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 June 30, 2009 (the "2009 Quarter"), with those for the three months ended June 30, 2008 (the "2008 Quarter"), and for the nine months ended June 30, 2009 (the "2009 Period"), with the nine months ended June 30, 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 (as such term is used 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 potential 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 current domestic and global 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 our OEM distribution channel where our sales are highly concentrated to a small number of customers; our ability to control operating expenses during periods of declining sales and or gross margins; the loss of a key salesman who has significant influence on our relationships with certain OEM customer makers of diabetic test kits; 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; 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, as well as risks that are at present not ascertainable, 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. A very few OEM customers account for a very high percentage of our net sales, and in general approximately 75% or more of net sales are concentrated in the diabetic sales product line. 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". In conjunction with the decline in cell phone product revenues, that part of our business that was engaged in distribution to retailers and distributors has become immaterial. Because of these factors concentration risks in our business-as to customer concentration, product line concentration, and distribution channel concentration-have increased.

Trends and Economic Environment: We believe that the deteriorating economic conditions, rising unemployment, tight credit markets, and heightened uncertainty in financial markets during the past 18 months 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 lower cost, universal, carry case solution. We believe this approach is intended to reduce expense to the OEM, and this sensitivity to expense has contributed to an environment in which it is difficult for us to maintain or increase prices, even as our vendors' prices may be increasing. We expect that these changes and developments, if implemented, will result in decreased revenues from the sales of these lower cost, universal, carry solutions and may adversely affect our gross profit.

As this environment has persisted we have engaged in our own cost cutting measures, including reductions in staff. 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 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

This management's discussion and analysis of financial condition and results of operations is based upon or derived from the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q, 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, except for our estimates with regard to "Deferred Income Taxes", which have been updated below.

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

Inventory Valuation

Inventory allowances were approximately $64 thousand and $168 thousand at June 30, 2009, and September 30, 2008, respectively. See Note 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 June 30, 2009, and September 30, 2008, respectively. The increase in deferred tax assets results primarily from net loss incurred in respect of the 2009 Period and accumulated temporary differences between book and tax income. During the 2009 Period, 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 carryforward 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 in respect of United States income taxes arising from the repatriation of certain foreign source income earned by our Swiss subsidiary, Forward Innovations, which is currently considered to be permanently invested and for which no Unites States tax liability has been accrued. As such, we established a full valuation allowance against our deferred tax assets. As of June 30, 2009, the valuation allowance was approximately $0.5 million. If we determine that we will be able to realize some or all of our deferred tax assets, the adjustment to reduce or eliminate the valuation allowance would reduce our tax expense and increase after-tax income. Changes in deferred tax assets and valuation allowance are reflected in the "Provision for (benefit from) income taxes" line item of our consolidated statements of operations. No such valuation allowance was recorded as of September 30, 2008. See Note 7 to the Financial Statements included in this Quarterly Report on Form 10-Q.

Forward Industries, Inc.

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

Net loss

We incurred a net loss of $64 thousand in the 2009 Quarter compared to a loss of $111 thousand in the 2008 Quarter. The small improvement in the 2009 Quarter was due primarily to lower general and administrative expenses and to a lesser extent the absence of a provision for income tax expense (attributable to the effect of maintaining a full valuation allowance), compared to an income tax expense in the 2008 Quarter. These factors were offset in small part by lower gross profit and lower other income (primarily interest income), as reflected in the table below:

                                                          (thousands of dollars)
                                                                                                                  2009    2008    Increase
                                                                                                                 Quarter Quarter (Decrease)
Net Sales.......................................................................................................  $4,107  $5,568   ($1,461)

Gross Profit...................................................................................................    1,031   1,162      (131)
Selling, General and Administrative Expenses........................................                             (1,158) (1,325)      (168)
Other Income................................................................................................          62      97       (35)
(Provision for) benefit from Income Taxes..............................................                               --    (45)         45
Net Loss*.....................................................................................................     ($64)  ($111)        $47

* Table may not total due to rounding.

Basic and diluted loss per share data was ($0.01) for the 2009 Quarter, compared to ($0.01) for the 2008 Quarter.

Net Sales

Net sales decreased $1.5 million, or 26%, to $4.1 million in the 2009 Quarter from $5.6 million in the 2008 Quarter, due to lower sales of diabetic products, which declined $1.4 million, or 30%. Sales of other products declined $0.1 million, or 10%. Cell phone product revenues, which are now included in sales of "other products", declined slightly and were $0.3 million in the 2009 Quarter and the 2008 Quarter. 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
                        Three Months ended June 30, 2009
                              (millions of dollars)
                                                      Americas APAC Europe Total*
Diabetic Products..................................       $0.9 $1.4   $0.8   $3.1
Other Products.......................................      0.9  0.1     --    1.0
                                               Total*     $1.8 $1.5   $0.9   $4.1

                           Net Sales for 2008 Quarter
                        Three Months ended June 30, 2008
                              (millions of dollars)
                                                      Americas APAC Europe Total*
Diabetic Products..................................       $1.0 $2.7   $0.8   $4.5
Other Products.......................................      0.9  0.1    0.1    1.1
                                               Total*     $1.9 $2.8   $0.9   $5.6

* 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 Lifescan, Abbott Labs, Roche Diagnostics, and Bayer (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 $1.4 million, or 30%, to $3.1 million in the 2009 Quarter, from $4.5 million in the 2008 Quarter. This decline was primarily driven by lower sales to our largest customer, which decreased by $1.4 million in the 2009 Quarter compared to the 2008 Quarter due to lower unit volumes and a lower average selling price. In addition, sales to another major diabetic product customer declined $0.2 million in the 2009 Quarter from the 2008 Quarter. These declines were offset, in part, by higher sales to our two other major diabetic product customers, which, in the aggregate, increased $0.4 million in the 2009 Quarter compared to the 2008 Quarter.

