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, 2008 ("Fiscal 2008"), with those of the fiscal year ended September 30, 2007 ("Fiscal 2007"), and compares our consolidated results of operations for Fiscal 2007 with those of the fiscal year ended September 30, 2006 ("Fiscal 2006") 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 that are not based on historical fact and that involve assessments of certain risks, developments, and uncertainties in our business. Such forward looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, can be identified by the use of forward-looking terminology such as "may", "will", "should", "expect", "anticipate", estimate", "intend", "continue", or "believe", or the negatives or other variations of these terms or comparable terminology. Forward looking statements may include projections, forecasts, or estimates of future performance and developments. Forward looking statements contained in this Report are based upon assumptions and assessments that we believe to be reasonable at the time such forward looking statements are made. 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 assumed and assessed. Such risk factors, uncertainties, contingencies, and developments, including those discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations and those identified in "Risk Factors" in Item 1A of this Annual Report, could cause our future operating results to differ materially from those set forth in any forward looking statement. Such factors include, among others, the following: our ability to maintain constructive commercial relationships with our key Original Equipment Manufacturer ("OEM") customers, including during periods of economic downturns generally or in their business environments; our success in winning new business from our customers and against competing vendors; whether replacement programs that we win will be more or less successful or profitable than those that are replaced; the success or failure of our efforts under our license agreements; levels of demand and pricing generally for cellular handsets and blood glucose monitoring devices sold by our customers for which we supply carry solutions; variability in order flow from our OEM customers; the loss of one or more key sales employees upon whom relationships with key OEM customers depend; OEM customers decision to reduce or eliminate their practice of including carry case accessories in-box; general economic and business conditions, nationally and internationally in the countries in which we do business or the onset of a global economic recession; the failure of one or more of our suppliers; the need to add materially to our inventory allowance, including the impact on inventory levels or saleability of inventory arising out of hub agreements we have entered into with two of our OEM customers; demographic changes; changes in technology, including developments affecting cellular handsets; developments in the treatment or control of diabetes that affect the incidence of use and replacement rates of handheld blood glucose monitors by diabetics; increased competition in the business of distribution of carry solutions for handheld electronic devices generally or increased competition to include carry solutions with products manufactured by our OEM customers in particular; changes affecting the business or business prospects of one or more of our principal OEM customers; governmental regulations and changes in, or the failure to comply with, governmental regulations; and other factors included elsewhere in this Annual Report and our other reports filed with the Commission. Accordingly, there can be no assurance that any such forward looking statement, projection, forecast or estimate can be realized or that actual returns, results, or business prospects will not differ materially from those set forth in any forward looking statement.

Forward Industries, Inc.

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.

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 listing is not intended to be a comprehensive list. 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 is 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.

Revenue Recognition

In accordance with the requirements of Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition in Financial Statements, the Company generally recognizes revenue from product sales to customers when: products that do not require further services by the Company are shipped; there are no uncertainties surrounding customer acceptance; and collectibility is reasonably assured.

Accounts Receivable

We record an allowance for doubtful accounts for all receivables judged by us to be unlikely to be collected. The effect of the allowance is to reduce the accounts receivable reported on our balance sheet to an amount that we believe will actually be collected. Significant management judgments, analyses, and estimates must be made and used in connection with establishing this valuation account, based on a combination of factors: the age of receivable balances, our historical bad debts write-off experience, and our respective customer's creditworthiness, among other factors. At September 30, 2008 and September 30, 2007, our allowance for doubtful accounts was approximately $10,000 and $47,000, respectively. Changes to this account are reflected in the general and administrative expense line of our consolidated statements of operations. Although we consider our allowance for doubtful accounts to be adequate and proper, changes in economic conditions, the assessments of new customers' creditworthiness, changes in customer circumstances, or other factors could have a material effect on the recorded allowance.

Inventory Valuation

We make estimates and judgments to value our inventory. Our inventory is recorded at the lower of cost or market. The majority of our inventory consists of finished goods that are custom made by our suppliers based on firm orders from our OEM customers and held for our account or supplied to our OEM customers' distribution hubs in anticipation of their draw-downs to fulfill orders. We also periodically stock inventory in anticipation of orders from our OEM customers when it appears to us commercially advantageous to do so. In addition, we hold inventory in support of sales to wholesalers and distributors in the aftermarket, including our license agreement with Motorola.

Forward Industries, Inc.

