (expense), net” in the accompanying consolidated statements of operations.In addition, assets and liabilities that are denominated in foreign currencies are translated into U.S. dollars at the rate of exchange at the balance sheetdate. These translation adjustments are likewise included in “other income (expense), net” in the accompanying consolidated statements of operations.The net gain (loss) from foreign currency transactions and translations was approximately $11,000, ($12,000) and ($53,000) for the fiscal years endedSeptember 30, 2007, 2006 and 2005, respectively.Comprehensive (Loss) IncomeFor the fiscal years ended September 30, 2007, 2006 and 2005, the Company did not have any components of comprehensive (loss) income other thannet (loss) income.Recent Accounting PronouncementsOn July 13, 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in IncomeTaxes, as amended by FASB Interpretation No. 48-1, Definition of Settlement in FASB Interpretation No. 48 on May 2, 2007 (FIN 48). FIN 48, clarifies theaccounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financialstatements. It also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure andtransition, and clarifies that income taxes are outside the scope of FASB Statement No. 5, Accounting for Contingencies.FIN 48 applies to all tax positions related to income taxes subject to SFAS 109. This includes tax positions considered to be “routine” as well as thosewith a high degree of uncertainty.FIN 48 is effective for fiscal years beginning after December 15, 2006. Differences between the amounts recognized in the statements of financialposition prior to the adoption of FIN 48 and the amounts recognized after adoption should be accounted for as a cumulative-effect adjustment recorded to thebeginning balance of retained earnings. The cumulative effect adjustment would not apply to those items that would not have been recognized in earnings, suchas the effect of adopting FIN 48 on tax positions related to business combinations. The Company has adopted FIN 48 effective October 1, 2007. TheCompany is currently evaluating the impact, if any, the adoption of FIN 48 will have on its consolidated financial statements. 45 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. NOTE 2 ACCOUNTING POLICIES (CONTINUED)Recent Accounting Pronouncements (continued)In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS No. 157"). SFASNo. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure about fairvalue measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB havingpreviously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS No. 157 does not requireany new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after December 15, 2007. The Company is currently evaluating theimpact, if any, the adoption of SFAS No. 157 will have on its consolidated financial statements.In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, Fair Value Option for Financial Assets and FinancialLiabilities (SFAS No. 159), which gives companies the option to measure eligible financial assets, financial liabilities and firm commitments at fair value(i.e., the fair value option), on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accountingstandards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability or upon entering into a firmcommitment. Subsequent changes in fair value must be recorded in earnings. SFAS No. 159 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007. The Company is in the process of evaluating the impact, if any, of adoption of SFAS No. 159 will have on itsconsolidated financial statements.NOTE 3 PROPERTY, PLANT AND EQUIPMENTProperty, plant and equipment and related accumulated depreciation are summarized in the table below: For the Fiscal Years Ended September 30, 2007 2006Furniture, fixtures and equipment $951,478 $893,446Leasehold improvements 170,280 167,796Property, plant and equipment, cost 1,121,758 1,061,242Less accumulated depreciation (961,114) (871,158)Property, plant and equipment, net $160,644 $190,084NOTE 4 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIESAccrued expenses and other current liabilities consist of the following: For the Fiscal Years Ended September 30, 2007 2006Accrued wages, bonuses and related expenses $137,457 $332,877Accrued royalties and commissions 89,249 130,501Accrued expenses 76,479 37,293Accrued income taxes -- 189,742Accrued expenses and other current liabilities $303,185 $690,413 46 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. NOTE 5 DEBTIn February 2007, Forward and its wholly-owned U.S. subsidiary, Koszegi Industries, Inc. renewed their credit facility with a U.S. bank that providesfor 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 March 2008. Forwardand Koszegi are required to eliminate borrowings for thirty consecutive days during the term of the facility and are required to comply with certain financialcovenants, including the maintenance of current and tangible net worth ratios, as defined. Amounts drawn under the credit facility bear interest at LIBOR plus2.5% and are secured by substantially all of Koszegi’s assets and certain assets of Forward, principally its holdings of Koszegi’s capital stock. There wereno borrowings or letter of credit obligations outstanding at any time under this facility during the fiscal years ended September 30, 2007 and 2006.In 2003, Forward’s wholly-owned Swiss subsidiary, Forward Innovations GmbH (Forward Innovations), established a credit facility with a Swissbank that provides for an uncommitted line of credit in the maximum amount of $400,000. Amounts borrowed under the facility may be structured as a termloan or loans, with a maximum repayment period of 12 months, as a letter of credit facility, or as a guarantee facility, or any combination of the foregoing. Either party may terminate the facility at any time; however, such termination would not affect the stated maturity of any term loans outstanding. Amountsborrowed other than as a term loan must be settled quarterly or converted into term loans. In connection with this facility, Forward Innovations agreed tocertain covenants. Amounts drawn under this credit