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 March 31, 2009 (the "2009 Quarter"), with those for the three months ended March 31, 2008 (the "2008 Quarter"), and the six months ended March 31, 2009 (the "2009 Period"), with the six months ended March 31, 2008 (the "2008 Period"). 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 and credit markets; a significant change of the Company's relationship with its customers (including changes affecting their businesses), including changes in distribution 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; whether our important OEM customers elect to offer much lower cost, simplified carry case accessories in box; 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 on gross margins of reduced prices for our products offered by our OEM customers; 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.

Forward Industries, Inc.

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 so significantly that we no longer present such revenues separately but include them as part of "other products". Because of this decline the customer concentration and product line concentration risks in our business have increased.

Trends and Economic Environment: We believe that deteriorating economic conditions, rising unemployment, tight credit markets, and heightened uncertainty in financial markets have adversely impacted discretionary consumer spending, including spending on the types of electronic devices that are accessorized by our products. We expect this 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. Certain of our OEM customers have significantly reduced their sales forecasts of electronic devices with which our products are packaged in box, therefore implying reduced sales revenues from these customers in future periods. Certain such customers have also advised us of proposed changes in their "in box" business model whereby the carry solution is a much lower cost, lower price simplified carry solution. We believe this approach is intended to reduce expense to the OEM. We expect that these changes will result in decreased revenues from the sales of these simplified carry solutions and may adversely affect our gross profit.

We have attempted to limit increases in operating expenses except where we think increases are critical to potential future growth.

See "Risk Factors" in Item 1A of Part II of this Quarterly Report on Form 10-Q and "If any one or more of our OEM customers elect to reduce their "in-box" accessory model, our results of operations and financial condition would be materially and adversely affected" in the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended September 30, 2008.

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 judgments and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosures 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.

Forward Industries, Inc.

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 March 31, 2009, and September 30, 2008, our allowance for doubtful accounts was approximately $25 thousand and $10 thousand, respectively.

Inventory Valuation

Inventory allowances were approximately $92 thousand and $168 thousand at March 31, 2009, and September 30, 2008, respectively. See Notes 3 to the Financial Statements. Changes to this account are reflected in the cost of goods sold line of our consolidated statements of operations.

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 March 31, 2009, and September 30, 2008, respectively. The increase in deferred tax assets results primarily from temporary differences between book and tax income and net loss incurred in respect of the 2009 Period. During the 2009 Quarter, as part of our periodic evaluation of the need for a valuation allowance against our deferred tax assets, and after consideration of all the evidence, both positive and negative (including, among others, projections of future taxable income, current year net operating loss carrforward utilization and the extent of our cumulative losses in recent years), we determined that, on a more likely than not basis, we would not be able to use any of our deferred tax assets, except for taxes arising from the repatriation of certain foreign source income, which is currently considered to be permanently invested and for which no Unites States tax liability has been accrued. As such, as of March 31, 2009, we established a valuation allowance against our deferred tax assets in the amount of $0.5 million. The establishment of the deferred tax asset valuation allowance has been reflected in "Provision for (benefit from) income taxes" line item of our consolidated statements of operations for the three- and six-month periods ended March 31, 2009. No such valuation allowance was recorded as of September 30, 2008.

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

Net loss

We incurred a net loss of $1.1 million in the 2009 Quarter compared to $0.4 million in the 2008 Quarter. The $0.7 million increase was due primarily to higher income tax expense (attributable to the effect of establishment of the valuation allowance), compared to an income tax benefit in the 2008 Quarter, as well as lower other income (primarily interest income) and higher selling expenses. These factors were offset in small part by higher gross profit and lower, general and administrative expenses, as reflected in the table below:

Forward Industries, Inc.





                                                                                                                        (millions of dollars)
                                                                                                                                            Increase
                                                                                                                 2009 Quarter 2008 Quarter (Decrease)
Net Sales.......................................................................................................         $4.3         $4.7     ($0.5)

Gross Profit...................................................................................................           0.7          0.6        0.1
Selling, General and Administrative Expenses........................................                                    (1.4)        (1.3)      (0.1)
Other Income................................................................................................              0.1          0.2      (0.1)
(Provision for) benefit from Income Taxes..............................................                                 (0.4)          0.2      (0.6)
Net Loss*.....................................................................................................         ($1.1)       ($0.3)     ($0.7)

* Table may not total due to rounding.