At the end of each fiscal quarter, we evaluate our ending inventories, and we establish an allowance for inventory that is considered obsolete, slow moving, or otherwise un-saleable. This evaluation includes, among other factors, analyses of inventory levels, historical loss trends, sales history, and projections of future sales demand. We physically dispose of inventory once its marketability has been determined to be zero. Inventory allowances were approximately $0.2 million and $0.6 million at September 30, 2008 and 2007, respectively. The decrease in the allowance from September 30, 2007 to September 30, 2008, was due to the disposal of cell phone inventory determined to be obsolete or unsalable. Increases to this account are reflected in the cost of goods sold line of our consolidated statements of operations. See Note 14, Subsequent Events, to our audited, consolidated financial statements in Item 8 of Part II of this Annual Report on Form 10-K.

The vast majority of our production is made to customer specifications. If a customer elects not to accept delivery, or defaults on a purchase order or commitment, or returns inventory from its hub without payment in violation of the hub arrangements, additional inventory write-downs or reserves may be required and would be reflected in cost of goods sold in the period the revision is made. Historically, actual inventory valuation results have not deviated significantly from those previously estimated by us.

Deferred Income Taxes

In our consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we are subject to taxation. This process involves estimating actual current income tax expense as well as assessing temporary differences resulting from differing treatment of revenue and expense items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We had approximately $0.4 million and $0.3 million of net deferred tax assets at September 30, 2008 and 2007, respectively. No valuation allowances were recorded in respect of these deferred tax assets as of such dates.

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

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

Variability of Revenues and Results of Operation

Because our sales revenues are 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.

Forward Industries, Inc.

We depend for the predominant proportion of our sales revenues on OEM orders from our three largest customers, each of which is a large, multinational corporation. Each of these customers launches different products and can purchase products accessories, such as carrying cases, from many different vendors. When we are selected to supply a carry solution "in-box" for a specific product and launch, we may not be in a position to know the frequency or volumes of our customers' orders, or the duration of such orders (which will depend on the OEM customer product's life cycle), all of which depend on our customers' ongoing assessments of the product's relative contribution to their businesses, as well as other factors. Our OEM customers may keep products for which our carry solutions have been selected to be packaged "in-box" in active promotion for many months, or for a very short period of time, depending on the popularity of the product, product development cycles and new product introductions, and our customers' competitors' product offerings. Product life cycles for blood glucose monitoring instruments and kits and related carry case accessories are subject to advances in the technology for measurement of blood sugars and insulin administration. Short product life cycles and/or significant variability in product pricing are particularly characteristic of the cellular handset market, where new functionality is constantly introduced, competition among vendors is high, and industry technical standards are subject to continuing change. When "in-box" programs end, and to the extent that the introduction of new programs does not include our products as an accessory "in-box", or such new programs do include our products as an accessory "in-box" but do not result in a comparable level of demand for our products, the level of our OEM product sales is susceptible to significant and rapid change.

All of this makes our quarterly revenue levels susceptible to a high degree of variability and difficult to predict. Significant, rapid shifts in our operating results may occur if and when one or more of these customers increases or decreases the size(s) of, or eliminates, its orders from us by amounts that are material to our business.

Trends in Results of Operations

º We anticipate that OEM diabetic sales will continue to account for the predominant percentage of revenue and that net sales contributions from OEM cell phone sales and aftermarket distribution for the first half of Fiscal 2009 will be negligible. We believe OEM diabetic sales will continue to lead revenue generation. We will see negligible revenue from licensed sales or sales of our proprietary products in the aftermarket. See "Risk Factors" in Part II, Item 1A, of this Annual Report on Form 10-K for a discussion of recent developments relating to our relationship with Motorola.

º We anticipate that gross profit and gross profit percentage may continue to be adversely impacted by product mix factors. The average gross margin for all diabetic product sales tends to be narrow compared to other OEM sales and aftermarket sales. With OEM diabetic product sales continuing to account for the predominant percentage of our total revenue mix, our overall gross profit margin will thus tend to be lower. Absent a material increase in revenues from our other product lines, we anticipate that our overall gross margin will remain compressed. Second, as relatively higher margin diabetic case programs mature, we expect to face increased pricing pressure from our largest OEM customers, and this will further impact gross profit.