facility bear interest at variable rates established by the bank (5.5% at September 30, 2007 and 2006). AtSeptember 30, 2007 and 2006, Forward Innovations is contingently liable to the bank in respect of a letter of credit issued on its behalf in the amount of€224,000 (approximately $315,000 and $284,000 at September 30, 2007 and 2006, respectively) in favor of Forward Innovations’ freight forwarder andcustoms agent in connection with its logistics operations in The Netherlands. The effect of the issuance of the letter of credit is to reduce the availability of thecredit line in an amount equal to the face amount of the letter of credit. NOTE 6 COMMITMENTS AND CONTINGENCIESRoyalty CommitmentsThe Company has been granted a license for the use of certain trademarks by Motorola, Inc. ("Motorola") for the distribution and sale of carrysolution products throughout the EMEA Region under a non-exclusive license agreement effective October 1, 2004. The license agreement expires by its termson December 31, 2007. Under the terms of the license agreement, the Company is required to pay Motorola a royalty based upon a percentage of theCompany's net sales to third parties of licensed products within the EMEA Region, subject to payment of minimum royalties (irrespective of actual net sales)to Motorola over the following three contract periods: Contract Period 1: October 1, 2004 to December 31, 2005Contract Period 2: January 1, 2006 to December 31, 2006Contract Period 3: January 1, 2007 to December 31, 2007The minimum royalty payment to Motorola for Contract Period 1 was agreed at $375,000, or $300,000 annualized. The license terms further providethat, prior to the commencement of each subsequent contract period, the parties would attempt to negotiate a new minimum royalty amount for the ensuingcontract period, in the absence of which a default formula would apply. The default formula provides that the minimum royalty payment for the ensuingContract Period may not be less than seventy-five per cent (75%) of the annualized royalties payable in respect of actual sales for the previous Contract Period,provided, however, that in no event may the minimum royalty in such ensuing Contract Period be less than seventy-five percent (75%) nor more than one-hundred-twenty-five percent (125%) of the amount of such prior Contract Period’s annual minimum royalty. The Company and Motorola were unable tonegotiate new agreed minimum royalty payment amounts for Contract Period 2 and Contract Period 3. Consequently, application of the default formularesulted in fixing the minimum royalty amounts at $225,000 for Contract Period 2 and $281,000 for Contract Period 3. 47 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. NOTE 6 COMMITMENTS AND CONTINGENCIES (CONTINUED)Royalty Commitments (continued)In July 2005, the license agreement with Motorola was amended to expand the licensed territory to include the APAC Region as well as the EMEA Regionin consideration for payment of additional royalties on sales in such licensed territory, subject to payment of minimum royalties, separate and apart fromroyalties payable in respect of sales in the EMEA Region. Under its current license agreement with Motorola, the Company recorded royalty expense of approximately $404,000, $525,000 and $310,000 for thefiscal years ended September 30, 2007, 2006, and 2005, respectively. These amounts are included in selling expenses in the accompanying consolidatedstatements of operations. These amounts represent royalties paid in respect of actual sales and in each case (except in the case of Fiscal 2007) represent anamount in excess (and in lieu) of the minimum royalties otherwise payable to Motorola in respect of those periods. The minimum royalties for the fiscal yearsended September, 30, 2007, 2006, and 2005, were $336,000, $291,000 and $310,000, respectively.Bank GuaranteeIn July 2002, Forward Innovations and its European logistics provider (freight forwarding and customs agent) entered into a Representation Agreementwhereby, among other things, the European logistics provider agreed to act as such subsidiary's fiscal representative in The Netherlands for the purpose ofproviding services in connection with any value added tax matters. As part of this agreement, the subsidiary agreed to provide an undertaking to the logisticsprovider with respect to any value added tax liability arising in The Netherlands that the logistics provider paid on the subsidiary's behalf. In February 2004,such subsidiary entered into a guarantee agreement with a Swiss bank relating to the repayment of any amount up to €224,000 (approximately $315,000 and$284,000 as of September 30, 2007 and 2006, respectively) paid by such bank to the logistics provider pursuant to a letter of credit that was issued by thebank in 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 sales in The Netherlands, (ii) the logistics provider asserts that it has been called uponin 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 theamount of value added tax due to the logistics provider, and (iv) the logistics provider makes a drawing under the letter of credit. Commencing December 31,2004, and on each anniversary thereafter until December 31, 2009, it is intended that the bank letter of credit will be renewed automatically for one-yearperiods. The subsidiary has agreed to keep a letter of credit guarantee in place for five years following the date its relationship terminates with the logisticsprovider. As of September 30, 2007, the Company has not incurred a liability in connection with this guarantee.Employment AgreementsOn December 27, 2005, upon the recommendation of the Compensation Committee of the Board of Directors, the Company entered into newEmployment Agreements with each of Mr. Jerome E. Ball and Mr. Michael M. Schiffman. The employment term of these agreements, which terminated andreplaced the existing agreements between the Company and each such officer, run from the effective date of October 1, 2005, until December 31, 2007, exceptMr. Sabra's agreement which expires December 31, 2008, unless otherwise terminated or extended pursuant to the terms of