UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 20112012

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

For the transition period from                     to                     

Commission File Number: 0-6669

FORWARD INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

3110 Main Street, Suite 400, Santa Monica, CA 90405477 Rosemary Ave., West Palm Beach, FL 33410

(Address of principal executive offices, including zip code)

(954) 419-9544(561) 456-0030

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 par value per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

[   ] Yes      [ X ] No

Indicate 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 ] No

Indicate 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 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  [ X ] Yes      [    ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rue 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  [ X ] Yes      [    ] No

Indicate 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 best of 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 form 10-K.  [X]

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  [   ] Yes   [X] No

The 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 equity was last sold, as of the last business day of the Registrant’s most recently completed second fiscal quarter was: $22,912,322.$12,294,881.

As of December 1, 2011, 8,087,8863, 2012, 8,105,185 shares of the Registrant’s common stock were outstanding.

Documents Incorporated by Reference
The registrant intends to file, not later than January 28, 2012,2013, a definitive proxy statement pursuant to Regulation 14A, promulgated under the Securities Exchange Act of 1934, as amended, to be used in connection with the registrant’s annual meeting of stockholders. The information required in response to Part III (Items 10-14) of this Annual Report on Form 10-K is hereby incorporated by reference to such proxy statement.

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Forward Industries, Inc.

Table of Contents

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Note Regarding Use of Certain Terms

In this Annual Report on Form 10-K, unless the context otherwise requires, the following terms have the meanings assigned to them as set forth below:

 "we""we", "our", and the "Company" refersrefer 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.;
"Forward US" refers to Forward Industries’ wholly owned subsidiary Forward Industries (IN), Inc., an Indiana corporation (formerly Koszegi Industries, Inc.);

corporation;
“Forward HK” refers to Forward Industries’ wholly owned subsidiary Forward Industries HK, Ltd., a limited company of Hong Kong;

Kong corporation;
“Forward Switzerland” refers to Forward Industries’ wholly owned subsidiary Forward Industries (Switzerland) GmbH, a limited company of Switzerland (formerly Forward Innovations GmbH);Swiss corporation;

 “Forward APAC” refers to Forward Industries’ wholly owned subsidiary Forward Asia Pacific Limited, a limited company of Hong Kong;Kong corporation;

“Forward UK” refers to Forward Industries’ wholly owned subsidiary Forward Ind. (UK) Limited, a limited company of England and Wales;

“Forward JAFZA”China” refers to Forward Industries’ registered branch officeIndustries Asia-Pacific Corporation (f/k/a Seaton Global Corporation), Forward’s exclusive sourcing agent in the Jebel Ali Free Zone of Dubai, United Arab Emirates (UAE);Asia-Pacific region;

“SGC” refers to Seaton Global Corporation, a British Virgin Islands registered corporation that is the exclusive buying agent for Forward in the APAC region;

“GAAP” refers to accounting principles generally accepted in the United States;

“Commission” refers to the United States Securities and Exchange Commission;

“Exchange Act” refers to the United States Securities Exchange Act of 1934, as amended;

“Fiscal 2012” refers to our fiscal year ended September 30, 2012;

“Fiscal 2011” refers to our fiscal year ended September 30, 2011;

“Fiscal 2010” refers to our fiscal year ended September 30, 2010;

 “Europe”Europe” refers to the countries included in the European Union;
“EMEA Region” means the geographic area encompassing Europe, the Middle East and Africa;

“APAC Region” refers to the Asia Pacific Region, consisting of Australia, New Zealand, Hong Kong, Taiwan, China, South Korea, Japan, Singapore, Malaysia, Thailand, Indonesia, India, the Philippines and Vietnam;

“Americas” refers to the geographic area encompassing North, Central, and South America;

“OEM” refers to Original Equipment Manufacturer of certain consumer electronic productsManufacturer;

“Retail” refers to the retail distribution channel; and

“Corporate” refers to the corporate distribution channel.

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PART I

ITEM 1.            BUSINESS

General

The Company designs, markets,Forward Industries, Inc. was incorporated under the laws of the State of New York and distributesbegan operations in 1961 as a manufacturer and distributor of specialty and promotional products. We design, market, and distribute carry and protective solutions, primarily for hand held electronic devices, including soft-sided carrying cases, bags, clips, hand straps, protective plates and skins, and other accessories for medical monitoring and diagnostic kits, bar code scanners, GPS and location devices, and cellular telephones. The Company also designs, markets, and distributes carry and protective solutions for other consumer products such as laptop computers, MP3 players, firearms, sporting, recreational, and aeronautical products.  The Company’sdevices. Our principal customer market is original equipment manufacturers, or “OEMs” (or the contract manufacturing firms of these OEM customers), of these products that either package our products as accessories “in box” together with their branded product offerings, or sell them through their retail distribution channels. Our OEM products include carrying cases and other accessories for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronic products (such as sporting and recreational products, bar code scanners, smartphones, GPS and location devices, tablets and firearms). Our OEM customers are located in Europe, the APACAmericas, the EMEA Region, and the Americas.

In addition to our existing OEM business, we are currently engaged in building a multi-channel distribution capability to the retail, corporate and on-line markets, as well as expanding our OEM business.  In our efforts to develop these channels, we have devoted considerable resources in the hiring of experienced sales, design, logistics, and operations professionals.   At the same time, we are working with a number of prospective partners on multiple fronts to consummate licensing, distribution or straight purchase arrangements to develop a broadly diversified portfolio of intellectual property in the consumer electronics accessories market.  We seek to identify the Company’s brand with innovation in electronics accessories. 

In executing the channel-building and product development elements of our strategy, we have incurred significantly increased selling, general, and administrative expenses as we devote resources to recruit, hire and compensate experienced sales, design, operations, and administrative professionals and to develop and/or acquire new product offerings. Insofar as most of our new personnel were hired in the second half of Fiscal 2011, the fourth quarter begins, and succeeding quarters will begin, to reflect more fully such investments in resources, while the anticipated benefits of those hires in the form of increased sales and profit will take significantly longer to be realized, if at all.  At the same time, we are investing resources in bringing new products to market, particularly in terms of funding product development activities with prospective partners.  We anticipate that the measure of success of our strategy as reflected in our results of operations will be determined by the strength of new distribution channels, by the speed in which we can bring new products to market, and by the success and acceptance of these products in the marketplace.

APAC Region. We do not manufacture any of theour OEM products that we design, market, and distribute.  We source substantially all of our OEM products we market and distribute from independent suppliers in China.

On June 21, 2012, we determined to exit our global retail business (“discontinued operations”) and focus solely on growing our OEM business.  Our suppliers custom manufacture our carrying solutionsdecision to eliminate the retail division was primarily driven by the longer than estimated path to bring it to profitability and related products to our order, based on our designsthe strong top line growth and know-how, and to our customers’ specifications.cost rationalizations in the OEM business.

Corporate History 

Forward Industries Inc. was incorporated in 1961 under the laws of the State of New York as a manufacturer and distributer of advertising specialty and promotional products. In 1989, we acquired Forward US (then known as Koszegi Industries, Inc.), a manufacturer of soft-sided carrying cases.  The carrying case business became our predominant business, and in September 1997, we sold the assets relating to the production of advertising specialty and promotional products, ceasing to operate in that segment.

In May 1994, we formed Forward HK to facilitate a more nimble and robust carrying case procurement and quality control infrastructure, and to enhance our foreign sourcing capabilities. Thereafter we determined that our domestic production capability was unnecessary, sold the related assets, and we now source substantially all our products from suppliers in the APAC Region.  See "Product Supply".

In May 2001, we formed Forward Switzerland to facilitate distribution of aftermarket products under our licenses for cell phone cases with a major North American multinational and to further develop our OEM European business presence.  After the expiration of the last of these licenses in March 2009, staff at Forward Switzerland was significantly reduced and in recent years has primarily served our OEM European customers.   As part of our strategy to develop a global retail distribution capability, we are reinvesting in both staff and infrastructure at Forward Switzerland and have established it as our EMEA headquarters from which we are coordinating our sales and marketing activities throughout the EMEA region. 

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In April 2011, we formed Forward JAFZA to facilitate the development of our business presence and retail distribution channel in the Middle East and India region.

In July 2011, we formed Forward UK to facilitate a more capable and robust administrative and sales support infrastructure that is dedicated to supporting the development of our retail distribution strategy in the EMEA region and our EMEA based sales and marketing personnel.

Products

We design and market to our OEM customers’ order carry and protective solutions for hand held consumer electronics and other products, including soft-sided carrying cases, bags, clips, hand straps, protective plates, and other accessories made of leather, nylon, vinyl, plastic, PVC and other synthetic materials. Our OEM products are used by consumers for protecting and carrying or transporting portable electronic and other products such as blood glucose monitoring kits, bar code scanners, GPS and location devices, cellular telephones, laptop computers, MP3 players, firearms, sporting and recreational products, and aeronauticalother products. Our carrying cases are designed to enable these devices to be stowed in a pocket, handbag, briefcase, or backpack, clipped to a belt or shoulder strap, or strapped to an arm, while protecting the consumer electronic or other product from scratches, dust, and mishandling.

At the same time, we are working with multiple prospective partners on multiple fronts to consummate licensing, distribution or straight purchase arrangements to develop a broadly diversified portfolio of intellectual property in the consumer electronics accessories market.

Diabetic Products

We sell carrying cases for blood glucose diagnostic kits directly to OEMs (or their contract manufacturers) of these electronic, monitoring kits made for use by diabetics.  We typically sell these cases at prices ranging from approximately $0.50 to $3.00 per unit.  Unit volumes are sold predominantly at the lower end of this price range.  The OEM customer or(or its contract manufacturermanufacturer) packages our carry cases “in box” as a custom accessory for the OEM’s blood glucose testing and monitoring kits, or to a much lesser extent, sells them through their retail distribution channels.  TheThese kits typically include a small, electronic blood glucose monitor, testing strips, lancets for drawing a drop of blood and our carrying case, customized with the manufacturer’s logo and designed to fit and secure the glucose monitor, testing strips, and lancets in separate straps, pouches, and holders.  As the kits and technology change, our carrying case designs change to accommodate the changes in size, shape and layout of the electronic monitoring device, strips and lancet.  Since the end of 2007, OEMs have sought to reduce the cost of these cases by simplifying their design.

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Other Products

                We also sell carrying and protective solutions to OEMs for a diverse array of other portable electronic and other products, including sporting and recreational products, bar code scanners, smartphones, GPS and location devices, cellular telephones, laptop computers, MP3 players,tablets, and firearms, sporting and recreational products, and aeronautical products on a made-to-order basis that are customized to fit the products sold by our OEM customers.  Our selling prices for these products also vary across a broad range, depending on the size and nature of the product for which we design and sell the carry solution.

Product Development

In our OEM business, the product life cycle in distributing and selling our technology solutions to our OEM customers is as follows.described below. We typically receive requests to submit product designs in connection with a customer’s introduction and rollout to market of a new product that the customer has determined to accessorize and customize with a carry solution.  Our OEM customers furnish the desired functionality, size and other basic specifications for the carrying solutions or other product, including the OEM’s identifying logo imprint on the product.  Our in-house design and production staff developsresources develop more detailed product specifications and design options for our customer’s evaluation.  We then furnish the customer with product samples.  Working with our suppliers and the customer, samples are modified and refined.  Once approved for commercial introduction and order by our customer, we work with our suppliers to ensure conformity of commercial production to the definitive product samples and specifications.  Manufacture and delivery of products in production quantities are coordinated with the customer’s manufacturing and shipment schedules so that our carry solution products are available with the OEM’scustomer’s product (and included “in box”, as the case may be) prior to shipment and sale, or to a lesser extent sold by the OEMour customer through its retail distribution channels.

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We are currently developing new products for our retail channel business.  The focus of such product development is on cases and accessories for consumer electronic devices.  In furtherance thereof, on August 30, 2011, we entered into a binding Memorandum of Understanding (“MOU”) with G-Form LLC, a manufacturer of consumer and athletic products incorporating proprietary extreme protective technology.  The MOU contemplates that we will launch new distinctive Forward branded products exclusively utilizing the licensed technology for sale to consumer electronics retailers, original equipment manufacturers and other business to business channels other than sport related or lifestyle stores and military or military channels.  Prior to launch of our own products, we may sell current G-Form branded electronic protection products in the Company’s territory.

Marketing, Distribution, and Sales

Geographic Sales Distribution

Through our wholly owned subsidiaries, Forward US and Forward Switzerland, we distribute and sell our products globally.  The approximate percentages of net sales to OEM customers by their geographic location for Fiscal 20112012 and 20102011 are as follows:

The importance of the APAC region is attributable to the fact that certain of our key customers outsource product manufacture to contract manufacturers located in China or elsewhere in Asia.  In these instances, we ship product to, and product is packaged “in box” at, such contract manufacturer’s facility.  If payment to us is due from the contract manufacturer, we identify the sale to its geographic location rather than that of the customer for whom the contract manufacturer is supplying product.  The increasedecrease in APAC contribution to net sales in Fiscal 20112012 compared to Fiscal 20102011 was due to the increase in revenue contribution from our largest diabetic case customer, which uses such a contract manufacturer.several existing customers in the Americas region. See Note 1417 to the audited consolidated financial statements included in Item 8 of this Annual Report. 

