The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements, and the notes thereto, and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2008. The following discussion and analysis compares our consolidated results of operations for the three months ended December 31, 2008 (the "2009 Quarter"), with those for the three months ended December 31, 2007 (the "2008 Quarter").
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

This quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are not based on historical fact. Such forward looking statements, can be identified by the use of forward-looking terminology such as "may", "might", "will", "should", "likely", "possible", "seek", "expect", "anticipate", estimate", "plan", "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. Forward looking statements are based upon assumptions that we believe to be reasonable at the time such forward looking statements are made. Whether those assumptions will be borne out will be determined by future factors, developments, and events, which are difficult to predict and may be beyond our control. These forward-looking statements involve assessments of known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others: the duration and severity of the current economic conditions and their impact on consumer demand and spending, demand for our products, and uncertainties in the financial markets; a significant change of the Company's relationship with its customers (including changes affecting their businesses) in channels where concentration of sales to a certain number of customers exists; our ability to control operating expenses during periods of declining sales and or gross margins; the impact on our business of an acquisition or the failure to make an acquisition; whether our important OEM customers continue to include carry solutions "in box" with their electronic products; our success in winning new business from existing and new customers and against competing vendors; the loss of a key salesman who has significant influence on our relationships with certain OEM customer makers of diabetic test kits; levels of demand and pricing generally for electronic devices sold by our customers for which we supply carry solutions; variability in order flow from our OEM customers; the adverse impact of pricing factors on gross margins; obsolescence of inventory, including the impact on inventory allowance arising out of hub agreements we have entered into; developments in the treatment or control of diabetes that may reduce the usage of handheld blood glucose monitors; increased competition in our business; changes in, governmental regulations; and other factors set forth under the caption "risk factors" included elsewhere in this quarterly report on Form 10-Q and in our Annual Report on Form 10-K for the year ended September 30, 2008.

Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Forward looking statements speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Form 10-Q

BUSINESS OVERVIEW

We design, market, and distribute custom-designed, soft-sided carrying cases and other carry solutions for consumer electronic products primarily to original equipment manufacturers (OEMs) of blood glucose monitoring kits for diabetic patients. Our OEM distribution channel is relatively concentrated by product line and customer. During the past three years, cell phone revenue in the OEM and aftermarket channel (sales to distributors and retailers), which historically was our largest revenue source by product line and was dependent on one or two major OEM customers,, has declined very significantly, such that we no longer present such revenues separately but include them as part of "other products".

Forward Industries, Inc.

Trends and Economic Environment: We believe that deteriorating economic conditions and heightened uncertainty in financial markets have adversely impacted discretionary consumer spending, including spending on the types of electronic devices for which consumers might typically purchase our products. We expect the challenging business environment to continue in the foreseeable future. The deterioration in general economic conditions worldwide has increased the challenges in the carry solution market, which for us has been characterized by declining gross profit and gross profit percentage for the past several years. We have attempted to limit increases in operating expenses except where we think increases are critical to potential future growth.

Variability of Revenues and Results of Operations. 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

This management's discussion and analysis of financial condition and results of operations is based upon or derived from our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent liabilities. We base these judgments and estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, and these judgments form the basis for our estimates concerning the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically re-evaluate these estimates and judgments based on available information and experience. Actual results could differ from our estimates under different assumptions and conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted. We discuss the material policies that are critical in making these estimates and judgments in our Annual Report on Form 10-K for the fiscal year ended September 30, 2008, under the caption "Management's Discussion and Analysis-Critical Accounting Policies and Estimates". There have been no material changes in critical accounting policies and estimates since September 30, 2008, except as may be noted below.

The notes to our audited consolidated financial statements in our Annual Report on Form 10-K for the year ended September 30, 2008, and the notes to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q contain additional information related to our accounting policies and should be read in conjunction with the following discussion and analysis relating to our overall financial performance, operations and financial position.

Accounts Receivable

At December 31, 2008, and September 30, 2008, our allowance for doubtful accounts was approximately $10 thousand, respectively.

Inventory Valuation

Inventory allowances were approximately $0.2 million at December 31, 2008, and September 30, 2008, respectively and primarily relates to product held for sale in the aftermarket under our license with Motorola. See Notes 3 and 10 to the Financial Statements. Changes to this account are reflected in the cost of goods sold line of our consolidated statements of operations.