each agreement. Each agreementprovides for successive one-year renewal terms, unless either party provides written notice of its intention not to renew the agreement not later than 90 daysprior to the end of the term (or renewal period). If the Company gives such notice, subject to certain conditions, the executive would be entitled to receive sixmonths salary at the rate then in effect as severance. Under his agreement, Mr. Ball is employed as the Company's Chairman and Chief Executive Officer at an annual salary of $325,000. Under hisagreement, Mr. Schiffman is employed as its President and Chief Operating Officer at an annual salary of $325,000. Under his employment agreement, Mr.Sabra is employed as Vice President and Chief Financial Officer at an annual salary of $185,000. In November 2006, the Compensation Committee of theBoard of Directors voted to increase the annual salary of Mr. Sabra pursuant to his employment agreement with the company to $225,000 effective from thetime of the announcement; no changes were made to any other term of Mr. Sabra's employment agreement. 48 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. NOTE 6 COMMITMENTS AND CONTINGENCIES (CONTINUED)Employment Agreements (continued) As set forth under "Consulting Agreement" below, Mr. Ball is retiring as Chief Executive Officer effective December 31, 2007, and has agreed toconsult for the Company. Mr. Schiffman's term of office as President and Chief Operating Officer will expire December 31, 2007. The Company and Mr.Schiffman are in negotiations relating to severance and other arrangements.Each of the above executives is eligible to receive an annual bonus based on achieving certain financial goals relating to operating income as determinedat the beginning of each fiscal year and non-financial goals, in each case as determined by the Compensation Committee of the Board of Directors. Themaximum amount of bonus payable under their existing agreements is equal to 50% of their combined annual salaries, the distribution of which is determinedby a formula set by the Compensation Committee. However, as permitted by the agreements, the Compensation Committee may, in its sole discretion, grant anamount in excess of such maximum to recognize the executive’s achievements.In addition to the foregoing, the agreements provide that each executive may terminate his agreement in the event that “good cause” (as defined in eachsuch agreement) is established, in which case the executive would be entitled to receive on the date of termination one-half his salary for the year in which suchtermination occurs plus the amount of the bonus to which he would otherwise be entitled, pro rated to the date of termination (and calculated as set forth ineach such agreement). In addition, in the case of death during the term of the agreement, the executive’s estate is entitled to the bonus to which he wouldotherwise have been entitled, pro rated to the date of death, together with benefits made available to employees generally, including under the Company’sretirement and group life insurance plans. Each such executive has also agreed to be bound by certain covenants that restrict his ability to compete with theCompany or solicit the employment of Company employees after the term of his employment, prohibits disclosure of Company confidential information andrestricts the executive, subject to certain customary exceptions, from making investments in entities that compete with the Company.Amounts incurred under employment agreements in effect during the fiscal years ended September 30, 2007, 2006 and 2005, amounted to $870,000,$835,000 and $1,196,250 for the years ended September 30, 2006 and 2005, respectively, including accrued bonus obligations. For Fiscal 2007 and 2006,under the terms of their employment agreements, Messrs. Ball, Schiffman, and Sabra did not earn bonuses. For Fiscal 2005, under the terms of theiremployment agreements, Messrs. Ball, Schiffman, and Sabra earned bonuses of $214,000, $151,000 and $142,500, respectively, which were accrued atSeptember 30, 2005.Consulting Arrangement The Company entered into a two-year consulting agreement with its Chief Executive Officer, Jerome E. Ball, to become effective upon his retirementas chief executive officer as of January 1, 2008. Under this consulting agreement the Company will retain him to advise the Company as to its principalcustomer relationships, development and strategies under its business plan, and potential acquisitions and/or business combinations. In exchange for suchservices, the Company has agreed to pay Mr. Ball $10,000 per month during the term of the consulting agreement, scheduled to commence January 1, 2008and expire December 31, 2009. If the agreement is terminated due to Mr. Ball’s permanent disability or death during the term of the agreement, the Companyhas agreed to pay Mr. Ball or his estate, as the case may be, one half the payments remaining under the agreement as a termination benefit. In addition, ifduring the term of the agreement Mr. Ball is re-elected to the Board of Directors and serves as its Chairman, he will be entitled to a fee of $25,000 per annum,payable in monthly installments. 49 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. NOTE 6 COMMITMENTS AND CONTINGENCIES (CONTINUED)Lease CommitmentsThe Company rents certain of its facilities under leases expiring at various dates through May 2012. Total rent expense for the years ended September30, 2007, 2006 and 2005, amounted to approximately $280,000 $257,000 and $245,000, respectively. Minimum future rental commitments under suchleases for future fiscal years are summarized below:Fiscal Year Ended September 30, Amount 2008 $ 318,0002009 297,0002010 165,0002011 145,0002012 96,000Thereafter --Total lease commitments $1,021,000NOTE 7 SHAREHOLDERS’ EQUITYAnti-takeover ProvisionsThe Company is authorized to issue up to 4,000,000 shares of "blank check" preferred stock. The Board of Directors has the authority and discretion,without shareholder approval, to issue preferred stock in one or more series for any consideration it deems appropriate, and to fix the relative rights