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Channels of Distribution

We primarily ship our products directly to our OEM customers or(or their contract manufacturers,manufacturers), who package our carry solutionsaccessory products “in box” with the OEM customer’stheir branded products.  Certain OEMs that becameSome of our customers in Fiscal 2011 or 2010 also purchase certain of our carry and protective solution products and offer them for sale as stand-alone accessories to complement their product offerings.

In addition to expanding our existing OEM business, we are currently engaged in building a multi-channel distribution capability to the retail, corporate and on-line markets, although there is no assurance that we will be successful.

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Sales by Product Line

Sales of carry and protective solutions for “Diabetic Products” and for “Other Products”, i.e., all (all products other than diabetic carry cases for blood glucose monitor kits,kits) accounted for approximately the following percentages of total net sales in Fiscal 20112012 and 2010:2011:

Sales Concentration

We have approximately 8074 active OEM customers.  Of these, three customers including(including their affiliates and contract manufacturers,manufacturers) accounted for approximately 62% and 69% of our net sales from continuing operations in Fiscal 2012 and 2011, and 73% in Fiscal 2010.respectively. All three of these “major” customers are OEMs of diabetic monitoring kits. These customers package our carry and protective solutions “in box” with their branded products, or to a lesser extent, sell them through their retail distribution channels. The approximate percentages of net sales contributed by each of these three customers to continuing operations for Fiscal 20112012 and Fiscal 20102011 are as follows:

* Tables may not total due to rounding.

Sales Force

During Fiscal 20112012 and 2010,2011, all net sales of OEM products were made directly by our employees, which are assigned key accounts or defined geographic sales territories.  See “Risk Factors” in Item 1A. of this Annual Report - “Our business could suffer if the services of key sales personnel we rely on were lost to us.”

OEM Distribution Hubs

We have distribution hub arrangements with three OEM customers.  These arrangements obligate us to supply our products to theour customer’s distribution hubs (may be multiple locations) where itstheir products are manufactured, kitted, and/or warehoused pending sale, and where our products are packaged in-box with the OEM customer’s products or, to a much lesser extent, distributed for retail sale. The product quantities we are required to supply to each distribution hub are based on the OEM customer’s purchase orders and forecasts.  We do not recognize revenue for product shipped to a hub until we have been advisednotified by our customer that our product has been withdrawn from the distribution hub to be placed “in box”and “consumed”. Hub arrangements have had the general effect of extending financing for our customers’ inventory build by extending the time between our placement of orders to our suppliers in order to ship and supply the hubs and the time that we are able to recognize revenue.  The corollary effect is an increase in our inventory levels.  

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Credit Risk

We generally sell our OEM products on 60-45- to 90-day credit terms customary in the industry.  Historically, we have not had significant credit problems with our customers. Our significant OEM customers are large, multi-national companies with good credit histories. None of these customers is or has been in default to us, and payments from all customers are generally received from them on a timely basis. Three OEM customers including(including their affiliates or contract manufacturers,manufacturers) accounted for approximately 71%76% and 72% of our accounts receivable at September 30, 2011. Three customers, including their affiliates or contract manufacturers, accounted for approximately 75% of our accounts receivable at September 30, 2010.

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2012 and 2011, respectively.

When we ship products to our OEM customer’s designated contract manufacturer and invoice such manufacturer (and not the OEM customer), even though our order flows originate with and depend on our relationship with the OEM, our accounts receivable credit risk lies with the contract manufacturer.  Our OEM customer does not guarantee the credit of the contract manufacturer to whom the OEM requests us to ship our carrying case products, and such order volumes may be significant from time to time.  In most cases, these contract manufacturers are themselves major multinational enterprises with good credit.  See Item 1A of this Annual Report on Form 10-K: “Risk Factors”.

Product Supply

Manufacturing

The manufacture of custom carrying cases and other carry and protective solutions generally consists of die cutting fabrics and heat sealing, gluing, sewing, and decorating (affixing logos to) the cut-outs by means of silk screening, hot-stamping, embroidering or embossing. The principal materials used in the manufacture of our products are vinyl, nylon, leather, metal and plastic parts (for clips, buckles, loops, hinges and other hardware), foam padding and cardboard, all of which are obtained according to our specifications from suppliers.  We do not believe that any of the component materials or parts used by our suppliers in the manufacture of our products is supply constrained.  We believe that there are adequate available alternative sources of supply for all of the materials used to manufacture, package, and ship our products.

Sourcing Agent

On March 12, 2012, we entered into a Buying Agency and Supply Agreement (the “Agreement”) with Forward Industries Asia-Pacific Corporation (“Forward China” f/k/a Seaton Global Corporation), a British Virgin Islands corporation, dated as of March 7, 2012.  The Agreement provides that, upon the terms and subject to the conditions set forth therein, Forward China shall act as our exclusive buying agent and supplier of Products (as defined in the Agreement) in the Asia Pacific region.  We purchase products at Forward China’s cost, and shall pay a service fee on the net purchase price.  The Agreement shall terminate on March 11, 2014, subject to renewal.  Terence Wise, a director of the Company, is a principal of Forward China.

Suppliers

We procure substantially all our supply of carrying solutions products from independent suppliers in China through Forward China.  We purchased approximately 90% of our OEM products from four such suppliers in Fiscal 20112012 and 88% from four2011. One such suppliers in Fiscal 2010. One China supplier accounted for approximately 58%54% and 67%58% of our OEM product purchases in Fiscal 2012 and 2011, and 2010.respectively.  Depending on the product, we may require several different suppliers to furnish component parts or pieces.  During Fiscal 2011 and currently we are experiencing higher price quotes, which we believe are attributable in significant degree to inflationary impacts on the suppliers’ labor and materials costs that they are attempting to pass on to us.

We place orders with one or more suppliers at the time we receive firm purchase orders and/or forecasts from our OEM customers for a particular product.  Accordingly, we do not have minimum supply requirement agreements with our suppliers to guarantee us supply of finished product, nor have we made purchase commitments to purchase minimum amounts from any of our suppliers. However, from time to time, we may order products from our suppliers in anticipationadvance of receiving a customer purchase order, or in quantities in excess of those forecasted to us by our customer, to which they are contractually obligated to us for, in order to meet requiredour customer’s delivery times.demands. 

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Quality Assurance

To ensure that product manufacturingour products manufactured by our Chinese suppliers meetsmeet our quality assurance standards our products we sell and distribute are inspected by independent contractors in China, which may be affiliated with one or more of our suppliers.  These contractors arewere subject to the control and supervision of our quality assurance employees based in Hong Kong.

Quality assurance and sourcing-related expenses are reflected in cost of goods sold inKong and/or by Forward China, our results of operations.exclusive sourcing agent (refer to “Sourcing Agent” under the “Product Supply” section). In January 2009, our Hong Kong inspection facility renewedJuly 2012, Forward China received its ISO 9001:20002008 quality certification, which covers all ISO activities previously covered under Forward’s ISO quality certification.

Logistics

Once our products are approved for shipment by our inspection and quality controlassurance procedures, theour products are typically shipped to our customer’s destination port in the Americas and EMEA regions on ocean-going container vessels.vessels, or by ground transport to our APAC customer’s locations in China or Hong Kong. In certain cases, and primarily at theour customer’s request, we will shipexpedite the shipment of our products by using air freight or ground transport to a customer’s location in China or Hong Kong.transportation.  Most ocean-going shipments bound for the United States are off-loaded at the port of Los Angeles or San Francisco, but certain customers arrange for shipments to East coast ports, such as Miami or Philadelphia. EuropeanEMEA destined shipments generally are routed via Rotterdam.  See “Item 1A. in this Annual Report “Risk Factors—Our shipments of products via container freight to customers in the United States and Europe may become subject to delays or cancellation at port facilities due to work stoppages or slowdowns, damage caused by weather or terrorism and congestion due to inadequacy of equipment and other causes.”

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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 not maintain credit insurance for our trade accounts receivable.

Competition

The business in which we engage is highly competitive in terms of product pricing, design, delivery terms, and customer service.  In the production of carry and protective solutions forour OEM products, we compete with numerous United States and foreign producers and distributors.  Some of our competitors are substantially larger than we are and have greater financial and other resources. We believe that we sustain our competitive position through maintenance 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.quality, and competitive pricing. We believe that our ability to compete based on product quality assurance considerations is enhanced by the local presence of our Hong Kong and outsourced Chinese based quality control and shipment capabilities. See Item 1A. in this Annual Report on Form 10-K: “Risk Factors - The carrying solutions business is highly competitive and does not pose significant barriers to entry.”

Employees

At September 30, 2011,2012, we had 4518 full-time employees, of whom two are employed in executive capacities, nineeight are employed in administrative and clerical capacities, thirteenseven are employed in sales and sales support six arecapacities, and one is employed in a design and product development capacities, and fifteen are employed in sourcing, quality control, and warehouse capacities.capacity. We consider our employee relations to be satisfactory.  None of our employees are covered by a collective bargaining agreement.  Of these employees, fifteen have been hired in connection with our potential retail channel business.

Since June 2003, we have employed our U.S. employees through a co-employment agreement with ADP Total Source, a Professional Employer Organization.Organization (“PEO”). The objective of this arrangement is for ADP Total Sourcethe PEO to assume many of the legal and administrative responsibilities of human resources management, health benefits, workers' compensation, payroll, payroll tax compliance, 401(K) plan administration and unemployment insurance and to perform these functions at lesser expense than if we were to perform them directly.

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 compliance with such regulations.  In addition, from time to time one or more customers may require testing of our products to ensure compliance with applicable consumer safety rules and regulations or the customer’s safety or packaging protocols.  Because we do not manufacture the products that we sell and distribute, compliance with federal, state and local laws and regulations pertaining to the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had, and is not anticipated to have, any direct material effect upon our capital expenditures, earnings, or competitive position.  However, compliance with such laws and regulations on the part of our suppliers may result in increased costs of supply to us, particularly if domestic environmental regulation in China becomes more prevalent.

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We have not been engaged in any environmental litigation or incurred any material costs related to compliance with environmental or other regulations.  From time to time we incur chemical and/or safety laboratory testing expense in order to address customer requests regarding our product materials or method of manufacture or regarding their packaging methods and standards.

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ITEM 1A.         RISK FACTORS 

Please read the note regarding "Cautionary statement for purposes of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995" that appears on pages 17page 16 of this Annual Report on Form 10-K.

We previouslyhave a history of losses and negative cash flow from operations.  We cannot assure you that we will achieve profitability in 2013.

We have incurred significant losses and negative cash flows from operations in recent years. We incurred net losses of approximately $9.6 million and $2.9 million for the fiscal years ended September 30, 2012 and 2011, respectively, and had net uses of cash in operating activities of approximately $10.8 million and $1.8 million for the fiscal years ended September 30, 2012 and 2011, respectively. Further, we may continue to incur net losses in future reporting periods as we incur expenses associated with the continuation of our business as well as its subsequent development, which development cannot be guaranteed. There is no assurance our future operations will be profitable.  If we cannot generate sufficient revenues to operate profitably, we may be forced to cease or suspend operations, or we may be required to raise additional capital to maintain or grow our operations. There is no assurance that we will be able to raise such additional capital.

There can be no assurance that the restructuring we have begun to implement will be successful.

In June 2012 we announced our intentionplans to diversify ourexit the global retail business by means of merger, acquisition or other business combination.

Our business strategy is to growand focus solely on growing our OEM business, expand product offeringswhich we believe will enable us to use working capital more effectively and technology solutions,improve organizational effectiveness. In connection with exiting the global retail business we also commenced a restructuring of our business, including: reducing annualized operating expense by over 50% through headcount reductions; closing offices in Santa Monica, London, Dubai and develop or acquire retail distribution capability.   ConsistentSaarbrucken; and relocating the corporate headquarters to Florida, where costs of operation are anticipated to be lower.  We also implemented a variable, lower cost sourcing and quality assurance solution through a third party Asia-based sourcing agent. While we believe these measures, along with this approach, in December 2010, we announced entry into a letter of intentother steps to acquire Flash Ventures Inc., a distributor of consumer electronics peripherals and accessories (“Flash”). In April 2011 we electedbe taken, will be sufficient to terminate such letter of intent and not make such acquisition.

Without completing such a merger or acquisitionreturn the Company to acquire a retail channel and product development capability, the time required to implement our growth strategy is likely to increase.  This growth strategy represents a significant shift in the Company’s strategy, andprofitability, there can be no assurance that wethis will be successful in our efforts to achieve our goals.