Forward Industries, Inc.

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

We had approximately $0.5 million and $0.4 million of deferred tax assets at December 31, 2008, and September 30, 2008, respectively. The increase in deferred tax assets results primarily from temporary differenced between book and tax income and net loss incurred in respect of the 2009 Quarter. No valuation allowances were recorded in respect of these deferred tax assets as of such dates.

RESULTS OF OPERATIONS FOR THE 2009 QUARTER COMPARED TO THE 2008 QUARTER

Net loss

We incurred a net loss of $0.2 million in the 2009 Quarter compared to $0.3
million in the 2008 Quarter. The $0.1 million improvement is a result of lower
operating expenses and an increase in tax benefit in the 2009 Quarter compared
to the 2008 Quarter, offset in part by declines in gross profit and "other
income", as shown in the table below:

                                                                                              (millions of dollars)
                                                                                       2009 Quarter 2008 Quarter  Increase
                                                                                                                 (Decrease)
Net Sales.............................................................................         $5.3         $5.0       $0.3

Gross Profit........................................................................            0.9          1.1      (0.2)
Selling, General and Administrative Expenses.............                                     (1.3)        (1.7)        0.4
Other Income.....................................................................               0.1          0.3      (0.2)
Benefit from Income Taxes..............................................                         0.1          0.1         --
Net Loss*...........................................................................         ($0.2)       ($0.3)       $0.1

* Table may not total due to rounding.

Basic and diluted loss per share data was ($0.03) for the 2009 Quarter, compared to ($0.04) for the 2008 Quarter. The reduction in loss per share in the 2009 Quarter was due to the decrease in net loss.

Net Sales

Net sales increased $0.4 million, or 7%, to $5.3 million in the 2009 Quarter from $5.0 million in the 2008 Quarter, due to an increase in sales of diabetic products of $0.6 million, or 16%. This increase was offset, in part, by a decline in sales of other products of $0.2 million, substantially all of which decline was in cell phone revenues. Cell phone revenues, including OEM and aftermarket sales, are now included in sales of "other products". The tables below set forth sales by product line and geographic location of our customers for the periods indicated.

Forward Industries, Inc.

                           Net Sales for 2009 Quarter
                        3 Months ended December 31, 2008
                              (millions of dollars)
                                                      APAC Americas Europe Total*
Diabetic Products..................................   $1.5     $1.1   $1.5   $4.1
Other Products.......................................  0.2      1.0     --    1.2
                                               Total* $1.7     $2.1   $1.5   $5.3

                           Net Sales for 2008 Quarter
                        3 Months ended December 31, 2007
                              (millions of dollars)
                                                      APAC Americas Europe Total*
Diabetic Products..................................   $1.9     $0.7   $0.9   $3.5
Other Products.......................................  0.4      0.8    0.2    1.4
                                               Total* $2.3     $1.5   $1.1   $5.0

* 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 the 2009 Quarter, OEM customers for these carrying cases included Abbott Labs, Bayer, Lifescan 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 $0.6 million, or 16%, to $4.1 million in the 2009 Quarter, from $3.5 million in the 2008 Quarter. These results were driven by higher sales to two of our largest customers, which increased by $1.1 million and $0.1 million, respectively, in the 2009 Quarter compared to the 2008 Quarter. The increases in sales were primarily attributable to several new in-box programs as well as higher volumes of existing in box programs. These increases were offset, in part, by declines in sales to Lifescan, our largest customer, and one other customer, of $0.5 million and $0.2 million, respectively, in the 2009 Quarter from the 2008 Quarter. We believe the decline in sales for Lifescan was due to the widespread economic weakness and customer deferrals of purchases of new blood glucose monitors.

Sales of carrying cases for blood glucose monitoring kits represented 77% of our total net sales in the 2009 Quarter compared to 71% of our total net sales in the 2008 Quarter due primarily to the continuing significant decline in cell phone product sales.

Other Product Sales

We design and sell a number of other carrying solutions for items such as cell phones, 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.
In general, sales of "other products" to order are made to numerous customers and typically vary from period to period without necessarily reflecting a significant trend in our business in this product line.