andpreferences thereof including their redemption, dividend and conversion rights.Stock RepurchaseOn September 27, 2002, the Board of Directors of the Company authorized the repurchase of up to 400,000 shares of the Company’s outstandingcommon stock, or approximately 7% of the number of shares then outstanding. On January 21, 2004, the Company’s Board of Directors increased theamount of shares authorized for repurchase to 486,200. During the fiscal year ended September 30, 2007, the Company repurchased 70,000 of its shares inthe open market for approximately $232,000 under such authorization. No shares were repurchased in the fiscal year ended September 30, 2006. As ofSeptember 30, 2007, the Company has repurchased an aggregate of 172,603 shares at a cost of approximately $403,000 since the inception of the program.Short-Swing SaleDuring the fiscal year ended September 30, 2005, a director of the Company sold shares of the Company’s common stock in transactions deemed to beshort-swing sales in accordance with Section 16(b) of the Securities Exchange Act of 1934. Section 16(b) provides that any profits realized by an insider(including any director or officer) from a non-exempt purchase and sale, or any sale and purchase, of an equity security of the issuer within any period of lessthan six months are recoverable by the issuer, irrespective of the intention of the insider in entering into such transaction. Accordingly, the director disgorgedto the Company the profits realized from the stock sale in the amount of approximately $256,000. The Company accounted for the cash receipt as acontribution from a shareholder and reflected the proceeds, net of tax, as an increase in additional paid-in capital in its financial statements.NOTE 8 STOCK BASED COMPENSATIONIn November 1996, the Company’s Board of Directors adopted the 1996 Stock Incentive Plan (the 1996 Plan), pursuant to which up to 4,000,000shares of common stock were issuable to officers, employees and non-employee directors of the Company upon the exercise of incentive stock options andnonqualified stock options. This plan was approved by shareholders in 1997. The exercise price of incentive options granted under the 1996 Plan wererequired by its provisions to be equal at least to the fair market value of the common stock at the date of grant. Options expire ten years after the date of grantand generally vest in equal proportions over three years. In November, 2006, the 1996 Plan expired in accordance with the terms thereof. 50 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. NOTE 8 STOCK BASED COMPENSATION (CONTINUED)In February 2007, the Company’s Board of Directors adopted the 2007 Equity Incentive Plan (the 2007 Plan), pursuant to which up to 400,000 sharesof common stock can be issued to officers, employees and non-employee directors of the Company upon the grant of restricted common stock and the exerciseof stock options granted to such persons. This plan was approved by shareholders in May 2007. The price at which restricted common stock may be grantedand the exercise price of stock options granted may not be less than the fair market value of the common stock at the date of grant. The Company’sCompensation Committee administers the plan. Options generally expire ten years after the date of grant and generally vest in equal proportions over threeyears. Adoption of new Accounting GuidanceEffective October 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123R, Share-Based Payments, andrelated interpretations, or SFAS No. 123R, which is a revision of SFAS No. 123, using the modified-prospective transition method for its share-basedcompensation plans. The Company previously accounted for its share-based compensation plans under the recognition and measurement provisions ofAccounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, or APB No. 25, as permitted by FASBStatement No. 123, Accounting for Stock-Based Compensation, or SFAS No. 123.Under SFAS No. 123R, all share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as anexpense in earnings over the requisite service period. Compensation cost for stock option awards granted under the Company’s 1996 Plan (expired inNovember 2006) is measured using the Black-Scholes model. Compensation cost for restricted stock awards granted under the Company’s 2007 Plan ismeasured at fair value on the date of grant based on the number of shares expected to vest and the quoted market price of the Company’s common stock.Compensation cost for all awards is generally recognized in earnings, net of estimated forfeitures, on a straight-line basis over the requisite service period.Compensation cost for awards with graded vesting is recognized on a straight-line basis over the requisite service period for each separately vesting portion ofthe award.Under the provisions of SFAS 123R, the Company recorded $166,000 of share-based compensation cost in its Consolidated Statements of Operationsfor the fiscal year ended September 30, 2007.NOTE 8 STOCK BASED COMPENSATIONAdoption of new Accounting Guidance (continued)The table below illustrates the effect on net income and income per share during the fiscal year ended September 30, 2006, as if we had then applied thefair value recognition provisions of SFAS No. 123R. For the fiscal year ended September 30, 2006 2005Net income, as reported $1,541,168 $9,434,439Total share-based employee compensation cost determined under SFAS No. 123R for all awards, net of tax 119,064 274,194Pro forma net income $1,422,104 $9,160,245 Net income per share: Basic – as reported $0.20 $1.37Basic – pro forma $0.18 $1.33 Diluted – as reported $0.19 $1.26Diluted – pro forma $0.18 $1.22 51 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. NOTE 8 STOCK BASED COMPENSATION (CONTINUED)Stock Option AwardsAs of October 1, 2006, all stock option awards granted under the 1996 Plan were fully vested. During the fiscal year ended September 30, 2007, theCompany, granted stock option awards to purchase an aggregate of 40,000 shares of its common stock under the 2007 Plan to its independent directors.Accordingly, the Company recognized compensation cost of $99,000 related