Management continues to evaluate potential merger and acquisition targets, and given the right strategic opportunity pursuant to satisfactory terms and conditions, itcase, or that additional steps will pursue a potential merger or acquisition if it is in the best interests of shareholders.   Therenot be required. If additional steps are required, there can be no assurance that wethey will be successful in our efforts to make any acquisition,properly implemented or that any business that we do acquire or invest in will be profitable or accretive.  There can be no assurance as to the timing of a transaction, or that the market price of our common stock will not decline in response to any such transaction as may be effected or not effected.

Our business strategy is to develop and grow our existing business and to expand into retail; to the extent that operating expenses continue to trend significantly higher before we realize higher revenues, our operating results may continue to be adversely and materially affectedsuccessful.

We are pursuing a more marketing-driven and product development-driven business model to grow our existing business and expand product offerings.  In executing this strategy, we have incurred, and are likely to continue to incur, increased selling, general, and administrative expense as we devote increased resources to expanding product sales and development and to establish a retail distribution channel, including resources to recruit and compensate experienced sales and marketing professionals.  Such increased expenses are likely to continue to impact our income statement and reduce cash and equivalents before such efforts result in increased revenues and profit, if at all, which may continue to materially and adversely affect our results of operations.  We have hired 15 employees in connection with the potential retail channel business and have invested significant resources in bringing new products to market, particularly in terms of funding product development.  As of September 30, 2011, no new products were available for market and there had been no sales in connection with the potential retail business.  Realization of higher revenues and resulting improvement in our results of operations will depend on management’s ability to execute successfully on its strategy and business plan, as to which there can be no assurance.

The cash investment required to execute our OEM growth strategy is likely to be substantial relative to our cash resources.

We have recently invested and expect to continue to invest substantial incremental cash resources to execute our OEM growth strategy to fund (i) operating losses reflecting the investment in our sales and distribution capabilities; (ii) investments in product development and other joint venture arrangements; and (iii) investments in working capital required to support new products and channels.strategy. While we believe that our existing cash resources are sufficient to support our growth strategy, there can be no assurances that our growth strategy will be successful or that we will earn a return on these investments.

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In pursuing strategic partnerships, we may decide to advance funds to third parties for product development.

We are aggressively pursuing business relationships with unrelated third parties (via potential joint sales, joint venture, licensing, or other arrangements) by which we are seeking to expand our sales base, access new customer markets, and/or develop new products to distribute and sell.  In certain cases, from time to time, we may deem it in the Company’s best interests to participate in the funding of new product development by extending short-term loans for working capital, product development, or related uses.  In general, a significant ancillary purpose of such loans might include enhancing the likelihood of our securing the business relationship with such third party that we deem advantageous to our business development efforts, as well as acceleration of the development timetable for the product.  Such lending may not be on a secured basis. Our business experience does not encompass bank lending expertise in the assessment of the creditworthiness of borrowers, and such lending on our part does not represent a core element of our business expertise.

There is a risk that the funds we loaned or advanced to third parties will not be repaid.

On January 5, 2011, the Company entered into a loan agreement with Flash Ventures, Inc., an unrelated entity, to provide a credit facility of up to $1,000,000, due December 1, 2011.  Pursuant to the agreement Flash executed an unsecured, unsubordinated term note in favor of the Company, bearing interest at 11% per annum on any unpaid principal, payable quarterly commencing March 31, 2011.   On January 6, 2011 and January 19, 2011, Flash drew $600,000 and $400,000, respectively, in funds under the note, leaving no further funding available.  Flash was late in making the interest payment due March 31, 2011, eventually making payment in full, and made timely payment thereafter.  Effective December 1, 2011, the terms of the loan were amended to, among other things, extend the maturity date to April 1, 2012 and to provide for the loan to be secured.  In connection with such amendment Flash made a principal payment of $250,000 on December 1, 2011.

As of September 30, 2011, we had advanced $500,000, in funds to a prospective joint venture participant in consideration as a prepaid royalty.

As with any debt obligation, there is a risk that the borrower will default and we as lender may not receive repayment in full of the funds loaned and interest thereon.  This risk is increased by virtue of the fact that many of these loans were made on an unsecured basis.  If this were to occur, it could have a material, adverse effect on our financial condition and reduce the amount of funds available to support our growth initiatives and other capital requirements.

Our business remains highly concentrated in our OEM - Diabetic Products line, posing risks to our financial condition and results of operations compared to periods when revenue from customers from two principal product lines were more balanced. If our OEM - Diabetic Products line were to suffer the loss of a principal customer or a material decline in or loss of sales, our business would be materially and adversely affected.

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Sales of diabetic cases to OEM customers accounted for approximately 73%74% of net revenues from continuing operations in Fiscal 2011.2012.  While OEMnet sales of “other products” reflect new customer adds and improved revenues in recent years,“Other Products” increased 26%, our business remains characterized by high product line as well as customer concentration.  In such circumstances, our financial condition and results of operations are subject to higher risk from the loss of a OEM diabetic case customer or from changes in the business practices of OEMs of blood glucose monitors, for example, a decision to reduce or eliminate inclusion of cases in box with the electronic device or a decision to focus on insulin pumps instead of insulin by injection.

Our business is and has been characterized by a high degree of customer concentration.  Our three largest customers accounted for approximately 70%62% and 73%69% of net sales from continuing operations in Fiscal 20112012 and Fiscal 2010,2011, respectively; the loss of, or material reduction in orders from, any of these customers would materially and adversely affect our results of operations and financial condition.

At present the predominant percentage of our sales revenues is concentrated in three large OEM customers for our diabetic blood glucose carry cases, including their affiliates and/or their contract manufacturers.  The loss of any of these customers, whether as a result of its purchase of its carry solution requirements from another vendor, its decision to manufacture its own carrying cases, its decision to award its orders to one of our competitors, or otherwise, would have a material adverse effect on our financial condition, liquidity and results of operations.

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If any one or more of our OEM customers elect to reduce or discontinue inclusion of cases “in-box”, our results of operations and financial condition would be materially and adversely affected.

The predominant percentage of our revenues is derived from sales of case accessories to our OEM customers who package our cases “in-box” with their electronics.  With the global recession and weak recovery, OEMs have sought continuously to reduce expenses.  If one or more of our OEM customers generally begin to reduce or discontinue the practice of including carry case accessories in-box, we would incur a significant decline in revenues and our results of operations and financial condition would be materially and adversely affected.

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

Three customers accounted for approximately 71%76%, and 72% of our accounts receivable at September 30, 2012 and 2011, and three customers accounted for approximately 75% of our accounts receivable at September 30, 2010.respectively. The failure to receive or collect such amounts when and as due could have a material adverse effect on our financial condition, liquidity, and results of operations.

We continue to encounter pressures from our largest OEM customers to maintain or even roll back prices or to supply lower priced carry solutions, and expect such pressure to persist. The effects of such price constraints on our business may be exacerbated by inflationary pressures that affect our costs of supply.

During Fiscal 20112012 and 2010,2011, we experienced significant pricing pressure from our largest OEM customers to maintain or even reduce the prices we charge them.  When we are unable to extract comparable concessions from our suppliers on prices they charge us, product sales margins erode. 

In addition to margin compression from customers, from time to timein general, we may encounterare encountering increased pricespricing from our Chinese suppliers who are reacting to inflationary increases in materials and labor costs incurred by them.  We believe that Fiscal 2011, Fiscal 2012, and the present represent a period of such inflationary pressures.  In addition, prices that our Chinese vendors charge to us may reflect appreciation of the Chinese currency against the USU.S. dollar, which can be passed through to us in the form of higher USU.S. dollar prices. This in turn will tend to reduce gross profit percentage if we are unable to raise prices.  We anticipate that constraints on our ability to maintain or increase prices to our major customers will continue to exert downward pressure on our gross profit percentagemargin in the fiscal year ending September 30, 2012.  This is particularly the situation with respect to our large diabetic customers for existing as well as new programs.2013. 

Our results of operations are subject to the risks of fluctuations in the values of foreign currencies relative to the U.S. Dollar.

Our results of operations are expressed in U.S. Dollars.  When the U.S. Dollar appreciates or depreciates in value against a currency in which all or a significant portion of revenues or other accounts receivable are denominated, such as the Euro, our results of operations can be adversely affected or benefited, respectively. For Fiscal 2011, there was not a significant depreciation of the Euro to affect our results of operations.  The degree of impact is proportional to the amount of foreign currency expense or revenue, as the case may be, and the fluctuations in exchange rates over the period in which the effect is measured on our financial statements.

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Future revenues are difficult to predict and are likely to show significant variability as a consequence of customer concentration.

Because our revenues are highly concentrated in a few large customers, and because the volumes of these customers' order flows to us can fluctuate markedly in a short period of time, our quarterly revenues, and consequently our results of operations, may be highly variable and subject to significant changes over a relatively short period of time.

Our largest OEM customers may keep consumer products with which our carry solutions are packaged "in-box" in active promotion for many months, or for a very short period of time, depending on various factors, including sales trends for the product, product development cycles, new product introductions, and our customers' competitors' product offerings.  As demand for the consumer product relating to the in-box program matures and decreases, we may be forced to accept significant price and/or volume reductions in customer orders for our carry solutions, which will adversely affect revenue. 

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These factors tend to lead to a high degree of variability in our quarterly revenue levels.  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, their orders from us by amounts that are material to our business. 

Our gross margins, and therefore our profitability, vary considerably by sales channel, customer and by product, type, and if the revenue contribution from one or more OEM customers or products changes materially, relative to total revenues, our gross profit percentage may fluctuate or decline.fluctuate.

Our gross profit margins on the products we sell can vary widely depending on the sales channel, product type, customer, and order size, and market in which the customer's products are sold.size. Because of the broad variability in price ranges and product types, we anticipate that gross margins, and accordingly their impact on operating income or loss, may fluctuate depending on the relative revenue contribution from each customer or product.

Product manufacture is often outsourced by our OEM customers to contract manufacturing firms in China and in these cases it is the contract manufacturer to which we must look for payment.

Such firms are performing manufacturing, assembly, and product packaging functions, including the bundling of our product accessories with the OEM customer's product.  As a consequence of this business practice, we often sell our carry solution products to the contract manufacturing firm.  This is particularly significant in the case of diabetic product sales to certain customers.  In these cases, we invoice the contract manufacturing firm and not the OEM customer.  Therefore, it is the contract manufacturing firm's credit to which we must look for payment in such cases and not that of our OEM customer.  This may alter the credit profile of our customer base and may involve significant purchase order volumes.  In some, but not all cases, the manufacturing firm is itself a large, multinational entity with significant financial resources.

Our dependence on foreign manufacturers creates quality control and other risks to our business. From time to time we may experience certain quality control, on-time delivery, cost, or other issues that may jeopardize customer relationships.

Our reliance on foreign suppliers, manufacturers, and other contractors involves significant risks, including risk of product quality issues and reduced control over quality assurance, manufacturing yields and costs, pricing, timely delivery schedules, the potential lack of adequate manufacturing capacity and availability of product, the lack of capital, and potential misappropriation of our designs.

Our shipments of products via container may become subject to delays or cancellation due to work stoppages or slowdowns, piracy, damage to port facilities caused by weather or terrorism, and congestion due to inadequacy of port terminal equipment and other causes.

To the extent that there are disruptions or delays in loading container cargo in ports of origin or off-loading cargo at ports of destination as a result of labor disputes, work-rules related slowdowns, tariff or World Trade Organization-related disputes, piracy, physical damage to port terminal facilities or equipment caused by severe weather or terrorist incidents, congestion in port terminal facilities, inadequate equipment to load, dock and offload container vessels or energy-related tie-ups or otherwise, or for other reasons, product shipments to our customers will be delayed.  In any such case, our customer 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 port facilities or other causes of delays in the loading, importation, offloading or movement of our products to the shipping destination agreed with our customer could result 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 such consequences, this may have an adverse effect on our financial condition and results of operations.

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The OEM carrying solutions business is highly competitive and does not pose significant barriers to entry.

There are many competitors in the sale of carry solutions products to OEMs, and competition is intense.  Since little or no significant proprietary technology is involved in the design, production, or distribution of the types of products we sell, others may enter the business with relative ease and compete against us.  Such competition may result in the diminution of our market share or the loss of one or more major OEM customers, thereby adversely affecting our net sales, results of operations, and financial condition.  Many of our competitors are larger, better capitalized, and more diversified than we are and may be 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 sales concentration than we do and be better able to withstand the loss of a key customer or diminution in its orders.

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

We are highly dependent on the efforts and services of certain key sales representatives who have account responsibility for, and have longstanding relationships with one or more of our largest customers.  Our business could be materially and adversely affected if we lost the services of any such individual.  If we lost the services of a key sales representative, we might experience a material reduction in orders from his customers, resulting in a loss of revenues, which would materially and adversely affect our results of operations and financial condition.

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 upon our results of operations, short-term and long-term cash availability, working capital, working capital needs, and other factors, as determined by our Board of Directors.  We do not anticipate that cash dividends will be paid in the foreseeable future.  The absence of dividend payments on a common stock might make such stock susceptible to greater market price swings.