Sales of other products declined $0.2 million to $1.2 million in the 2009 Quarter from $1.4 million in the 2008 Quarter. This decline was the result of lower sales of cell phone carry solutions in the 2009 Quarter, which decreased $0.2 million from the 2008 Quarter. Sales to one customer in this product line increased $0.1 million in the 2009 Quarter compared to the 2008 Quarter, but were offset by declines in sales to other smaller customers for these products.

Forward Industries, Inc.

Sales of other products represented 23% of our net sales in the 2009 Quarter compared to 29% of net sales in the 2008 Quarter (which for that period, as we then broke out sales for our cell phone product line, represents the sum of "other product" and "cell phone" sales).

Gross Profit

Gross profit decreased $0.2 million, or 16%, to $0.9 million in the 2009 Quarter from $1.1 million in the 2008 Quarter primarily due to higher costs incurred in connection with the relocation of our Hong Kong facility and staffing changes there that increased Hong Kong personnel expense. Higher compliance, warehouse, rent, and travel costs in the 2009 Quarter also contributed to the higher level of Hong Kong costs.

Gross profit as a percentage of net sales was 18% in the 2009 Quarter compared to 23% in the 2008 Quarter.

Selling, General, and Administrative Expenses

Operating expenses decreased $0.4 million, or 23%, to $1.3 million in the 2009 Quarter from $1.7 million in the 2008 Quarter due primarily to a $0.3 million reduction in personnel costs as a result of the expiration at December 31, 2007, of employment agreements of two executives. Accordingly, compensation expense (including severance of $0.2 million) for these two executives was reflected in the 2008 Quarter but not the 2009 Quarter. Additionally, we incurred no royalty and commission expense in the 2009 Quarter as a result of the amendment of the Motorola license in December 2008, which eliminated all minimum royalty obligations under the current agreement, compared to $0.1 million of expense in the 2008 Quarter under the prior agreement. Lesser decreases in professional fees and other operating expenses also contributed to the improvement.

Other Income

Other income, primarily interest income on cash balances, declined 65% to $0.1 million in the 2009 Quarter, from $0.3 million in the 2008 Quarter due primarily to lower average interest rates in the 2009 Quarter on slightly lower cash balances compared to the 2008 Quarter. Other income also declined to a lesser extent as a result of foreign currency losses incurred in respect of the 2009 Quarter compared to the 2008 Quarter.

Pretax Loss

Pretax loss narrowed 10% to $0.3 million in the 2009 Quarter compared to the 2008 Quarter as a result of the changes as described above.

Income Taxes

We recorded a benefit from income taxes of $0.1 million in the 2009 Quarter compared to a benefit of $57 thousand in the 2008 Quarter due primarily to increased deferred tax expense resulting primarily from temporary differences between book and tax income. The effective income tax rate increased as a percentage of pre-tax income primarily as a result of adjustments to Federal and state net operating loss carryforwards which were booked in the prior year after the tax returns were filed. The benefit consists primarily of estimated U.S. federal income taxes, and to a lesser extent, current state and foreign income taxes. See Note 7 to the Financial Statements.

At December 31, 2008, we had approximately $4.2 million of earnings attributable to our foreign subsidiaries for which not provisions have been recorded for income tax that could occur upon repatriation. Except to the extent such earnings can be repatriated tax efficiently, they are permanently invested abroad. It is not practicable to determine the amount of income taxes payable in the event all such foreign earnings are repatriated.

Forward Industries, Inc.

LIQUIDITY AND CAPITAL RESOURCES

During the 2009 Quarter, we used $1.3 million of cash in operations compared to generating $1.0 million in the 2008 Quarter. Our operating cash flows in the 2009 Quarter consisted of a net loss of $0.2 million, reduced by $48 thousand for non-cash items, and $1.2 million for net changes in working capital items. Changes in accounts receivable, inventories, and prepaid and other current assets of $1.2 million, $0.4 million, and $52 thousand, respectively, contributed to the net cash used by operating activities. These were partially offset by changes in accounts payable and accrued expenses and other current liabilities of $0.5 million and $71 thousand, respectively. The change in accounts receivable is attributable to the higher sales levels in the 2009 Quarter and the timing in which these accounts receivable were originated. The change in inventories and accounts payable is in support of sales orders received and the ramping up of production in anticipation of the Chinese New Year. The change in prepaid expenses and other current assets is primarily a result of an increased amount of deposits on hand with certain newer suppliers in support of purchase orders we have placed with them.