º Building inflationary pressures in or affecting China's economy contributed to rising costs of goods sold, which pressured gross profit. We cannot yet predict whether or when falling commodity prices observed in the first quarter of Fiscal 2009 will benefit cost of goods sold. We source 100% of the products we sell and distribute from vendors located in China. Rising labor, energy, and materials costs (particularly in South China, where we source the majority of our products), and the rising value of the Renminbi in comparison to the U.S. dollar in Fiscal 2008 adversely affected gross profit during Fiscal 2008. We had very little if any ability to pass higher costs on to our larger customers. The recent reversal of commodity prices and possibly labor inputs may benefit our cost of goods sold. But final prices to us are the subject of negotiation with our suppliers, and it is too early to predict whether lower inputs will be passed through to us.

º Pre-tax net loss in recent and the current reporting periods would have been significantly larger but for the substantial level of "other income", which consists primarily of interest income on cash balances. Federal Reserve and European Central Bank reductions in the level of interest rates combined with slightly lower cash balances have and may continue to result in lower levels of other income and thus result in a smaller offset to operating losses.

Forward Industries, Inc.

Results of Operations for Fiscal 2008 compared to Fiscal 2007

Net loss

Net loss in Fiscal 2008 increased $0.3 million to $0.9 million compared to $0.6 million in Fiscal 2007 The deterioration in results was primarily due to a $0.8 million, or 16%, reduction in gross profit, due primarily to a $6.5 million decline in sales of cell phone carry solution products, and to a $0.4 million, or 39%, decrease in other income, which consists primarily of interest income. These declines were partially offset by a decrease in selling, general and administrative expenses of $0.9 million, or 14%, primarily due to lower personnel costs, royalty expense, and travel & entertainment costs. Basic and diluted per share data was ($0.11) for Fiscal 2008, compared to ($0.07) for Fiscal 2007. The decrease in earnings per share in Fiscal 2008 was due to the increase in the net loss.

Net Sales

Net sales decreased $2.2 million, or 10%, to $20.0 million in Fiscal 2008 compared to $22.2 million in Fiscal 2007 due to lower sales of cell phone products, which declined $6.5 million, or 80%. This decrease was offset, in part, by higher sales of carry cases for diabetic products, which increased $4.4 million, or 40%. The tables below set forth approximate net sales by product line and geographic location of our customers for the periods indicated.

          Net Sales for Fiscal 2008
            (millions of dollars)
                     APAC Americas EMEA Total
Diabetic Products    $9.0     $3.1 $3.2 $15.3
Cell Phone Products  0.5       0.6  0.5   1.6
Other Products        0.5      2.4  0.1   3.1
Totals*             $10.0     $6.1 $3.9 $20.0

          Net Sales for Fiscal 2007
            (millions of dollars)
                     APAC Americas EMEA Total
Diabetic Products    $7.2     $2.1 $1.6 $10.9
Cell Phone Products   3.3      2.0  2.8   8.1
Other Products        0.4      2.6  0.1   3.1
Totals*             $10.9     $6.7 $4.5 $22.2

* Tables may not total due to rounding.

Diabetic Product Sales

We design to the order of and sell directly to our OEM customers carrying cases used by diabetics to carry their personal electronic, blood glucose monitoring kits. In Fiscal 2008, OEM customers for these carrying cases included Lifescan, Abbott Labs, and Roche Diagnostics (including their subsidiaries, affiliates and contract manufacturers) as well as other customers. Our carrying cases are packaged as an accessory "in-box" with the monitoring kits that are sold by our OEM customers.

Sales of cases and related accessories for blood glucose monitoring kits increased $4.4 million to $15.3 million in Fiscal 2008, or 40% higher than Fiscal 2007. These results were driven by higher sales to our three largest customers for Fiscal 2008, which increased by $2.0 million, $1.1 million, and $1.2 million, respectively, in Fiscal 2008. The increase in sales was attributable to higher volumes of in-box sales from existing programs and increased contributions from new programs.

Sales of carrying cases for blood glucose monitoring kits represented 76% of our total net sales in Fiscal 2008 compared to 49% of our total net sales in Fiscal 2007 due primarily to the continuing significant decline in cell phone product sales as well as the increase in OEM sales of cases and accessories for the blood glucose monitors.

Forward Industries, Inc.

Other Product Sales

We design and sell a number of carrying solutions for items such as cameras, portable oxygen tanks, bar code scanners, MP3 players, and other carrying solutions for an assortment of products on a made-to-order basis that are customized to meet the individual needs of our smaller OEM customers. By the nature of our distribution in this market, sales of these customized products to order in their product category vary from period to period without necessarily reflecting a significant trend in overall demand for these items.