We have in place anti-takeoveranti-takeover measures and charter provisions 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 their redemption, dividend and conversion rights. Our ability to issue the authorized but unissued shares of preferred stock could be used to impede takeovers of our company.  Under certain circumstances, 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. In addition, our certificate of incorporation requires the affirmative vote of two-thirds of the shares outstanding to approve a business combination such as a merger or sale of all or substantially all assets.  Such provision and blank check preferred stock may discourage attempts to acquire Forward. Applicable laws that impose restrictions on, or regulate the manner of, a takeover attempt may also have the effect of deterring any such transaction.  We are not aware of any attempt to acquire Forward.

We maintain cash balances in our bank accounts that exceed the FDIC insurance limitation.

We maintain our cash assets at commercial banks in the U.S. in amounts in excess of the Federal Deposit Insurance Corporation insurance limit of $250,000 and in Europe in amounts that may exceed any applicable deposit insurance limits. In the event of a failure at a commercial bank where we maintain our deposits or uninsured losses on money market or other cash equivalents in which we maintain cash balances, we may incur a loss to the extent such loss exceeds the insurance limitation, which could have a material adverse effect upon our financial conditions and our results of operations.

ITEM 1B.         UNRESOLVED STAFF COMMENTS

    Not Applicable    

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ITEM 2.            PROPERTIES

We sub-leasedIn September 2012, we relocated our executive offices from Santa Monica, California to West Palm Beach, Florida, which consists of approximately 5,3002,815 square feet, of office and warehouse space at 1801 Green Road, Pompano Beach, Florida onwhich we rent for approximately $6,200 per month under a month-to-month basis from a tenant at the same premises. We used this office space as our executive office and our United States sales office until April 2011. This sub-lease expired on November 30, 2011.lease agreement scheduled to expire in July 2020.

In April 2011, the Companywe relocated itsour executive offices from Pompano Beach, Florida to offices in Santa Monica, California, which consists of approximately 3,400 square feet for which the Company rentswe rent at $13,500 per month under lease agreements, which expire in October 2016. In light of our return to Florida in September 2012, we anticipate sub-leasing this space for the remainder of our lease term at rates equal or above those that we are contractually obligated to.

In May 2011, the Company, under a license granted by the Jebel Ali Free Zone Authority (JAFZA), established a registered branch office in the Jebel Ali Free Zone (JAFZ) of the United Arab Emirates.  Under the license, the Company rents approximately 638 square feet of office space at annual rate of AED118,580 (approximately $32,300 at September 30, 2011) through May 2012. We use this office space to facilitate product sales in the Middle-East and India region.

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In July 2011, Forward HK renewed its lease for approximately 4,400 square feet of office space in Kowloon, Hong Kong, which extends through October 2014 at a monthly rate of $15,000. We use this office space as our APAC headquarters from which we coordinate and conduct our Asia-based sourcing, quality assurance, and logistics activities.

In October 2011, the Company, entered into a lease for approximately 1,000 square feet of office space in London, England at $8,000 per month, which extends through September 2012. We use this office space to perform administrative and sales support (such as accounting, operational, and customer service functions) to our EMEA based sales team.

Forward Innovations sub-leasessub-lease approximately 1,300 square feet of office space in Cham, Switzerland on a month-to-month basis from a tenant at the same location. We use this office as our EMEA headquarters from which we coordinate our sales and marketingsales support activities throughout the EMEA region.

In October 2011, we entered into a lease for approximately 1,000 square feet of office space in London, England at $8,000 per month under a lease agreement that expired in September 2012. We used this office space to perform administrative and sales support (such as accounting, operational, and customer service functions) primarily to our EMEA-based Retail sales team. Consequently, this lease was not renewed as part of our exit from our Retail business (refer to “Discontinued Operations”). All OEM sales, sales support and administrative activities in the EMEA region are coordinated from our branch office in Cham, Switzerland.

In April 2012, we renewed our license through the Jebel Ali Free Zone Authority (JAFZA) to maintain a registered branch office in the Jebel Ali Free Zone (JAFZ) of the United Arab Emirates.  Under this license, we rent approximately 638 square feet of office space at annual rate of $35,000 through March 2013. We used this office space to facilitate sales of our Retail products in the Middle-East and India region through July 2012, at which time we shut down this office space as part of our exit from our Retail business (refer to “Discontinued Operations”).

In July 2011, we renewed our lease for approximately 4,400 square feet of office space in Kowloon, Hong Kong, which extends through October 2014 at a monthly rate of $15,000. We used this office space as our APAC headquarters from which we coordinated and conducted our Asia-based sourcing, quality assurance, and logistics activities. In September 2012, we vacated this office space in connection with our use of an exclusive sourcing agent in the APAC region (refer to “Sourcing Agent” section under Item 1 – “Product Supply”).

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.  We believe 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 facilities upon approximately equivalent terms.

ITEM 3.            LEGAL PROCEEDINGS

Targus Group International, Inc., et al. v., Forward Industries, Johnson, et al.

On September 19, 2011, the Company,Forward, Mr. Brett Johnson (our former President and Chief Executive Officer), and one of our employees were named in a Complaint filed in Orange County Superior Court by Targus Group International, Inc. and two of its affiliates.  The Complaint alleged a claim for breach of contract against Mr. Johnson.  The Complaint further alleged a "breach“breach of fiduciary duty/duty of loyalty"loyalty” against the employee, and it asserted claims against Mr. Johnson and the CompanyForward for allegedly aiding and abetting that alleged breach.  The Complaint also asserted a cause of action against all Defendants for unfair competition.  An Amended Complaint was filed on October 11, 2011.  In addition to the claims asserted the in the original Complaint, the Amended Complaint added an additional Targus affiliate as a plaintiff and named an additional employee of the CompanyForward as a defendant.  The Amended Complaint asserted a claim against that employee for breach of contract and for "breach“breach of fiduciary duty/duty of loyalty," ” and it added new claims against the CompanyForward and Mr. Johnson for allegedly inducing the breach of and interfering with that employee'semployee’s contract and for allegedly aiding and abetting his breach of duty.  The claim for unfair competition in the Amended Complaint relies on these new allegations as well. AllForward entered into a Settlement Agreement, effective as of October 17, 2012, which resolved claims between the claims asserted inCompany and the other defendants, on the one hand, and Targus Group International, Inc. and the other plaintiffs, on the other hand, related to this action arise out ofaction.  In connection with the decisions of former employees of one or more ofSettlement Agreement, a payment was made to the plaintiffs, to accept offerssubstantially all of employment with the Company.  The amount of damages sought is not specified.  The Company believes it has substantial defenses to these claims and intends to vigorously defend the action.which was made by Forward’s insurer.

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Other Litigation

From time to time, the Company may become a party to other legal actions or proceedings in the ordinary course of its business.  As of September 30, 2011,2012, there were no such actions or proceedings, either individually or in the aggregate, that, if decided adversely to the Company’s interests, the Company believes would be material to its business.

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ITEM 4.            RESERVEDNOT APPLICABLE

PART II

ITEM 5.           MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Common Stock

The principal market for our common stock is the NASDAQ SmallCap Market. Our common stock is traded under the symbol "FORD". The following 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 two fiscal years.

_______________________________
*High and low bid price information as furnished by The NASDAQ Stock Market Inc.

On December 1, 2011,3, 2012, the closing bid quotation for our common stock was $1.62$1.20

Holders of common stock.

 As of December 1, 2011,3, 2012, there were approximately 115112 holders of record of our common stock, excluding approximately 8,7207,827 beneficial holders of common stock whose shares are held in street name.

Dividends

We 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 payment of 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 no contractual or other restrictions on our ability to pay dividends if we were to decide to declare and pay them.

Recent sales of unregistered securities

During Fiscal 2012 and 2011, we did not sell any shares of common stock, or securities exercisable for or exchangeable into common stock, or any other securities that were not registered under the Securities Act of 1933.

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Securities authorized for issuance under equity compensation plans.

For information relating to this topic, see Part III, Item 11 of this Annual Report. “Executive Compensation—Securities Authorized for Issuance under Equity Compensation Plans”, which is incorporated in this Annual Report on Form 10-K by reference to our 20112012 Proxy Statement.

Purchase of Equity Securities

No repurchase of any shares of our common stock or other equity security was made by or on behalf of the Company during Fiscal 2012 or 2011.

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In September 2002 and January 2004, our Board of Directors authorized the repurchase of up to an aggregate of 486,200 shares of our common stock. Under those authorizations, as of September 30, 2011, we have repurchased an aggregate of 172,603 shares at a cost of approximately $0.4 million, leaving a balance of 313,597 shares (approximately 3.9% of the shares outstanding at September 30, 2011) under those authorizations, but none during Fiscal 2011 or Fiscal 2010.  Separate from the foregoing authorizations, in Fiscal 2010 in connection with exercises of stock options to purchase 50,000 shares in the aggregate of common stock by two non-employee directors and an officer, such persons received, net, an aggregate of 24,030 shares in transactions valuing such shares at market on the respective dates of exercise in lieu of payment of the exercise price of such options.  Under applicable authority, such transactions are not deemed to constitute purchases by us of our common stock.

ITEM 6.           SELECTED FINANCIAL DATA

Not applicable.

ITEM 7.           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our audited Consolidated Financial Statements and the notes thereto and other financial information appearing in Item 8 of this Annual Report on Form 10-K.  This discussion and analysis compares our consolidated results of operations for the Fiscal year ended September 30, 20112012 ("Fiscal 2011"2012"), with those for the Fiscal year ended September 30, 20102011 ("Fiscal 2010"2011"), and is based on or derived from the audited Consolidated Financial Statements included in Item 8 in this Annual Report. All figures in the following discussion are presented on a consolidated basis. All dollar amounts and percentages presented herein have been rounded to approximate values.

Cautionary statement for purposes of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995

The following management’s discussion and analysis includes “forward-looking statements”, as such term is used within the meaning of the Private Securities Litigation Reform Act of 1995.  These “forward-looking statements” are not based on historical fact and involve assessments of certain risks, developments, and uncertainties in our business looking to the future.  Such forward looking statements 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 may include projections, forecasts, or estimates of future performance and developments.  Forward-looking statements contained in this Annual Report are based upon assumptions and assessments that we believe to be reasonable as of the date of this Annual Report.  Whether those assumptions and assessments 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 we assumed and assessed.  Risks, uncertainties, contingencies, and developments, including those discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and those identified in “Risk Factors” in Item 1A of this Annual Report on Form 10-K, could cause our future operating results to differ materially from those set forth in any forward looking statement.  There can be no assurance that any such forward looking statement, projection, forecast or estimate contained can be realized or that actual returns, results, or business prospects will not differ materially from those set forth in any forward looking statement.

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

Business Overview

Trends and Economic Environment

In executingJune 2012, we determined to exit our global retail business and focus solely on growing our OEM business.  Our decision to eliminate our retail division was based primarily on the channel-buildinglonger than estimated path to bring it to profitability and product development elementsthe strong top-line growth and cost rationalizations achieved in the OEM business over the past two years. 

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In connection with the exit of our strategy, during Fiscal 2011retail business, we entered into a second Memorandum of Understanding (the “New MOU”) with G-Form.  In accordance with this New MOU we have incurred,assisted G-Form on a short-term basis with transitioning certain operational and we intend tosales functions previously performed by Forward for G-Form products. We continue to incur, significantly increased selling, general,work with G-Form to distribute our remaining retail product inventory and administrative expensesare working with them to settle on the amount of funds owed to us as we devote resources to recruit, hirea result of the net effect of certain transactions between G-Form and compensate experienced sales, design, operations, and administrative professionals, and to develop and/or acquire new product offerings. Insofarus, as mostcontemplated under the New MOU.

As part of our new personnel were hiredongoing restructuring, we implemented several key measures beginning in the second halfmid-Fiscal 2012 to improve our operating performance and return our company to profitability. These actions included replacing our legacy sourcing and quality assurance infrastructure with a variable, lower cost, solution through our use of Fiscal 2011, with further investmentan exclusive, Asia-based, sourcing agent (refer to Note 14 in personnel planned for the first quarter of Fiscal 2012, the fourth quarter of Fiscal 2011, and succeeding reporting periodsour Notes to Financial Statements). We believe that this agency relationship will begin to reflect more fully our investments in resources, while the anticipatedyield meaningful, longer-term benefits, of such hires in the form of increased sales and profit will take significantly longer to be realized, if at all.  At the same time, we are investing resources in bringing new products to market, particularly in terms of funding product development activities with prospective partners.  We anticipate thatnegotiating favorable material costs, improving the measure of successquality of our strategy as reflectedproducts, and diversifying our supplier base. With regard to lowering our fixed overhead, we have closed our offices in London, Dubai Saarbrucken, and Santa Monica, and relocated our resultscorporate headquarters to West Palm Beach, where we expect costs of operations willoperation to be determined by the strengthlower. In addition, we have significantly reduced headcount through elimination of new distribution channels, by the speed in which we can bring new productspersonnel dedicated to market,our Retail business and by the success and acceptancereinvested a portion of these productscosts savings to expand and restructure our sales, design, customer service, finance and IT personnel focused on growing our OEM business. Lastly, we have begun to implement a rigorous cost rationalization plan with regard to other components of our operating expenses that we believe will result in the marketplace. a more streamlined and efficient use of our working capital.