Basic and diluted loss per share data was ($0.13) for the 2009 Quarter, compared to ($0.05) for the 2008 Quarter. The increase in loss per share in the 2009 Quarter was due to the increase in net loss.

Net Sales

Net sales decreased $0.5 million, or 10%, to $4.3 million in the 2009 Quarter from $4.7 million in the 2008 Quarter, due to primarily to lower sales of diabetic products, which declined $0.4 million, or 12%, and to a lesser extent, lower sales of other products, which declined $0.1 million, or 4%. Cell phone revenues, which are now included in sales of "other products", were $0.4 million in the 2009 Quarter compared to $0.3 million in the 2008 Quarter. The tables below set forth sales by product line and geographic location of our customers for the periods indicated.

                           Net Sales for 2009 Quarter
                          3 Months ended March 31, 2009
                              (millions of dollars)
                                                      APAC Americas Europe Total*
Diabetic Products..................................   $1.4     $0.8   $0.9   $3.2
Other Products.......................................  0.3      0.8     --    1.1
                                               Total* $1.7     $1.6   $0.9   $4.3




                           Net Sales for 2008 Quarter
                          3 Months ended March 31, 2008
                              (millions of dollars)
                                                      APAC Americas Europe Total*
Diabetic Products..................................   $2.4     $0.4   $0.7   $3.6
Other Products.......................................  0.3      0.6    0.2    1.2
                                               Total* $2.8     $1.0   $0.9   $4.7

* 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 typically 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 decreased $0.4 million, or 12%, to $3.2 million in the 2009 Quarter, from $3.6 million in the 2008 Quarter. These results were driven by lower sales to Lifescan, our largest customer, which decreased by $0.9 million in the 2009 Quarter compared to the 2008 Quarter. This decline was offset, in part, by higher sales to our other major diabetic product customers, which, in the aggregate, increased $0.5 million in the 2009 Quarter compared to the 2008 Quarter.

Forward Industries, Inc.

Sales of carrying cases for blood glucose monitoring kits represented 74% of our total net sales in the 2009 Quarter compared to 75% of our total net sales in the 2008 Quarter.

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 less than $0.1 million to $1.1 million in the 2009 Quarter from $1.2 million in the 2008 Quarter. This decline was the result of smaller decreases in sales to several customers of these products, of which no decline exceeded $0.1 million in the 2009 Quarter. These declines were partially offset by higher sales to Motorola, which increased $0.2 million in the 2009 Quarter compared to the 2008 Quarter.

Sales of other products represented 26% of our net sales in the 2009 Quarter compared to 25% 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 increased by less than $0.1 million, or 7%, to $0.7 million in the 2009 Quarter from $0.6 million in the 2008 Quarter. This increase was primarily due to a $0.4 million decrease in expense for reserve for obsolete inventory, which is reflected in "cost of goods sold". The decrease in reserve expense more than offset the increase in materials costs (relative to lower revenues in the 2009 Quarter) and Hong Kong operating costs, which, as a percentage of sales (and on a dollar basis in the case of our Hong Costs), were higher in the 2009 Quarter compared to the 2008 Quarter. Our freight costs were also slightly lower in the 2009 Quarter, both on a dollar basis and as a percentage of sales.

Gross profit as a percentage of net sales was 16% in the 2009 Quarter compared to 13% in the 2008 Quarter.

Selling, General, and Administrative Expenses

Operating expenses increased 2%, to $1.4 million in the 2009 Quarter from $1.3 million in the 2008 Quarter. Personnel expense in selling and in general and administrative categories was slightly higher, reflecting new hires in these areas in the past six months, while professional fees were lower. Changes in other categories of operating expenses were minimal.

Other Income

Other income, primarily interest income on cash balances, declined 65% to less than $0.1 million in the 2009 Quarter, compared to $0.2 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. In addition, other income 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 increased 20% to $0.6 million in the 2009 Quarter compared to the 2008 Quarter as a result of the changes as described above.

Forward Industries, Inc.

Income Taxes

We recorded income tax expense of $0.4 million in the 2009 Quarter compared to a benefit from income taxes of $0.2 million in the 2008 Quarter primarily due to the establishment of a full valuation allowance against our deferred tax assets in the 2009 Quarter. See "Critical Accounting Policies and Estimates-Deferred Income Taxes", above, and "Note 7 - Income Taxes" in Notes to Consolidated Financial Statements set forth elsewhere in this Quarterly Report on Form 10-Q.