to stock option awards in its Consolidated Statements of Operations for the fiscalyear ended September 30, 2007.A summary of the stock option activity under our Stock Incentive Plans during the fiscal years ended September 30, 2007, 2006 and 2005 is presentedbelow: Shares Weighted AverageExercise Price Weighted AverageRemaining Contractual Term (Years) Aggregate Intrinsic ValueOutstanding at September 30, 20041,813,750 $2.17 Granted30,000 $15.91 Exercised(1,607,100) $2.20 Forfeited-- -- Expired-- -- Outstanding at September 30, 2005236,650 $3.71 Granted40,000 $6.02 Exercised(27,900) $3.14 Forfeited-- -- Expired-- -- Outstanding at September 30, 2006248,750 $4.15 Granted40,000 2.85 Exercised(53,000) 1.75 Forfeited-- -- Expired(3,750) 2.00 Outstanding at September 30, 2007232,000 $4.51 4.68 $233,000 Options vested or expected to vest at September 30, 2007 232,000 $4.51 4.68 $233,000Options exercisable at September 30, 2007232,000 $4.51 4.68 $233,000 52 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. NOTE 8 STOCK BASED COMPENSATION (CONTINUED)Stock Option Awards (continued)The table below provides additional information regarding stock option awards that were outstanding and exercisable at September 30, 2007. Stock Options Outstanding and ExercisableRange of Exercise PricesOutstanding at September 30, 2007 Weighted AverageRemaining Contractual Term (Years) Weighted Average Exercise Price$1.75 to $2.85162,000 3.19 $1.32$6.0240,000 8.59 $6.02$15.9130,000 7.56 $15.91 232,000 The fair value of each stock option on the date of grant was estimated using a Black-Scholes option-pricing formula applying the followingassumptions for each respective period: For the Fiscal Years Ended September 30, 2007 2006Expected term (in years) 5.0 5.0Risk-free interest rate 5.24% 4.70%Expected volatility 86.1% 96.2%Expected dividend yield 0% 0%Expected Term: The expected term represents the period over which the stock option awards are expected to be outstanding.Risk-Free Interest Rate: The Company based the risk-free interest rate used in its assumptions on the implied yield currently available on U.S.Treasury zero-coupon issues with a remaining term equivalent to the award’s expected term.Expected Volatility: The volatility factor used in the Company’s assumptions is based on the historical price of its stock over the most recent periodcommensurate with the expected term of the award.Expected Dividend Yield: The Company historically has not paid any dividends on its common stock and had no intention to do so on the date theshare-based awards were granted. Accordingly, the Company used a dividend yield of zero in its assumptions.The Company estimates the expected term, volatility and forfeitures of share-based awards based upon historical data.Restricted Stock AwardsIn May 2007 the Compensation Committee granted awards of 33,000 shares of restricted stock, in the aggregate, to certain key employees, one of whomalso serves as a director, pursuant to the 2007 Plan. Vesting of the restricted stock is subject to a continued service condition with one-third of the awardsvesting immediately on the date of grant and one-third vesting each year on the anniversary date the awards were granted. The grant date aggregate fair value ofthe awards was approximately $115,000, or $3.49 per share. The fair value of the awards was equal to the market value of the Company’s common stock onthe grant date. 53 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. NOTE 8 STOCK BASED COMPENSATION (CONTINUED)Restricted Stock Awards (continued)The following table summarizes restricted stock activity from October 1, 2006 through September 30, 2007. Shares Weighted Average Grant Date Fair ValueNonvested balance at October 1, 2007 -- --Changes during the period: Shares granted 33,000 $3.49Shares vested (11,001) $3.49Shares forfeited -- --Nonvested balance at September 30, 2007 21,999 $3.49As of September 30, 2007, there was $48,000 of total unrecognized compensation cost related to restricted stock awards granted under the 2007 EquityIncentive Plan. That cost is expected to be recognized over two years.WarrantsDuring Fiscal 1999, the Company issued warrants to purchase 380,000 shares of the Company's common stock to three consultants as partialconsideration for services in such areas as investment banking and shareholder relations matters. These warrants were not issued pursuant to a shareholderapproved equity compensation plan. As of September 30, 2007, all such warrants had expired unexercised except warrants to purchase 75,000 shares of theCompany’s common stock at an exercise price of $1.75, and such warrants are outstanding and expire 90 days after a registration statement, which includesall the shares underlying the warrants, is declared effective by the Securities and Exchange Commission. As of September 30, 2007, no such registrationstatement has been filed with the Securities and Exchange Commission.NOTE 9 INCOME TAXESThe Company’s income tax (benefit) provision consists of the following United States and foreign components: For the Fiscal Years Ended September 30, 2007 2006 2005U.S. Federal and State Current-- $810,000 $2,040,905 Deferred(229,843) 133,000 565,965 Foreign: Current-- 9,000 447,745 Deferred(19,537) -- --Income tax (benefit) provision($249,380) $952,000 $3,054,615 54 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. NOTE 9 INCOME TAXES (CONTINUED)The deferred tax (benefit) provision is the change in the deferred tax assets and liabilities representing the tax consequences of changed in the amount oftemporary differences, net operating loss carryforwards and changes in tax rates during the fiscal year. The Company’s deferred tax assets and liabilities arecomprised of the following: As of September 30, 2007 2006Deferred tax assets: Net operating losses$146,737 $ --Inventory reserve and capitalization202,950 149,578Share-based compensation45,577 --Allowance for doubtful accounts7,156 7,148 402,420 156,726Deferred tax liabilities: Prepaid insurance(77,102) (68,726)Depreciation(15,679) (5,000) (92,781) (73,726)Net deferred tax assets$309,639 $ 83,000 The Company believes that it is more likely