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With regard to our OEM business, we have recently been awarded several large programs by two major diabetic customers. We anticipate that these programs will begin to contribute meaningfully to revenues beginning in late Fiscal 2012. While these new programs will increase our sales volume, we anticipate that gross margins on certain of these new or prospective programs will be lower than the gross margins seen in the first part of Fiscal 2011.  Our businessit remains highly concentrated by customer and product type, especially in the diabetic case product line.  However, aswith respect to our Diabetic Products line, where we indicated in previous reports, we intended to build on the 10% growth in revenue that was contributed by “other products” in Fiscal 2010, and in Fiscal 2011 we have exceeded such targets.  Accordingly, even as diabetic product sales continue to increase, we believe that we are making progress in diversifying the customer base. 

We continue to operate in a very challenging price sensitive environment. We continue to experience pricing and gross margin environmentpressure from our major Diabetic Products customers, but especially with respect to certain of our OEM customers.  The global economy continueslonger-lived programs for which price concessions are expected to face headwinds, and our OEM customers remain very price sensitive.  As reflected in the “gross profit” discussions below,be granted to them over an extended period of time.  Moreover, we are encountering higher costs from our China-based suppliers due to materials and labor price increases placingthat place continuing pressure on our profit margins.  As the expected launch of new and replacement diabetic programs increasingly replace mature programs, we anticipate that the impact of materials and labor cost increases from our China-based suppliers will become more evident in this product line and gross profit generally.  Product mix factors may exacerbate this trend.  In manycertain cases, we are not able to pass these higher costs through to customers, particularly when replacement program products resemble their predecessorpredecessors or historically similar products, for which customers have become accustomed to a narrow price range. See “Risk Factors”Through our exclusive sourcing agent in Item 1.A of this Annual Report. We are actively looking atthe APAC region, we have intensified our search for alternative sources of supply as well as other geographic regions to expand and diversify our manufacturing capabilities in order to mitigate this trend.

In late Fiscal 2011, we were awarded several large programs by Diabetic Products customers C and D that have contributed meaningfully to our net sales and overall product mix in Fiscal 2012. As we expected, these new programs increased our sales volume, but depressed our overall gross margin in the Fiscal 2012, as the gross margins on these programs are lower than those seen in Fiscal 2011. We expect that these new programs will continue to represent a significant portion of our overall product mix during Fiscal 2013 and anticipate that our overall gross margin for will continue to reflect this.

Our gross margin in Fiscal 2012 was also negatively impacted by a significant level of quality remediation charges, as well as transition and termination costs in respect of the restructure of our sourcing and quality operations. We believe these to be non-recurring.

Variability of Revenues and Results of Operation

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

Critical Accounting Policies and Estimates

We have identified the accounting policies and significant estimation processes below as critical to our business operations and the understanding of our results of operations. The discussion below is not intended to be comprehensive. In many cases, the accounting treatment of a particular transaction is specifically dictated 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 associated risks related to these policies on our business operations are discussed throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect reported and expected financial results. For a detailed discussion of the applications of these and other accounting policies, refer to Item 8. “Financial Statements and Supplementary Data” in this Annual Report. Our preparation of our consolidated financial statements requires us to make estimates and assumptions that are believed to be reasonable under the circumstances. There can be no assurance that actual results will not differ from those estimates and such differences could be significant.

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Cash and Cash Equivalents

Cash and cash equivalents consist primarily of cash on deposit and highly liquid money market accounts. The Company minimizes itsaccounts, short-term bonds, and certificates of deposit with original contractual maturities of three months or less, predominately in U.S. dollar denominated instruments. We may purchase these short-term bonds with anticipated maturity of 90 days or less at a premium or discount. We record these investments as cash and cash equivalents net of amortization of premium or discount. We minimize our credit risk associated with cash and cash equivalents by investing in high quality instruments and by periodically evaluating the credit quality of the primary financial institution issuers of such instruments. The Company holdsWe hold cash and cash equivalents at major financial institutions in the United States, theat which cash amounts of which may significantly exceed FDIC insured limits, and in Europe.limits. At September 30, 2011,2012, this amount was approximately $10.5$4.4 million. Historically, the Company haswe have not experienced any losses due to such cash concentrations.

Marketable Securities

The Company has investments in marketable equity securities that are classified as available-for-sale and are recorded at fair value with the corresponding unrealized holding gains or losses, net of taxes, recorded as a separate component of “Accumulated Other Comprehensive Loss” within shareholders’ equity. Unrealized losses that are determined to be other-than-temporary, based on current and expected market conditions, are recognized in earnings. The fair value of marketable securities is determined based on quoted market prices at the balance sheet dates. The cost of marketable securities sold is determined by the specific identification method.

Accounts Receivable

Accounts receivable consist of unsecured trade accounts with customers or their contract manufacturers. The Company performsWe perform periodic credit evaluations of its customers including an evaluation of days outstanding, payment history, recent payment trends, and perceived credit worthiness, and believes that adequate allowances for any uncollectible receivables are maintained. Credit terms to the majority of customers are generally range from net thirty (30) days to net sixty (60) days; however, the Company typically extends to its largest customers payment terms up to 90ninety (90) days. The Company hasWe have not historically experienced significant credit or collection problems with itsour OEM customers or their contract manufacturers. None of theseIn addition, we maintain credit insurance that provides up to 90% coverage on trade accounts with customers or their contract manufacturers is or has been in default to the Company, and payments are generally received from them on a timely basis. Three customers, including their affiliates and contract manufacturers, accounted for approximately 71% and 75% of the Company’s accounts receivable at September 30, 2011 and 2010, respectively.EMEA region. At September 30, 2012, no allowance for doubtful accounts relating to our continuing operations was deemed necessary. At September 30, 2011, and 2010, the allowance for doubtful accounts was approximately $14,000 and $19,000, respectively.$14,000.

Inventory ValuationInventories

Inventories consist primarily of finished goods and are stated at the lower of cost (determined by the first-in, first-out method) or market.  Based on management’s estimates, an allowance is made to reduce excess, obsolete, or otherwise un-saleable inventories to net realizable value. The allowance is established through charges to cost of goods sold onin the Company’s consolidated statements of operations. As reserved inventory is disposed of, the Company charges off the associated allowance.  In determining the adequacy of the allowance, management’s estimates are based upon several factors, including analyses of inventory levels, historical loss trends, sales history, and projections of future sales demand. The Company’s estimates of the allowance may change from time to time based on management’s assessments, and such changes could be material. At September 30, 2011,2012, the Company did not record an allowance for obsolete inventory.inventory of the Company’s continuing operations was approximately $99,000. At September 30, 2010, the allowances2011, no allowance for obsolete inventory was approximately $28,000.deemed necessary.

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Property and Equipment

Property and equipment consist of furniture, fixtures, and equipment and leasehold improvements and are recorded at cost. Expenditures for major additions and improvements are capitalized, and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is 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.method. The estimated useful life for furniture, fixtures and equipment ranges from three to ten years. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements. The CompanyFor the fiscal years ended September 30, 2012 and 2011, we recorded approximately $74,000$103,000 and $54,000 of depreciation and amortization expense in Fiscal 2011 and 2010,from continuing operations, respectively. Depreciation and amortization for production related property and equipment is included as a component of costs of goods sold in the accompanying consolidated statements of operations. Depreciation and amortization for selling and general and administrative related property and equipment is included as a component of operating expenses of continuing operations in the accompanying consolidated statements of operations.

Revenue Recognition

We generally recognize revenue from product sales to customers when: (1) title and risk of loss are transferred (in general, these conditions occur at either point of shipment or point of destination, depending on the terms of sale); (2) persuasive evidence of an arrangement exists; (3) we have no continuing obligations to the customer; and (4) collection of the related accounts receivable is reasonably assured.

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Shipping and Handling Costs

We classify shipping and handling costs (including inbound and outbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs, and other costs associated with our Hong Kong distribution facility and network) as a component of cost of goods sold in the accompanying consolidated statements of operations. This classification may not be comparable to similar companies within our industry.

Income Taxes

We account for its income taxes in accordance with accounting principles generally accepted in the United States of America, which requires, among other things, recognition of future tax benefits and liabilities measured at enacted rates attributable to temporary differences between financial statement and income tax bases of assets and liabilities and to net tax operating loss carryforwards to the extent that realization of these benefits is more likely than not. We periodically evaluate the realizability of our net deferred tax assets.  See Note 8 to the Notes to Consolidated Financial Statements. Our policy is to account for interest and penalties relating to income taxes, if any, in “income tax expense” in theits consolidated statement of operations.operations and include accrued interest and penalties within the “accrued liabilities” in its balance sheets, if applicable. For the fiscal years presented in the accompanying consolidated statements of operationsended September 30, 2012 and 2011, no income tax related interest or penalties were assessed or recorded.

Revenue Recognition

We generally recognize revenue from product sales to our customers when: (1) title and risk of loss are transferred (in general, these conditions occur at either point of shipment or point of destination, depending on the terms of sale); (2) persuasive evidence of an arrangement exists; (3) we have no continuing obligations to the customer; and (4) collection of the related accounts receivable is reasonably assured.

Shipping and Handling Costs

We classify shipping and handling costs (including inbound and outbound freight charges, purchasing and receiving costs, quality assurance costs, and internal transfer costs), as a component of cost of goods sold in the accompanying consolidated statements of operations.

Advertising and Promotion Costs

Advertising and promotion costs, consisting primarily of sampling related costs, are expensed as incurred. Advertising and promotion costs for continuing operations are included in selling expenses in the accompanying consolidated statements of operations and amounted to approximately $43,000 and $158,000 for the fiscal years ended September 30, 2012 and 2011, respectively. 

Foreign Currency Transactions

The functional currency of the Company and its wholly owned foreign subsidiaries is the U.S. dollar. Foreign currency transactions may generate receivables or payables that are fixed in terms of the amount of foreign currency that will be received or paid. Fluctuations in exchange rates between such foreign currency and the functional currency increase or decrease the expected amount of functional currency cash flows upon settlement of the transaction. These increases or decreases in expected functional currency cash flows are foreign currency transaction gains or losses that are included in “other income (expense), net” in the accompanying consolidated statements of operations. The net loss from foreign currency transactions and translations for continuing operations was approximately $55,000 and $33,000 for the fiscal years ended September 30, 2012 and 2011, respectively.

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Comprehensive Loss

We calculate comprehensive loss as the total of our net loss and all other changes in equity (other than transactions with owners), including foreign currency translation adjustments. Comprehensive loss was approximately $(9,670,000) for the fiscal year ended September 30, 2012. We did not have any material components of comprehensive loss, other than net loss, for the fiscal year ended September 30, 2011.

Fair Value of Financial Instruments

For certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and other accrued liabilities, the carrying amount approximates fair value due to the short-term maturities of these instruments.

Share-Based Payment Expense

We recognize share-based equity compensation in our consolidated statements of operations at the grant-date fair value of our stock options and other equity-based compensation. The determination of grant-date fair value is estimated using anthe Black-Scholes option-pricing model, which includes variables such as the expected volatility of our share price, the exercise behavior of our employees,its grantees, interest rates, and dividend yields. These variables are projected based on our historical data, experience, and other factors. Changes in any of these variables could result in material increases to the valuation of options granted in future periods and increases in the expense recognized for share-based payments. ReferIn the case of awards with multiple vesting periods, we have elected to Note 7 Share-Based Compensationuse the graded vesting attribution method, which recognizes compensation cost on a straight-line basis over each separately vesting portion of this Annual Report.the award as if the award was, in-substance, multiple awards. In addition, we recognize share-based compensation to non-employees based upon the fair value, using the Black-Scholes pricing model, determined at the deemed measurement dates over the related contract service period.

Results of Operations for FiscalRESULTS OF OPERATIONS FOR FISCAL 2012 COMPARED TO FISCAL 2011 compared to Fiscal 2010

Net lossLoss from Continuing Operations

We incurred a net loss of $2.9Loss from continuing operations increased $1.3 million to $3.3 million in Fiscal 2011 compared to net loss of $1.72012 from $2.0 million in Fiscal 2010.2011. The increase in net loss is primarily the result ofdue to: i) decreased gross profit on a higher sales base, ii) higher sales and marketing expenses, as well asiii) higher general and administrative expenses which were offset,and, to a lesser extent, iv) changes in part, by an increased gross profit on higher salesother (expense) income and “other income” (primarily interest income) in Fiscal 2011,income taxes, as reflected in the table below:

* Table may not total due to rounding.

BasicLoss from continuing operations per basic and diluted loss per share was ($0.36)$(0.41) and $(0.25) for Fiscal 2012 and 2011, compared to ($0.21) for Fiscal 2010. The increase in loss per share in Fiscal 2011 was due to the increase in net loss, which was offset, in small part, by the increase in weighted average shares outstanding in Fiscal 2011.respectively.