During the 2008 Quarter, we generated $1.0 million of cash from operations consisting of a net loss of $0.3 million, increased by $0.1 million for non-cash items, and $1.2 million for net changes in working capital items, consisting primarily of changes in accounts receivable and accounts payable of $0.2 million and $1.3 million, respectively, offset, in part, by changes in inventories of $0.4 million.

Investing activities used $0.1 million in the 2009 Quarter for purchases of property, plant and equipment, primarily leasehold improvements and furniture and fixtures for our new Hong Kong procurement and quality control facility. In the 2008 Quarter, net investing activities used $19,000 for purchases of property, plant and equipment, primarily computer and telecommunications hardware and software.

There were no financing activities in the 2009 Quarter or the 2008 Quarter.

At December 31, 2008, our current ratio (current assets divided by current liabilities) was 8.78; our quick ratio (current assets less inventories divided by current liabilities) was 8.20; and our working capital (current assets less current liabilities) was $22.8 million. As of such date, we had no short or long-term debt outstanding.

Our primary source of liquidity is our cash on hand. The primary demands on our working capital are: operating losses and accounts payable arising in the ordinary course of business, the most significant of which arise when our customers place orders and we order from our suppliers. Historically, our sources of liquidity have been adequate to satisfy working capital requirements arising in the ordinary course of business. We anticipate that our liquidity and financial resources for the twelve months will be adequate to manage our financial requirements. See "Trends in Results of Operations" for a discussion of anticipated increases in selling, general, and administrative expense.

Forward Innovations maintains a credit facility with a Swiss bank that provides for an uncommitted line of credit in the maximum amount of $400,000. Amounts borrowed under the facility may be structured as a term loan or loans, with a maximum repayment Period of 12 months, or as a guarantee facility, or any combination of the foregoing. Either party may terminate the facility at any time; however, such termination would not affect the stated maturity of any term loan outstanding under the facility. Amounts borrowed other than as a term loan must be settled quarterly or converted into term loans. Amounts drawn under this credit facility bear interest at variable rates established by the bank (5.35% as December 31, 2008). At December 31, 2008, Forward Innovations is contingently liable to the bank under a letter of credit issued on its behalf in the amount of €224,000 (equal to approximately $315,000 as of December 31, 2008) in favor of Forward Innovations' freight forwarder and customs agent. The effect of the issuance of the letter of credit is to reduce the availability of the credit line in an amount equal to the face amount of the letter of credit. See Notes 4 and 10 to the unaudited consolidated Financial Statements set forth in Item 1.

Forward Industries, Inc.

On September 27, 2002, our Board of Directors authorized the repurchase of up to 400,000 shares of our outstanding common stock, or approximately 7% of the number of shares then outstanding. On January 21, 2004, our Board increased the amount of shares authorized for repurchase to 486,200. Under that authorization, as of December 31, 2008, we had repurchased an aggregate of 172,603 shares at a cost of approximately $0.4 million. In addition, in connection with an exercise of outstanding stock options, 72,917 shares were purchased during Fiscal 2008 in a non-cash transaction, which was outside the foregoing authorizations. No repurchases were made during the 2009 Quarter. The repurchase program may be discontinued or terminated at any time.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The Company has entered into various contractual obligations and commercial
commitments that, under accounting principles generally accepted in the United
States, are not recorded as a liability.  The following is a summary of such
contractual cash obligations as of December 31, 2008:

Contractual Obligation or  Jan 09 - Dec                   Jan 12 - Dec
Commitment                      09       Jan 10 - Dec 11       13       Thereafter
Employment Agreements          $425,000       $       --      $      --    $     --
Operating Leases                 313,000         565,000         68,000          --
                   Totals       $738,000       $ 565,000        $68,000    $     --

The Company has not guaranteed the debt of any unconsolidated entity and does not engage in derivative transactions or maintain any off-balance sheet special purpose entities.