than not that the deferred tax assets will be realized through future taxable income. Accordingly, theCompany has not recorded a valuation allowance against its deferred tax assets as of September 30, 2007. The Company had net operating losses ofapproximately $350,000 and $230,000 for United States and foreign income tax purposes, respectively, as of September 30, 2007. The Company intends tocarryback to prior tax years the United States net operating loss for an estimated refund of approximately $127,000.For the fiscal years ended September 30, 2007, 2006 and 2005, the Company recorded a (benefit) provision for income taxes of approximately($249,000), $952,000 and $3,055,000, respectively. The significant elements contributing to the difference between the federal statutory tax rate and theCompany’s effective tax rate are as follows: For the Fiscal Years Ended September 30, 2007 2006 2005Statutory federal income tax rate34.0% 34.0% 34.0%State taxes, net of federal benefit1.8% 1.7% 1.6%Non-deductible items(1.1%) 0.2% 0.1%Foreign tax rate differential(7.9%) (1.3%) (10.2%)Other4.3% 3.4% (1.0%)Effective tax rate31.1% 38.0% 24.5% Effective June 2001, undistributed earnings of the Company’s Swiss subsidiary are considered to be permanently invested; therefore, in accordancewith SFAS No. 109, no provision for U.S. Federal and state income taxes on those earnings has been provided. At September 30, 2007 and 2006, theCompany’s Swiss subsidiary had approximately $4,774,000 and $4,985,000 of accumulated undistributed earnings, respectively. NOTE 10 (LOSS) EARNINGS PER SHAREBasic per share data for each period presented is computed using the weighted-average number of shares of common stock outstanding during eachperiod. Diluted per share data is computed using the weighted-average number of common and dilutive common-equivalent shares outstanding during theperiod. Dilutive common-equivalent shares consist of shares that would be issued upon the exercise of stock options, computed using the treasury stockmethod. For this purpose, the average quoted market prices on the NASDAQ SmallCap Market for the Company's common stock for the fiscal years endedSeptember 30, 2007, 2006 and 2005 were $3.95, $9.99 and $7.66, respectively. 55 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. NOTE 10 (LOSS) EARNINGS PER SHARE (CONTINUED)Loss per share data for the fiscal year ended September 30, 2007 excludes all outstanding options as inclusion of such shares would be anti-dilutive.For the fiscal years ended September 30, 2007 and 2006, options to purchase a total of 237,000 and 70,000 shares of common stock were outstanding,respectively, but were not included in the computation of diluted earnings per share because the exercise prices were greater than the average quoted marketprice of the Company’s common stock, and therefore, their effect would be anti-dilutive as calculated under the treasury method promulgated by the Statementof Financial Accounting Standard No. 128, Earnings per Share (“SFAS 128”). No shares were excluded from the computation of diluted earnings per sharefor the fiscal year ended September 30, 2005.In accordance with the contingently issuable shares provision of SFAS 128, 21,999 shares of service-based common stock awards (“restrictedstock”) granted in Fiscal 2007 were excluded from the calculation of diluted earnings per share for the fiscal year ended September 30, 2007.NOTE 11 401(K) PLANThe Company maintains a 401(k) benefit plan allowing eligible U.S.-based employees to contribute a portion of their salary in an amount up to theannual maximum amounts as set periodically by the Internal Revenue Service. The Company, at its discretion, may contribute up to $0.40 on each dollar ofemployee contribution. The Company's matching contributions were approximately $75,000, $63,000 and $72,000 for the years ended September 30, 2007,2006 and 2005, respectively, and are reflected in the accompanying consolidated statements of operations. The Company's contributions vest equally over athree-year period.NOTE 12 LEGAL PROCEEDINGSFrom time to time, the Company may become a party to legal actions or proceedings in the ordinary course of its business. As of September 30, 2007,there were 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, the Company was served with a summons and purported class action complaint that was filed July 31, 2006, in a mattercaptioned Lynn Finkelstein & Company, Inc., on behalf of certain of its clients as attorney-in-fact and all others similarly situated, Plaintiff, vs. ForwardIndustries, Inc. and certain of its executive officers, in their individual capacities, Defendants, brought in the United States District Court for the SouthernDistrict of Florida (Case No. 06-21922-Civ). The complaint alleged that the Company during the purported class period July 25, 2005, to February 2, 2006,made certain misrepresentations of fact, or failed to disclose certain material facts, and violated certain generally accepted accounting principles in thepresentation of its financial statements included in its periodic reports filed with the Commission pursuant to the Exchange Act. On September 14, 2007, the United States District Court for the Southern District of Florida issued an order granting the Company’s motion todismiss this purported class action complaint. The Court’s orders specify that the complaint is dismissed with prejudice for failure to satisfy the pleadingrequirements of the Private Securities Litigation Reform Act of 1995. In addition, plaintiff’s motion for oral argument was denied. Plaintiff elected not toappeal the Court’s orders within the required 30-day period. 