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Net Sales

Net sales increased $3.8$6.6 million, or 20%29%, to $29.4 million in the Fiscal 2012 from $22.8 million in Fiscal 2011 from $19.0 million in Fiscal 2010 due primarily to higher sales of diabetic products,Diabetic Products, which increased $2.5$5.0 million, or 18%, and to a lesser extent, higher sales of “Other Products”,Other Products, which increased $1.2 million, or 26%.$1.6 million. The tables below set forth net sales by channel, product line, and geographic location of our customers for the periods indicated.

* Tables may not total due to rounding.

Diabetic Product Sales

We design to the order of, and sell carrying cases for blood glucose diagnostic kits directly to, OEMs (or their contract manufacturers).  The OEM customer or its contract manufacturer packages our carry cases “in box” as a custom accessory for the OEM’s blood glucose testing and monitoring kits, or to a lesser extent, sell them through their retail distribution channels.

Sales of cases and related accessories for blood glucose monitoring kitsDiabetic products increased $2.5$5.0 million, or 18%30%, to $21.7 million in Fiscal 2012, from $16.7 million in Fiscal 2011 from $14.1 million in Fiscal 2010.2011. This increase was primarily due primarilyto the addition of a new major Diabetic Products customer in Fiscal 2012, and to higher sales to two of our major diabetic customers, as presented in thelargest long-standing Diabetic Products customer.

The following table below, which sets forth our sales by diabeticDiabetic Products customer for the periods indicated.

* Table may not total due to rounding.

Sales of carrying cases for blood glucose monitoring kitsDiabetic Products represented 74% of our total net sales in Fiscal 2012 compared to 73% of our total net sales in Fiscal 2011 compared to 74% of our total net sales in Fiscal 2010.2011.

Other Product Sales

We design and sell carryingcases and protective solutions primarily to OEMs for a diverse array of other portable electronic devices (such as smartphones, tablets, GPS devices, and bar code scanners), as well as a variety of other products (such as firearms, sporting, and other recreational products) on a made-to-order basis that are customized to fit the products including bar code scanners, GPS and location devices, cellular telephones, laptop computers, MP3 players, firearms,sold by our OEM customers.

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Sales of Other products increased $1.6 million, or 26%, to $7.7 million in Fiscal 2012 from $6.1 million in Fiscal 2011. This increase was primarily due to higher sales to two existing customers, as well as contributions from two new customers added in Fiscal 2012. With regard to the two existing customers, sales to a sporting and recreational products and aeronautical products.

Sales of other productscustomer increased $1.2$0.9 million or 26%, to $6.2$1.5 million in Fiscal 2011 from $4.92012, whereas sales to a long-standing cellular customer increased $0.6 million to $1.2 million in Fiscal 2010. Included2012. With regard to the two new customers added in the Fiscal 2011 amount is2012, a tablet customer contributed $0.6 million of sales, whereas a personal computer/laptop customer contributed $0.4 million of sales, which we believe to be non-reoccurring. In addition, in Fiscal 2011, we sold $0.4 million of products to Flash Ventures, Inc. (refer to Note 35 – NoteNotes Receivable in the Notes to Financial Statements), under their brand, which we considerconsidered as non-recurring business. The balanceSmaller changes in a number of the increase was primarily driven by higher sales to five existingOther Products customers which totaled $1.5 million in the aggregate and individually accounted for 10% or more of total increase inlargely offset each other, products. Smaller increases in several other customer accounts, totaling $0.3 million in the aggregate, also contributed to the higher sales of “Other Products” in Fiscal 2011. These sales increases were offset, in part, by decreases in sales to several customers, mostnone of which werechanges individually immaterial, except to two customers, which each decreased $0.2 million, respectively.

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was material.

Sales of other productsOther Products represented 27%26% of our net sales in Fiscal 20112012 compared to 26%27% of our total net sales in Fiscal 2010.2011.

Gross Profit

Gross profit increased $0.8decreased $1.1 million, or 20%22%, to $5.1$4.0 million in Fiscal 20112012 from $4.2$5.1 million in Fiscal 2010. The increase resulted primarily from the $3.8 million, or 20%, increase in net sales in Fiscal 2011 and, to a much lesser extent, from decreases from Fiscal 2010, in absolute terms, in tooling, packaging and warehousing costs, as well as the cost of operating our Hong Kong sourcing and quality control functions. In addition, as a percentage of sales, all components of our Cost of Goods Sold, with the exception of our Material Costs, were lower in Fiscal 2011, which improved our gross margin from Fiscal 2010. However, the increase in Material Costs, as a percentage of sales, offset the factors that improved our gross margin in Fiscal 2011. As a result,percentage of sales, our gross marginprofit declined to 14% in Fiscal 2012 from 22% in Fiscal 2011. This decline was 22%driven primarily by our Diabetic Products business, and in particular, factors specific to three major Diabetic customers, as discussed more fully below:

• Net Sales to Diabetic Customer B were $3.7 million in both Fiscal 20112012 and 2010.

  The increase2011; however, price concessions granted on two larger, longer-lived programs, combined with increases in material costs, which as a percentage of sales, increased 2% in Fiscal 2011 was attributable primarily to our “Other Products line, where we experienced lower average margins due partly to changes in product mix, and partly to increased materials, labor, and other production costs passed on to us from our Hong Kong based suppliers. These pricing pressures are presently more evidentsuppliers, compressed our gross margins on such programs and decreased our total gross margin for this Diabetic Customer by approximately 6%.

• Our total unit sales to Diabetic Customer C increased 28% in Fiscal 2012 from Fiscal 2011; however, our Other Products line, where the product life cycles are generally much shorter than those included in our Diabetic Products line. We are also experiencing increased costs of materials with regard to our Diabetic Products line, especiallyaverage sales price in respect of several new and replacement programs for diabetic case products, butare significantly lower than the impactaverage sales price of pricing pressures on maturetheir predecessor programs sales in this product line remained relatively muted in Fiscal 2011. In addition, our average cost for such new and replacement programs have also increased, partly as a result of product mix, and partly as a result of a general increase in materials, labor, and other production costs that we our suppliers are passing on to us.

• Several large programs that were recently awarded to us by Diabetic Customer D, contributed $2.4 million to our net sales in Fiscal 2012; however, as expected, gross margins on these new programs are significantly lower than the average gross margins we realized from our other major Diabetic Products customers in Fiscal 2011. Consequently, these new programs had the effect of depressing our total gross margin in Fiscal 2012.

• In the third quarter of Fiscal 2012, we experienced quality issues with Diabetic Customers B and C. As a result, during the second half of Fiscal 2012, we incurred significantly higher levels of inspection, warehousing, handling, and freight costs in remediating these quality issues, which negatively impacted our gross profit margin by approximately 3% in Fiscal 2012.

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Sales and Marketing Expenses

Sales and marketing expenses increased $1.2decreased $0.9 million, or 56%35%, to $3.4$1.7 million in Fiscal 2012 compared to $2.6 million in Fiscal 2011 from $2.2 million in Fiscal 2010. The significantly higher level of expense reflects our focus on growing sales generally, developing our capability to sell into the retail channel, and developing new products (particularly for retail), and the ramp-up of necessary resources applied to achieve these goals, and isdue primarily due to the following:

• $0.6 million increasedecrease in personnel expense due to: i)resulting from the restructuring and growthrestructure of our sales, forcemarketing, and ii) higher sales commissions accrued in respectproduct development team, as well as the recovery of the higher sales levels achieved in the Fiscal 2011;share-based compensation expense from stock option forfeitures.

• $0.30.2 million increasedecrease in travel and entertainment expenses incurredresulting from reduced travel and entertainment activities by newour restructured and scaled down sales and sales support personnel added globallydesign team during Fiscal 2011 primarily in connection with development2012, as well as our reinforcement of prospective new sales channels;cost controls and policies relative to travel and entertainment.

• $140 thousand increase0.1 million decrease in product developmentadvertising and design costs; and

• $180 thousand increase in the aggregate in occupancy, telecommunication, and general office expenses.promotion costs resulting primarily from narrowing our focus on supporting our core customer base.

In connection with the potential retail channel business we have hired 15 employees.  To date, these employees have not generated any revenue.

Lesser fluctuations in other components of sales and marketing expenses were immaterial.

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General and Administrative Expenses

General and administrative expenses increased $1.1$0.9 million, or 29%20%, to $4.7$5.6 million in Fiscal 20112012 from $3.6$4.6 million in Fiscal 20102011 due primarily to the following:

• ·$0.60.7 million increase in professional fees resulting primarily from: i) $0.7 million in higher legal and litigation settlment costs; and ii) $0.3 million in consulting fees, expense reimbursements, and equity compensation paid to our Chief Executive Officer prior to his appointment to such position while serving as a strategic consultant to the Company (refer to “Employment Agreements” under Note 12 – Commitments and Contingencies  to our consolidated financial statements). These increases were offset, in part, by a $0.2 million reduction in accounting fees and investment banking fees.

• $0.4 million increase in personnel expensecosts resulting primarily from: i) hiresthe restructuring and expansion of additionalour finance and information technology operations,departments; ii) the hire of an executive officer (refer “Employment Agreements” under Note 12 – Commitments and accounting personnel during the period; ii) retention bonusContingencies to an executive;our consolidated financial statements ); and iii) relocation expense and increased salary expenses associated with the relocation of the Company’s headquartersbonuses awarded to California; iv) recruitment and signing fees attributablecertain personnel, including an executive officer (refer to new hires; v) increased payroll taxes and benefits attributableNote 12 –Employment Agreements in Notes to personnel hires; and vi) associated higher level of share based compensation awards.Financial Statements).

• $16078 thousand increase in travel and entertainment expenses attributable primarily to relocation-related travel in connection with identification and establishment of new office space in Californiaoccupancy costs resulting from higher rent and related personnel relocation travel, as well as travel by executives associated with strategic and business development activities.

• $250 thousand increaseexpense incurred in the aggregate in telecommunications costs (resulting from hosting and connectivity charges associated withoccupying the Company’s IT infrastructure, as well as cellular telephone charges)executive offices in Santa Monica, California throughout Fiscal 2012 compared to a portion of Fiscal 2011, prior to which we occupied lower cost executive offices in Pompano Beach, Florida.

These increases in general and generaladministrative expenses were offset, in part, by a $0.2 million decrease in office expenses resulting from lower computer and postage expenses; and a $0.1 million decrease in public costs (primarily computer expenses and office supplies);

$160 thousand increase in professional fees including:resulting from i) legal, taxation, and accounting consulting fees incurred in connection with the proposed Flash Ventures transaction, as well as other strategic and business development activities;lower meeting fees; ii) consulting fees relatinglower share-based compensation to the Company’s internal control environment;directors; and iii) legal fees resulting from the Targus matter (refer to Note 12).lower filing and stock transfer agent fees. Lesser fluctuations in other components of general and administrative expenses were immaterial.

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Other Income (Expense)

Other income (expense), consisting primarily of interest income on cash and cash equivalent balances and on short termshort-term notes receivable (refer to Note 35 – Notes Receivable in our Notes to Financial Statements), as well as foreign currency transaction gains and losses, improveddeclined $92 thousand, to $34 thousand of expense in Fiscal 2012 from $58 thousand of income in Fiscal 2011 from $10 thousand of income in Fiscal 2010.the 2011. This improvement resulted primarily from a $65$48 thousand increasedecline in interest income and increases in foreign currency losses and other expenses of $44 thousand in the aggregate.

RESULTS OF DISCONTINUED OPERATIONS FOR FISCAL 2012 COMPARED TO FISCAL 2011

On June 21, 2012, we determined to exit our global Retail business and focus solely on growing our OEM business.  The decision to eliminate the Retail division was primarily driven by the longer than estimated path to bring it to profitability and the strong top line growth and cost rationalizations in the OEM business. Accordingly, the results of operations for the Retail division have been recorded as discontinued operations in the accompanying consolidated financial statements for the fiscal years presented.

Loss from Discontinued Operations

Loss from discontinued operations increased $5.4 million to $6.3 million in Fiscal 2012 from $0.9 million in Fiscal 2011. The increase is due to a $1.9 million gross loss and a $3.5 million increase in operating expenses. Loss from discontinued operations per basic and diluted share was $(0.78) and $(0.11) for Fiscal 2012 and 2011, respectively.

Net Sales

Net sales from discontinued operations of $2.2 million in Fiscal 2012 resulted from first time sales of Retail Products to several new customers in the Americas and EMEA regions, which were net of sales returns, discounts, and price protection of $2.8 million. Sales from discontinued operations in Fiscal 2011 were 14 thousand.

Gross Loss

We realized a gross loss on sales from discontinued operations of $1.9 million in Fiscal 2012 primarily as a result of a provision charges of $2.8 million in sales returns, discounts, and price protection (referred to above); $0.7 million to write down inventory to net realizable value; and $0.2 million to write-off forfeited advances made to suppliers. Gross loss from discontinued operations in Fiscal 2011 was 4 thousand.