Sales of other products were $3.1 million for both Fiscal 2008 and Fiscal 2007, which represented 16% and 14% of our total sales, respectively.

Cell Phone Product Sales

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

In addition to our "in-box" business with OEM customers, we engage in the sale of carry solution products as separately packaged accessories directly to wholesalers (for re-sale to retail outlets) and retailers (for re-sale to retail consumers), a distribution channel we sometimes refer to as the "aftermarket". Products in this channel include products bearing the Motorola logo, for which we have licensed the non-exclusive rights in the United States, Canada, and Europe. Product and channel development for these products are underway as we are committing resources to strengthen (and establish, in the case of North American markets) our sales and marketing capability. We don't expect to see revenue contribution, if any, from these markets until the second fiscal quarter of Fiscal 2009.

See "Risk Factors" in Item 1A of Part I of this Annual Report on Form 10-K for a discussion of the risks relating to OEM customer Motorola.

Total sales of cell phone products in Fiscal 2008 declined $6.5 million to $1.6 million, to a level one-fourth of that compared to Fiscal 2007. Sales of such products in Fiscal 2008 were predominantly OEM sales to Motorola, which decreased $4.8 million, to $1.2 million, or to a level approximately one-fifth the level attained in Fiscal 2007.

Aftermarket sales of cell phone products, consisting primarily of licensed sales of Motorola branded products, declined to $0.4 in Fiscal 2008, $1.5 million lower than "aftermarket" sales in Fiscal 2007, which consisted entirely of Motorola branded products sold under the expired license.

Sales of carry solutions for cell phone products represented 8% of our total net sales in Fiscal 2008 compared to 36% in Fiscal 2007, due primarily to the decline in cell phone sales and to a lesser extent the significant increase in diabetic product sales.

Gross Profit

Gross profit decreased $0.8 million, or 16%, to $4.0 million in Fiscal 2008 from $4.8 million in Fiscal 2007. As a percentage of net sales, gross profit decreased to 20% in Fiscal 2008 from to 22% in Fiscal 2007. These decreases were due to several factors. First, net sales decreased $2.2 million due to the steep decline in our cell phone products line. Second, average gross margin on diabetic product sales, which accounted for 76% total net sales in Fiscal 2008 compared to 49% in Fiscal 2007, tend to be lower than other product lines, and thus, adversely affected our gross profit percentage. Third, higher labor and materials costs due to inflation and currency factors, all contributed to restrain gross profit and gross profit percentage. Lastly, the cost of operating our Hong Kong facility, which constitutes part of our cost of goods sold on our statements of operations, increased due to higher quality and compliance measures implemented in Fiscal 2008, which on a lower revenue base, acted as a drag on our gross profit percentage. Compared to the above figures, Fiscal 2008 gross profit and gross profit percentage would have been $3.8 million and 19%, respectively, but for the agreement of a customer to pay $250,000 to us that has the effect of reducing Fiscal 2008 cost of goods sold by that amount. The payment, which is in settlement of a larger amount of unpaid invoices to the customer in respect of product included as part of our inventory allowance in Fiscal 2008 and Fiscal 2007, had the effect of significantly improving fiscal fourth quarter gross profit and gross profit percentage, thereby improving the full-year figures to the extent described above. See Note 14, Subsequent Events, to the audited consolidated financial statements in Item 8 of Part II of this Annual Report.

Forward Industries, Inc.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses decreased $0.9 million, or 14%, to $5.7 million in Fiscal 2008 from $6.6 million in Fiscal 2007. This decrease was due to reductions in selling personnel costs and general administrative personnel costs of $0.3 million and $0.1million, respectively, primarily due to the expiration at December 31, 2007, of employment agreements of two executives, one in each area. In addition, Royalty expenses were lower by $0.3 million as a result of the elimination of the minimum royalty obligations under the new License Agreement. Travel and entertainment costs incurred by selling personnel also decreased $0.1 million in Fiscal 2008. Other components of our operating expenses also declined in Fiscal 2008, the most significant of which was "other general and administrative costs", which decreased $0.1 million primarily due to lower depreciation expense, share-based compensation for our directors, and investor relations fees. Royalty and commission expense declined $30,000 in Fiscal 2008 compared to Fiscal 2007 due to lower sales of licensed products.

Other Income (Expense)

Other income, primarily interest income on cash balances, declined 39% to $0.6 million, due to sharply lower average interest rates in Fiscal 2008 on slightly lower cash balances compared to Fiscal 2007. The second component of "other . . .