56 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. NOTE 13 OPERATING SEGMENT INFORMATIONThe Company operates in a single segment that provides carrying solutions for portable electronic devices. This carrying-solution segment designs,markets, and distributes products to its customers that include manufacturers of consumer hand held wireless telecommunications and medical monitoringdevices. The carrying solution segment operates in geographic regions that include primarily the Americas, EMEA, and APAC regions. Geographic regions aredefined based primarily on the location of the customer. Revenues from External CustomersThe following table presents net sales related to these geographic segments. (dollars in thousands) For the Fiscal Years Ended September 30, 2007 2006 2005APAC $10,945 $13,347 $18,903Americas6,690 10,403 11,669EMEA4,516 6,858 21,297Total net sales$22,151 $30,608 $51,869Long-Lived Assets (Net of Accumulated Depreciation)Identifiable long-lived assets, consisting entirely of property, plant and equipment, by geographic region are as follows: (dollars in thousands) As of September 30, 2007 2006APAC $39 $48Americas110 125EMEA12 17Total net sales$161 $190Supplier ConcentrationSubstantially all of the Company’s products are purchased from suppliers in the APAC geographic region.Major CustomersThe following customers or their affiliates accounted for more than ten percent of the Company’s net sales, by geographic region: Fiscal Year Ended September 30, 2007 Americas EMEA APAC TotalCompanyLifescan, Inc--% --% 64% 32%Motorola Inc. *29% 19% 30% 27%Abbott Laboratories27% 22% 1% 13% Fiscal Year Ended September 30, 2006 Americas EMEA APAC TotalCompanyMotorola Inc. *35% 27% 45% 37%Lifescan, Inc1% 9% 39% 19% 57 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. NOTE 13 OPERATING SEGMENT INFORMATION (CONTINUED)Major Customers (continued): Fiscal Year Ended September 30, 2005 Americas EMEA APAC TotalCompanyMotorola Inc. *9% 30% 17% 56%Lifescan, Inc0% 1% 11% 12%Nokia1% 3% 7% 11% * Motorola percentages do not include the sale of licensed Motorola products made by the Company to third parties under its license agreement withMotorola. Other than the customers presented in the table above, no other single customer comprised more than 10% of the Company’s net sales.Two customers accounted for approximately 75% of the Company’s accounts receivable at September 30, 2007 and September 30, 2006, respectively.NOTE 14 QUARTERLY RESULTS Amounts in thousands (except per share data) Fiscal Quarter Ended December 31, 2006 March 31, 2007 June 30,2007 September 30, 2007Net sales$7,434 $5,876 $4,401 $4,439Gross profit$1,957 $1,301 $941 $605Net income (loss)$373 ($35) ($283) ($609)Basis per share data$0.05 ($0.00) ($0.04) ($0.08)Diluted per share data$0.05 ($0.00) ($0.04) ($0.08) Amounts in thousands (except per share data) Fiscal Quarter Ended December 31, 2005 March 31, 2006 June 30, 2006 September 30, 2006Net sales$8,670 $6,457 $7,305 $8,176Gross profit$2,644 $1,414 $1,745 $2,032Net income (loss)$774 $64 $285 $418Basis per share data$0.10 $0.01 $ 0.04 $0.05Diluted per share data$0.10 $0.01 $ 0.04 $0.05 58 SIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by theundersigned, hereunto duly authorized.Dated: November 29, 2007 FORWARD INDUSTRIES, INC. (Registrant) By: /s/ Jerome E. Ball Jerome E. Ball Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Chairman and Chief Executive Officer (Principal Executive Officer) By: /s/Douglas W. Sabra Douglas W. Sabra Vice President, Chief Financial Officer and (Principal Financial and Accounting Officer) In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated: November 29, 2007 /s/Jerome E. Ball Jerome E. Ball Chief Executive Officer and Chairman of the Board (Principal Executive Officer) November 29, 2007/s/Douglas W. Sabra Douglas W. Sabra Chief Financial Officer and Vice President (Principal Financial Officer and Principal Accounting Officer) November 29, 2007/s/Michael Schiffman Michael Schiffman President and Director November 29, 2007/s/Bruce Galloway Bruce Galloway Director November 29, 2007/s/Edwin Levy Edwin Levy Director November 29, 2007/s/Louis Lipschitz Louis Lipschitz Director November 29, 2007/s/Norman Ricken Norman Ricken Director 59 Exhibit Index3.ARTICLES OF INCORPORATION AND BY-LAWS 3.1Certificate of Incorporation of the Company as amended (incorporated by reference to Exhibit 2(a) to the Form 10-SB) 3.2By-Laws (incorporated by reference to Exhibit 2(b) to the Form 10-SB) 3.3Amendment to By-Laws (Article I, Section 2) (incorporated by reference to Exhibit 3(c) to the Company's Registration Statement onForm SB-2 filed November 13, 1995 (Reg. No. 33-99338) (the "1995 SB-2 Registration Statement") 3.4Certificate of Amendment of Certificate of Incorporation filed by the New York Department of State on August 22, 1997 (incorporatedby reference to the Company's Annual Report on Form 10-KSB for the period ended September 30, 1997)10.MATERIAL CONTRACTS Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 10.1License Agreement, effective as of October 1, 2004, between Motorola, Inc. and the Company (incorporated by reference to Exhibit 10.1to the Company’s Current Report on Form 8-K, filed October 18, 2004. 10.21996 Stock Incentive Plan of Forward Industries, Inc. (incorporated by reference to Exhibit 4 to the Registration Statement on Form S-8 of the Company, as filed on April 25, 2003). 10.3Amendment One to Employment Agreement effective as of July 12, 2005 between the Company and Douglas W. Sabra (incorporatedby reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 12, 2005). 10.4Employment Agreement effective as of October 1, 2005 between the Company and Jerome E. Ball (incorporated byreference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on December 28, 2005). 10.5Employment Agreement effective as of October 1, 2005 between the Company and Michael M. Schiffman (incorporatedby reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 28, 2005). 10.6Employment Agreement effective as of October 1, 2005 between the Company and Douglas W. Sabra (incorporated byreference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on December 28, 2005). 10.7Forward Industries, Inc. 2007 Equity Incentive Plan (incorporated by reference to Exhibit 4.2 to the RegistrationStatement on Form S-8 of the Company, as filed on July 10, 2007). 