Operating Expenses

Operating expenses of discontinued operations were $4.4 million in Fiscal 2012 compared to $0.9 million in Fiscal 2011. This increase was due primarily to the Flash note receivable,higher personnel expenses, which increased $2.6 million in Fiscal 2012; and to a lesser extent, interest bearing short-term investments.increases in travel and entertainment expenses, royalties and commissions, and occupancy costs of $0.2 million, $0.2 million, and $0.1 million, respectively. Lesser fluctuations in other components of operating expenses were immaterial.

Liquidity and Capital ResourcesOther Expense

Other expense of discontinued operations, consisting primarily of foreign currency losses, was $68 thousand of expense in Fiscal 2012. There was no operating income (expense) from discontinued operations in Fiscal 2011.

LIQUIDITY AND CAPITAL RESOURCES

During Fiscal 2011,2012, we used $1.8$10.8 million of cash in operations, compared to a use of $1.7 million in Fiscal 2010. Net cash used in operating activities in Fiscal 2011which consisted of a net loss of $2.9$9.6 million, adjusted by $0.5$1.3 million for non-cash items (primarily share based compensation)write-downs of retail inventory), and offset bya net cash provided byuse in working capital items of $0.6$2.4 million. As to working capital items, cash provided by operations consisted of an increase in prepaid and other assets (current and long-term) of $0.8 million and a decrease in accrued expenses and other current liabilities of $0.3 million. These changes were offset, in part, by decreases in accounts receivables and inventory of $0.7 million and $20 thousand, respectively, and an increase in accounts payable of $0.5 million. The increase in prepaid and other assets (current and long term) is due primarily to advanced royalties paid to a strategic partner (refer to Note 11 – License Agreement – in Notes to Financial Statements), prepaid rents (for the Company’s California headquarters and its JAFZA branch office), prepaid tooling and mold costs in support of firm purchase orders, prepaid telecommunication and IT costs, and insurance premiums. The decrease in accrued expenses and other current liabilities is primarily due to payments made during the Fiscal 2011 in respect of items accrued as of September 30, 2010: (i) $229 thousand in severance payments to a former officer of the Company; (ii) $142 thousand in settlement costs paid to a shareholder (iii) $225 thousand in sales commissions; and (iv) $130 thousand in wages. The decrease in accounts receivable is due to an improvement in our days sales outstanding and timing differences in cash payments received immediately prior to the close of our fiscal year. The increase in accounts payable is due to higher materials purchases made in the fourth quarter of Fiscal 2011 compared to the fourth quarter of Fiscal 2010 and are primarily in support of sales orders received in our OEM channel.

During Fiscal 2010, we used $1.7 million of cash in operations consisting of a net loss of $1.7 million, reduced by $0.4 million for non-cash items, and increased by net changes in working capital items of $0.4 million. As to working capital items, uses of cash in operating activities in respectconsisted of increases in accounts receivable and inventories and prepaid and other current assets were $1.4 million, $0.4of $3.7 million and $12 thousand,$3.5 million, respectively. These changes were offset, in part, by increases in accounts payable and accrued expenses and other current liabilities of $0.6$3.0 million and $0.8$1.3 million, respectively,respectively; and a decrease in prepaid and other current assets of $14 thousand,$0.4 million. The increase in accounts receivable was primarily due to the timing and higher volume of sales recorded in the three-month period ended September 30, 2012 Quarter compared to the three-month period ended September 30, 2011. The increases in inventories and accounts payable are due to higher materials purchases made in the three-month period ended September 30, 2012 in support of sales orders received from our customers, compared to the three month-period ended September 30, 2011. The decrease in prepaid and other current assets is due primarily to utilization of advances made to a prospective joint venture partner (refer to “Binding Memorandum of Understanding” in Note 13 – in our Notes to Consolidated Financial Statements) and amortization of annual general casualty insurance premiums. The increase in accrued expenses and other current liabilities is primarily due to receipts of inventory from our suppliers; and incurrence of third party inspection services and professional fees, for which provided cash to operating activities.we had not yet received invoices as of September 30, 2012. 

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During Fiscal 2011, we used $1.8 million of cash in operations consisting of a net loss of $2.9 million, reduced by $0.5 million for non-cash items, and increased by net changes in working capital items of $0.6 million. As to working capital items, cash increased primarily as a result of a decrease in accounts receivable of $0.7 million and an increase in accounts payable of $0.5 million. These changes were offset, in part, by a decrease in accrued expenses and other current liabilities of $0.3 million and an increase in prepaid expenses of $0.3 million.

In Fiscal 2012, net investing activities generated $0.5 million of cash, which consisted of $1.0 million in payments received on a loan made to Flash Ventures, Inc. (refer to Note 5 – Notes Receivable in our Notes to Financial Statements), purchases of marketable equity securities of $0.4 million, and purchases of property and equipment, primarily computer and telecommunications hardware and software, of $72 thousand. In Fiscal 2011, net investing activities used $1.8 million of cash, primarily in short-term loans of $1.5 million made to prospective strategic partners (refer to Note 35 – Notes Receivable – in our Notes to Financial Statements), of which $0.5 million was convertedand to advanced royalties (refer to Note 11 – License Agreement –a lesser extent, in Notes to Financial Statements). In addition, net investing activities consisted of purchases of $0.3 million of property and equipment, primarily computer and telecommunications hardware and software. In Fiscal 2010, investing activities used $9 thousand in purchases of property and equipment.

There were no financing activities in Fiscal 2012 and 2011.   In Fiscal 2010, financing activities generated $67 thousand in proceeds from the exercise of stock options.

At September 30, 2011,2012, our current ratio (current assets divided by current liabilities) was 6.1;2.15; our quick ratio (current assets less inventories divided by current liabilities) was 5.8;1.67; and our working capital (current assets less current liabilities) was $18.3$9.1 million.  As of such date, we had no short or long-term debt outstanding.

Our primary source of liquidity is our cash and cash equivalents on hand. The primary demands on our working capital currently are: i) operating losses, should they occur, and ii) accounts payable arising in the ordinary course of business, the most significant of which arise when our customers place orders with us and we order products from our suppliers, and iii) development of strategic partnerships.suppliers. Historically, our sources of liquidity have been adequate to satisfy working capital requirements arising in the ordinary course of business.  Management’s recently announced business strategy includes (i) increasing the Company’s existing OEM business and (ii) expanding its product offerings and diversifying its distribution by moving into the retail channel.  We anticipate that the building out of our product offerings and establishing a retail distribution channel through internal growth and development of strategic partnerships may lengthen the period required to increase net sales revenues expected to be generated by the new channel and products.  Results of operations for Fiscal 2011 reflect the increase in operating costs brought to bear to achieve these goals.  Accordingly, we anticipate significant uses of cash and capital resources going forward as a result of one or more of the following developments in future periods: (i) continued operating losses due to the investments incurred in conjunction with our implementation of management’s strategy (see “Trends and Economic Environment” above), in particular in increased selling and other personnel expenses;  (ii) use of capital in financing strategic partnerships in investing activities; and (iii) investments in working capital required to support new products and sales channels.   We anticipate that our liquidity and financial resources for the next twelve months will be adequate to meetmanage our operating and financial requirements. We expect to substantially complete our exit of our retail business by January 31, 2013 and do not expect to have any continuing involvement in the retail business after this date. We anticipate an additional loss from discontinued operations of approximately $0.2 million to $0.4_million, which we anticipate incurring between October 2012 and January 2013.

ITEM 7A.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable

ITEM 8.            FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements and notes thereto included in this Annual Report may be found at pages [2832 to 45]54 of this Annual Report on Form 10-K.

ITEM 9.            CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A.         CONTROLS AND PROCEDURES

Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that is designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

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In accordance with Exchange Act Rule 13a-15(b), our management, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, performed an evaluation of the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this Report (the fourth quarter of the Fiscal year ended September 30, 2011,2012, in the case of this Annual Report on Form 10-K). Based on that evaluation, the Company's Principal Executive Officer and Principal Financial Officer concluded that the Company's disclosure controls and procedures were effective, as of the end of the period covered by this Report (the fourth quarter of the Fiscal year ended September, 30, 2011,2012, in the case of this Annual Report on Form 10-K), to provide reasonable assurance that information required to be disclosed in the Company's reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms.

Management’s Report on Internal Control Over Financial Reporting

Our Principal Executive Officer and our Principal Financial Officer are responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

• pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors; and

• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our Principal Executive Officer and our Principal Financial Officer assessed the effectiveness of our internal control over financial reporting as of September 30, 2011.2012.   In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control — Integrated Framework.

Based on this assessment, our Principal Executive Officer and our Principal Financial Officer believe that, as of September 30, 2011,2012, our internal control over financial reporting is effective based on those criteria.

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.Annual Report.

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This report shall not be deemed to be filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, unless the registrant specifically states that the report is to be considered “filed” under the Exchange Act or incorporates it by reference into a filing under the Securities Act or the Exchange Act.

Changes in Internal Control

Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, performed an evaluation required by Rule 13a-15(d) of the Exchange Act as to whether any change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the last Fiscal quarter of the Fiscal year ended September 30, 2011.2012.  Based on that evaluation, our Principal Executive Officer and our Principal Financial Officer concluded that no change occurred in the Company's internal control over financial reporting during the last Fiscal quarter of the Fiscal year ended September 30, 20112012 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

ITEM 9B.         OTHER INFORMATION

None

PART III 

ITEM 10.         DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item regarding directors and executive officers is incorporated to this Annual Report on Form 10-K by reference to our Definitive Proxy Statement to be filed with the Securities and Exchange Commission not later than January 28, 2012,2013, in connection with our Annual Meeting of Stockholders (the “2011“2012 Proxy Statement”) under the headings “Election of Directors”, “Structure and Practices of the Board of Directors”, and “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters;—Section 16(a) Beneficial Ownership Reporting Compliance”.  Information regarding executive officers is also incorporated to this Annual Report on Form 10-K by reference to the 20112012 Proxy Statement under the caption “Executive Officers.” The information required by this item relating to Corporate Governance, including Code of Ethics, is incorporated to this Annual Report on Form 10-K by reference to the 20112012 Proxy Statement under the heading “Structure and Practices of the Board of Directors.”

ITEM 11.         EXECUTIVE COMPENSATION

The information required by this item is incorporated to this Annual Report on Form 10-K by reference to the 20112012 Proxy Statement under the heading “Executive Compensation and Related Information.”

ITEM 12.         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated to this Annual Report on Form 10-K by reference to the 20112012 Proxy Statement under the headings “Executive Compensation and Related Information—Securities Authorized for Issuance Under Equity Compensation Plans” and “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

ITEM 13.         CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated to this Annual Report on Form 10-K by reference to the 20112012 Proxy Statement under the headings “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters—Certain Relationships, Director Independence, and Related Transactions” and “Structure and Practices of the Board of Directors;—Board of Directors and Director Independence.”

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ITEM 14.         PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated to this Annual Report on Form 10-K by reference to the 20112012 Proxy Statement under the heading “Matters Relating to Independent Registered Public Accountants;—Principal Accountant Fees and Services.”

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PART IV

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† Portions have been omitted pursuant to request for confidential treatment and the omitted portions have been separately filed with the Commission.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Forward Industries, Inc.

We have audited the accompanying consolidated balance sheetsheets of Forward Industries, Inc. and Subsidiaries as of September 30, 2012 and 2011, and the related consolidated statements of operations, shareholders' equity and cash flows for the yearyears then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.audits.

We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit providesaudits 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 Forward Industries, Inc. and Subsidiaries as of September 30, 2012 and 2011, and itstheir results of operations and cash flows for the yearyears then ended, in conformity with accounting principles generally accepted in the United States of America.

New York, New York

December 15, 201120, 2012

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Forward Industries, Inc.

We have audited the accompanying consolidated balance sheet of Forward Industries, Inc. (the Company) as of September 30, 2010 and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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 Forward Industries, Inc. as of September 30, 2010 and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Miami, Florida

December 8, 2010

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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 20112012 AND 2010

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

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FORWARD INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS2011

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

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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 20112012 AND 20102011

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

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34

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

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 as a manufacturer and distributor of specialty and promotional items.products. The Company designs, markets, and distributes carry and protective solutions, primarily for hand held electronic devices, including soft-sided carrying cases, bags, clips, hand straps, protective plates and skins, and other accessories for medical monitoring and diagnostic kits, bar code scanners, GPS and location devices, and cellular telephones. The Company also designs, markets, and distributes carry and protective solutions for other consumer products such as laptop computers, MP3 players, firearms, sporting, recreational, and aeronautical products.devices. The Company’s principal customer market is original equipment manufacturers, or “OEMs” (or the contract manufacturing firms of these OEM customers), of these products that either package ourits products as accessories “in box” together with their branded product offerings, or sell them through their retail distribution channels. The Company’s OEM products include carrying cases and other accessories for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronic products (such as sporting & recreational products, bar code scanners, smartphones, GPS &location devices, tablets, and firearms,). The Company’s OEM customers are located in Europe, the APACAmericas, the EMEA Region, and the Americas.