At March 31, 2009, we had approximately $4.0 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.

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

Net loss

We incurred a net loss of $1.3 million in the 2009 Period compared to $0.6 million in the 2008 Period. The $0.6 million increase is a result of higher income tax expense (attributable to the effect of establishment of the valuation allowance in respect of deferred tax assets, discussed above at Note 7 in Notes to the Consolidated Financial Statements and "Critical Accounting Policies and Estimates-Deferred Income Taxes"), lower other income (primarily interest income), and lower gross profit, offset in part by lower selling, general and administrative expenses, as reflected in the table below:

                                                                                                                  (millions of dollars)
                                                                                                                  2009   2008   Increase
                                                                                                                 Period Period (Decrease)
Net Sales.......................................................................................................   $9.6   $9.7     ($0.1)

Gross Profit...................................................................................................     1.6    1.7      (0.1)
Selling, General and Administrative Expenses........................................                              (2.7)  (3.1)        0.3
Other Income................................................................................................        0.2    0.4      (0.3)
(Provision for) benefit from Income Taxes..............................................                           (0.3)    0.2      (0.5)
Net Loss*.....................................................................................................   ($1.3) ($0.6)     ($0.6)

* Table may not total due to rounding.

Basic and diluted loss per share data was ($0.16) for the 2009 Period, compared to ($0.08) for the 2008 Period. The reduction in loss per share in the 2009 Period was due to the increase in net loss.

Net Sales

Net sales decreased $0.1 million, or 1%, to $9.6 million in the 2009 Period from $9.7 million in the 2008 Period, due to lower cell phone sales, which are now included in "other products" sales, which decreased $0.2 million, or 9%. The decline in sales of "other products" was offset, in part, by higher sales of diabetic products, which increased slightly more than $0.1 million, or 2% in the 2009 Period. 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 Period
                          6 Months ended March 31, 2009
                              (millions of dollars)
                                                      APAC Americas Europe Total*
Diabetic Products..................................   $2.9     $1.9   $2.4   $7.2
Other Products.......................................  0.5      1.8   $0.1    2.3
                                               Total* $3.4     $3.7   $2.5   $9.6




                            Net Sales for 2008 Period
                          6 Months ended March 31, 2008
                              (millions of dollars)
                                                      APAC Americas Europe Total*
Diabetic Products..................................   $4.3     $1.1   $1.6   $7.1
Other Products.......................................  0.7      1.5    0.5    2.6
                                               Total* $5.0     $2.6   $2.1   $9.7

* Tables may not total due to rounding.

Diabetic Product Sales

Sales of cases and related accessories for blood glucose monitoring kits increased $0.1 million, or 2 %, to $7.2 million in the 2009 Period, from $7.1 million in the 2008 Period. These results were driven by higher sales to two of our largest customers, which increased by $1.2 million and $0.3 million, respectively, in the 2009 Period compared to the 2008 Period. These increases were primarily attributable to several new in-box programs in the first fiscal quarter of 2009 as well as higher volumes of existing in box programs. The higher sales to these two customers were offset, in part, by lower sales to Lifescan, our largest customer, which declined $1.4 million, or 31%, in the 2009 Period from the 2008 Period.

Sales of carrying cases for blood glucose monitoring kits represented 75% of our total net sales in the 2009 Period compared to 73% of our total net sales in the 2008 Period due primarily to the continuing significant decline in "other product" sales.

Other Product Sales

Sales of other products declined $0.2 million, or 9%, to $2.3 million in the 2009 Period from $2.6 million in the 2008 Period. This decline was primarily the result of lower aftermarket sales of cell phone carry solutions in the 2009 Period, which decreased almost $0.2 million from the 2008 Period. This decline was offset, in part, by higher sales to one cell phone customer, which increased $0.1 million in the 2009 Period compared to the 2008 Period, as well as several smaller increases in sales to other customers for "other products".

Sales of other products represented 25% of our net sales in the 2009 Period compared to 27% of net sales in the 2008 Period (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 $0.1 million, or 7%, to $1.6 million in the 2009 Period from $1.7 million in the 2008 Period primarily due to higher costs incurred in connection with the relocation of our Hong Kong facility and staffing changes . . .