10.8Consulting Agreement, dated August 15, 2007, between Jerome E. Ball and Forward Industries, Inc. (incorporated byreference to Exhibit 99.2 to the Current Report on Form 8-K of the Company as filed on August 16, 2007).21.SUBSIDIARIES OF THE REGISTRANT 21.1List of Subsidiaries of Forward Industries, Inc.23.CONSENT OF EXPERTS AND COUNSEL 23.1Consent of Kaufman, Rossin & Co., P.A. relating to 1996 Stock Incentive Plan31.CERTIFICATIONS PURSUANT TO RULE 13a-14(a) (Section 302 of Sarbanes-Oxley) 31.1Certification of Jerome E. Ball 31.2Certification of Douglas W. Sabra32.CERTIFICATIONS PURSUANT TO RULE 13a-14(b) (Section 906 of Sarbanes-Oxley) 32.1Certifications of Jerome E. Ball and Douglas W. Sabra 60 Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit 21.1 List of Subsidiaries of Forward Industries, Inc. 1. Koszegi Industries Inc., an Indiana Corporation2. Koszegi Asia Ltd., a Hong Kong Limited Company3. Forward Innovations GmbH, a Switzerland GmbHAll three subsidiaries are wholly-owned by Forward Industries, Inc. Each does business under its name as set forth above.Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit 23.1 Consent of Independent Registered Public Accounting FirmWe hereby consent to the incorporation by reference in the Registration Statement on Forms S-8 (Registration Nos. 333-104743 and 333-144442) ofForward Industries, Inc., of our report dated November 29, 2007, which appears in the annual report on Form 10-K of Forward Industries, Inc. forthe year ended September 30, 2007. /s/ Kaufman, Rossin & Co., P.A.Certified Public Accountants November 29, 2007Miami, Florida Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Exhibit 31.1CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE EXCHANGE ACT I, Jerome E. Ball, Chairman of the Board and Chief Executive Officer of Forward Industries, Inc. (“Forward”) certify that:1.I have reviewed this annual report on Form 10‑K for the fiscal year ended September 30, 2007, of Forward; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of Forward as of, and for, the periods presented in this report; 4.Forward’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a‑15(e) and 15d‑15(e)) for Forward and we have: a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to Forward, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; b)Not applicable; c)evaluated the effectiveness of Forward’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report (the fourth quarter in the case ofthis annual report on Form 10-K) based on such evaluation; and d)disclosed in this report any change in Forward’s internal control over financial reporting that occurred during Forward’s most recent fiscalquarter (Forward’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, Forward’s internal control over financial reporting; and 5.Forward’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, toForward’s auditors and the audit committee of Forward’s board of directors (or persons performing the equivalent functions): a)all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which arereasonably likely to adversely affect Forward’s ability to record, process, summarize and report financial information; and b)any fraud, whether or not material, that involves management or other employees who have a significant role in Forward’s internal controlsover financial reporting. Date: November 29, 2007 /s/Jerome E. BallJerome E. BallChairman of the Boardand Chief Executive Officer(Principal Executive Officer) Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit 31.2CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE EXCHANGE ACTI, Douglas W. Sabra, Chief Financial Officer of Forward Industries, Inc. (“Forward”) certify that:1.I have reviewed this annual report on Form 10‑K for the fiscal year ended September 30, 2007, of Forward; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of Forward as of, and for, the periods presented in this report; 4.Forward’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a‑15(e) and 15d‑15(e)) for Forward and we have: a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to Forward, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; b)Not applicable; c)evaluated the effectiveness of Forward’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report (the fourth quarter in the case ofthis annual report on Form 10-K) based on such evaluation; and d)disclosed in this report any change in Forward’s internal control over financial reporting that occurred during Forward’s most recent fiscalquarter (Forward’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, Forward’s internal control over financial reporting; and 5.Forward’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, toForward’s auditors and the audit committee of Forward’s board of directors (or persons performing the equivalent functions): a)all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which arereasonably likely to adversely affect Forward’s ability to record, process, summarize and report financial information; and b)any fraud, whether or not material, that involves management or other employees who have a significant role in Forward’s internal controlsover financial reporting. Date: November 29, 2007 /s/Douglas W. SabraDouglas W. SabraChief Financial Officer(Principal Financial and Accounting Officer) Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit 32.1CERTIFICATIONS OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICERPURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Jerome E. Ball, Chief Executive Officer of Forward Industries, Inc. (”Forward”), and Douglas W. Sabra, Chief Financial Officer of Forward, do each certifypursuant to 18 U.S.C. §1350 that, to the best of their knowledge:1. Forward’s annual report on Form 10-K for the fiscal year ended September 30, 2007 (the “Report”) fully complies with the requirements of Section13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934; and2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Forward. IN WITNESS WHEREOF, the undersigned have set their hands hereto as of the 29th day of November 2007. /s/ JEROME E. BALLJerome E. BallChief Executive Officer(Principal Executive Officer) /s/ DOUGLAS W. SABRADouglas W. SabraChief Financial Officer(Principal Financial and Accounting Officer) Source: FORWARD INDUSTRIES INC, 10-K, November 29, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.

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