We doAPAC Region. The Company does not manufacture any of theits OEM products that we design, market, and distribute.  We sourcesources substantially all of its OEM products we market and distribute from independent suppliers in China.  Our suppliers custom manufacture our carrying solutionsChina (refer to Note 14 – Buying Agency and related productsSupply Agreement).

On June 21, 2012, the Company determined to our order, basedexit its global retail business and focus solely on our designsgrowing its OEM business.  The decision to eliminate the retail division was primarily driven by the longer than estimated path to bring it to profitability and know-how,the strong top line growth and to our customers’ specifications.cost rationalizations in the OEM business.

NOTE 2            ACCOUNTING POLICIES

Accounting Estimates

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

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Forward Industries, Inc. ("Forward") and its wholly owned subsidiaries (Forward Industries (IN), Inc.,US, Forward Industries (Switzerland) GmbH (“Switzerland, Forward Switzerland”),HK, Forward Industries HK Ltd., Forward Asia Pacific Limited,APAC, and Forward Ind. (UK), Ltd., together with Forward, the "Company")UK). All significant intercompany transactions and balances have been eliminated in consolidation.

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NOTE 2            ACCOUNTING POLICIES (CONTINUED)Certain prior period amounts have been reclassified, in addition to discontinued operations as disclosed in Note 3, to conform to the current period presentation.

Cash and Cash Equivalents

Cash and cash equivalents consist primarily of cash on deposit and highly liquid money market accounts, short-term bonds, and certificates of deposit with original contractual maturities of three months or less, predominantlypredominately in USU.S. dollar denominated instruments. The Company may purchase these short-term bonds with anticipated maturity of 90 days or less at a premium or discount. The Company records these investments as cash and cash equivalents net of amortization of premium or discount. The Company minimizes its credit risk associated with cash and cash equivalents by investing in high quality instruments and by periodically evaluating the credit quality of the primary financial institution issuers of such instruments. The Company holds cash and cash equivalents at major financial institutions in the United States, at which cash amounts may significantly exceed FDIC insured limits, and in Europe.limits. At September 30, 2011,2012, this amount was approximately $10.5$4.4 million. Historically, the Company has not experienced any losses due to such cash concentrations.

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NOTE 2            ACCOUNTING POLICIES (CONTINUED)

Marketable Securities

The Company has investments in marketable equity securities that are classified as available-for-sale and are recorded at fair value with the corresponding unrealized holding gains or losses, net of taxes, recorded as a separate component of “Accumulated Other Comprehensive Loss” within shareholders’ equity. Unrealized losses that are determined to be other-than-temporary, based on current and expected market conditions, are recognized in earnings. The fair value of marketable securities is determined based on quoted market prices at the balance sheet dates. The cost of marketable securities sold is determined by the specific identification method.

Accounts Receivable

Accounts receivable consist of unsecured trade accounts with customers or their contract manufacturers. The Company performs periodic credit evaluations of its customers including an evaluation of days outstanding, payment history, recent payment trends, and perceived credit worthiness, and believes that adequate allowances for any uncollectible receivables are maintained. Credit terms to the majority of customers are generally range from net thirty (30) days to net sixty (60) days; however, the Company extends to certain customers, particularly its largest, payment terms up to 90ninety (90) days. The Company has not historically experienced significant credit or collection problems with its OEM customers or their contract manufacturers. In addition, the Company maintains credit insurance that provides up to 90% coverage on trade accounts with customers in the EMEA region. At September 30, 2012, no allowance for doubtful accounts relating to the Company’s continuing operations was deemed necessary. At September 30, 2011, and 2010, the allowance for doubtful accounts was approximately $14,000 and $19,000, respectively.$14,000.

Inventories

Inventories consist primarily of finished goods and are stated at the lower of cost (determined by the first-in, first-out method) or market.  Based on management’s estimates, an allowance is made to reduce excess, obsolete, or otherwise un-saleable inventories to net realizable value. The allowance is established through charges to cost of goods sold onin the Company’s consolidated statements of operations. As reserved inventory is disposed of, the Company charges off the associated allowance.  In determining the adequacy of the allowance, management’s estimates are based upon several factors, including analyses of inventory levels, historical loss trends, sales history, and projections of future sales demand. The Company’s estimates of the allowance may change from time to time based on management’s assessments, and such changes could be material. At September 30, 2011 the Company did not record an allowance for obsolete inventory. At September 30, 2010,2012, the allowance for obsolete inventory of the Company’s continuing operations was approximately and $28,000.$99,000. At September 30, 2011, no allowance for obsolete inventory was deemed necessary.

Property and Equipment

Property and equipment consist of furniture, fixtures, and equipment and leasehold improvements and are recorded at cost. Expenditures for major 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 loss is 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.method. The estimated useful life for furniture, fixtures and equipment ranges from three to ten years. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements. For the fiscal years ended September 30, 20112012 and 2010,2011, the Company recorded approximately $74,000$103,000 and $54,000 of depreciation and amortization expense from continuing operations, respectively. Depreciation and amortization for production related property, plant and equipment is included as a component of costs of goods sold in the accompanying consolidated statements of operations. Depreciation and amortization for selling and general and administrative related property and equipment, is included as a component of operating expenses in the accompanying consolidated statements of operations.

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NOTE 2            ACCOUNTING POLICIES (CONTINUED)

Income Taxes

The Company accounts for its income taxes in accordance with accounting principles generally accepted in the United States of America, which requires, among other things, recognition of future tax benefits and liabilities measured at enacted rates attributable to temporary differences between financial statement and income tax bases of assets and liabilities and to net tax operating loss carryforwards to the extent that realization of these benefits is more likely than not. The Company periodically evaluates the realizability of its net deferred tax assets.  See Note 810 to these Notes to Consolidated Financial Statements. The Company’s policy is to account for interest and penalties relating to income taxes, if any, in “income tax expense” in its consolidated statementstatements of operations and include accrued interest and penalties within the “accrued liabilities” in its balance sheets, if applicable. For fiscal years presented in the accompanying consolidated statements of operationsended September 30, 2012 and 2011, no income tax related interest or penalties were assessed or recorded.

Revenue Recognition

The Company generally recognizes revenue from product sales to its customers when: (1) title and risk of loss are transferred (in general, these conditions occur at either point of shipment or point of destination, depending on the terms of sale); (2) persuasive evidence of an arrangement exists; (3) havethe Company has no continuing obligations to the customer; and (4) the collection of the related accounts receivable is reasonably assured.

Shipping and Handling Costs

The Company classifies shipping and handling costs (including inbound and outbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs, and other costs associated with the Company’s Hong KongAsia-based distribution facility and network)capability, as a component of cost of goods sold in the accompanying consolidated statements of operations.

Advertising and Promotion Costs

Advertising and promotion costs, consisting primarily of samples tradeshow costs, and websitetradeshow costs, are expensed as incurred. Advertising and promotion costs for continuing operations are included in sales and marketingselling expenses in the accompanying consolidated statements of operations and amounted to approximately $173,000$43,000 and $111,000$158,000 for the fiscal years ended September 30, 20112012 and 2010,2011, respectively. 

Foreign Currency Transactions

The functional currency of the Company and its wholly owned foreign subsidiaries is the U.S. dollar. Foreign currency transactions may generate receivables or payables that are fixed in terms of the amount of foreign currency that will be received or paid. Fluctuations in exchange rates between such foreign currency and the functional currency increase or decrease the expected amount of functional currency cash flows upon settlement of the transaction. These increases or decreases in expected functional currency cash flows are foreign currency transaction gains or losses that are included in “other income (expense), net” in the accompanying consolidated statements of operations. The net loss from foreign currency transactions and translations for continuing operations was approximately $37,000$55,000 and $33,000$37,000 for the fiscal years ended September 30, 20112012 and 2010,2011, respectively.

Accumulated Other Comprehensive Loss

For the fiscal years ended September 30, 2011 and 2010, the Company did not have any components ofAccumulated other comprehensive loss, other than net loss.which is included as a component of Shareholders’ Equity, includes unrealized gains or losses on available-for-sale securities and currency translation adjustments related to the Company’s foreign subsidiaries.

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NOTE 2            ACCOUNTING POLICIES (CONTINUED)

Fair Value of Financial Instruments

For certain of the Company’sThe Company records its financial instruments including cashthat are accounted for under Accounting Standard Codification (“ASC”) 320, “Investments-Debt and cash equivalents, accounts receivable, accounts payable, and other accrued liabilities, the carrying amount approximatesEquity Securities” (“ASC 320”) at fair value. The determination of fair value dueis based upon the fair value framework established by ASC 820. ASC 820 provides that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occcures in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The fair value hierarchy is broken down into three levels based on the source of inputs as follows: (a) Level 1 – valuations based on unadjusted quoted prices in active markets thar are accessible at the measurement date for identical, unrestricted assets or liabilities; (b) Level 2 – valuations based on quoted prices in markets that are not active, or financial instruments for which all significant inputs are observable; either directly or indirectly; and (c) Level 3 – valuations based on prices or valuation techniques that require inputs that are both significant to the short-term maturities of these instruments.

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NOTE 2            ACCOUNTING POLICIES (CONTINUED)fair value measurement and unobservable; thus, reflecting assumptions about the market participants.

Share-Based Payment Expense

The Company recognizes share-based equity compensation in its consolidated statements of operations at the grant-date fair value of stock options and other equity-based compensation. The determination of grant-date fair value is estimated using anthe Black-Scholes option-pricing model, which includes variables such as the expected volatility of the Company’s share price, the exercise behavior of its grantees, interest rates, and dividend yields. These variables are projected based on the Company’s historical data, experience, and other factors. Changes in any of these variables could result in material increases to the valuation of options granted in future periods and increases in the expense recognized for share-based payments. In the case of awards with multiple vesting periods, the Company has elected to use the graded vesting attribution method, which recognizes compensation cost on a straight-line basis over each separately vesting portion of the award as if the award was, in-substance, multiple awards. Refer to Note 79 Share-Based Compensation. In addition, the Company recognizes share-based compensation to non-employees based upon the fair value, using the Black-Scholes pricing model, determined at the deemed measurement dates over the related contract service period.

Recent Accounting Pronouncements

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which provides a consistent definition of fair value and ensures that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards (IFRS). The guidance changes certain fair value measurement principles and expands the disclosure requirements particularly for Level 3 fair value measurements. The guidance is effective for the Company beginning January 1, 2012 and is to be applied prospectively. The adoption of this guidance, which relates primarily to disclosure, is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In June 2011, the Financial Accounting Standards Board (FASB)(“FASB”) issued ASU No. 2011-05, Comprehensive Income (Topic 220) – Presentation of Comprehensive Income (Accounting Standards Update (ASU) No. 2011-05), which updates the Codification to require the presentation of(“ASU 2011-05”). This update requires that the components of net income, the components of other comprehensive income (OCI) and the total of comprehensive income in eitherbe presented as a single continuous financial statement of comprehensive income or in two separate but consecutive statements. The option of presenting other comprehensive income in the statement of stockholders’ equity is eliminated. This update also requires the presentation on the face of the financial statements of reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements where the components of net income and the components of other comprehensive income. These updates do not affectincome are presented. In December 2011, the items reported in OCI orFASB issued ASU 2011-12, which deferred the guidance on whether to require entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement where net income is presented and the statement where other comprehensive income is presented for reclassifying such items to net income. These updatesboth interim and annual financial statements. ASU 2011-12 reinstated the requirements for the presentation of reclassifications that were in place prior to the Codificationissuance of ASU 2011-05 and did not change the effective date for ASU 2011-05. For public entities, the amendments in ASU 2011-05 and ASU 2011-12 are effective for fiscal years, and interim and annual periods within those years, beginning after December 15, 2011.2011, and should be applied retrospectively. The Company does not expect the implementationadoption of this guidance to have a material impact on its consolidated financial statements.

In February 2010,for the FASB issued ASU No. 2010-09 “Subsequent Events (ASC Topic 855) “Amendments to Certain Recognitionfiscal year ended September 30, 2012 concerned disclosure only and Disclosure Requirements” (“ASU No. 2010-09”). ASU No. 2010-09 requires an entity that is an SEC filer to evaluate subsequent events through the date that the financial statements are issued and removes the requirement for an SEC filer to disclose a date, in both issued and revised financial statements, through which the filer had evaluated subsequent events. The adoption did not have an impact on the Company’sCompany's consolidated financial position andor results of operations.

In January 2010,NOTE 3                    DISCONTINUED OPERATIONS

On June 21, 2012, the FASB issued an amendmentCompany determined to ASC 820, Fair Value Measurementsexit its global retail business and Disclosure,focus solely on growing its OEM business.  The decision to require reporting entitieseliminate the retail division was primarily driven by the longer than estimated path to separately disclosebring it to profitability and the amountsstrong top line growth and business rationalecost rationalizations in the OEM business.