Sales of carrying cases for blood glucose monitoring kits represented 76% of our total net sales in the 2009 Quarter compared to 80% of our total net sales in the 2008 Quarter, the decline being attributable to the decline in diabetic sales revenues for the 2009 Quarter.

Other Product Sales

We design and sell 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 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. Beginning with the first fiscal quarter of 2009, we changed our presentation of sales by product line by combining cell phone product sales with "other product sales" as the amounts of cell phone product revenues ceased to warrant separate presentation. For purposes of the discussion below, the 2008 Quarter results have, for consistency of presentation with the 2009 Quarter, been calculated retroactively to combine "other products" with cell phone products.

Forward Industries, Inc.

Sales of other products declined $0.1 million to $1.0 million in the 2009 Quarter from $1.1 million in the 2008 Quarter. This decline was primarily the result of lower sales to our largest customer of these products, which decreased $0.2 million in the 2009 Quarter from the 2008 Quarter. Also contributing to this decline were smaller decreases in sales to several other 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 other smaller customers of these products, which increased $0.1 million in the aggregate 2009 Quarter compared to the 2008 Quarter.

Sales of other products represented 24% of our net sales in the 2009 Quarter compared to 20% of net sales in the 2008 Quarter.

Gross Profit

Gross profit decreased by $0.1 million, or 11%, to $1.0 million in the 2009 Quarter from $1.2 million in the 2008 Quarter which was primarily due to the $1.5 million decline in net sales. However, as a percentage of sales, gross profit increased to 25% in the 2009 Quarter compared to 21% in the 2008 Quarter. This improvement reflected better average gross profit percentage across all product lines in the 2009 Quarter, but especially in our diabetic products line, driven by the introduction of new products. Gross profit percentage also improved as a result of decreases in tooling and testing costs and a non-recurring reduction in our reserve for obsolete inventory, which, both of which had the effect of reducing "cost of goods sold". These improvements were partially offset by the cost of operating our Hong Kong facility (which also is reflected in our "cost of goods sold"), a significant component of which represents fixed costs, which on a lower sales base, acts to reduce gross profit percentage.

Selling, General, and Administrative Expenses

Operating expenses decreased $0.2 million, or 13%, to $1.2 million in the 2009 Quarter from $1.3 million in the 2008 Quarter. Lower royalty expense, professional fees, and "other general and administrative expenses" (primarily insurance expense) were the primary drivers for the decrease. These reductions were partially offset by increases in selling personnel, and advertising and promotion expenses. Changes in other categories of operating expenses were not significant.

Other Income

Other income, primarily interest income on cash balances, declined 36% to $62 thousand in the 2009 Quarter, compared to $97 thousand 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. The decline in interest income in the 2009 Quarter was offset in part by foreign currency transactions (which represents the other component of "other income"), as a result of net gains in the 2009 Quarter compared to net losses in the 2008 Quarter.

Pretax Loss

Pretax loss decreased 3% to $64 thousand in the 2009 Quarter compared to $66 thousand in the 2008 Quarter as a result of the changes as described above.

Income Taxes

We recorded no income tax expense (benefit) in the 2009 Quarter compared to a provision for income taxes of less than $0.1 million in the 2008 Quarter primarily due to our maintenance 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 June 30, 2009, we had approximately $3.9 million of earnings attributable to our Swiss subsidiary for which no provision for U.S. Federal income has been recorded. Such earnings are currently considered to be permanently invested in such subsidiary. The Company may, from time to time, re-evaluate whether such earnings shall continue to be permanently invested and whether and under what circumstances consideration will be given to their repatriation in a tax-efficient manner.

Forward Industries, Inc.

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 $0.8 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"), which led to a net income tax provision in the 2009 Period compared to a tax benefit in the 2008 Period, 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:

                                                           (thousands of dollars)
                                                                                                                   2009    2008    Increase
                                                                                                                  Period  Period  (Decrease)
Net Sales.......................................................................................................  $13,670 $15,249   ($1,579)

Gross Profit...................................................................................................     2,639   2,899      (260)
Selling, General and Administrative Expenses........................................                              (3,876) (4,386)      (510)
Other Income................................................................................................          218     541      (323)
(Provision for) benefit from Income Taxes..............................................                             (300)     189      (490)
Net Loss*.....................................................................................................   ($1,319)  ($756)     ($563)

* Table may not total due to rounding.

Basic and diluted loss per share data was ($0.17) for the 2009 Period, compared to ($0.10) for the 2008 Period. The increase in loss per share in the 2009 Period was due to the increase in net loss.

Net Sales

Net sales decreased $1.6 million, or 10%, to $13.7 million in the 2009 Period from $15.2 million in the 2008 Period, due primarily to lower diabetic product sales, which were $1.2 million lower in the 2009 Period compared to the 2008 period. Sales of "other products" (which also includes cell phone sales), were $0.4 million, or 10%, lower in the 2009 Period compared to the 2008 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
                         Nine Months ended June 30, 2009
                              (millions of dollars)
                                                      Americas APAC Europe Total*
Diabetic Products..................................       $2.9 $4.3   $3.2  $10.3
Other Products.......................................      2.6  0.6    0.1    3.3
                                               Total*     $5.5 $4.9   $3.3  $13.7




                            Net Sales for 2008 Period
. . .