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 thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011. The following discussion and analysis compares our consolidated results of operations for the three months ended June 30, 2012 (the "2012 Quarter"), with those for the three months ended June 30, 2011 (the "2011 Quarter") and our consolidated results of operations for the nine months ended June 30, 2012 (the "2012 Period") with the nine months ended June 30, 2011 (the "2011 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

The following management's discussion and analysis includes "forward-looking statements", as such term is used within the meaning of the Private Securities Litigation Reform Act of 1995. These "forward-looking statements" are not based on historical fact and involve assessments of certain risks, developments, and uncertainties in our business looking to the future. Such forward-looking statements can be identified by the use of forward-looking terminology such as "may", "will", "should", "expect", "anticipate", "estimate", "intend", "continue", or "believe", or the negatives or other variations of these terms or comparable terminology. Forward-looking statements may include projections, forecasts, or estimates of future performance and developments. Forward-looking statements contained in this Quarterly Report on Form 10-Q are based upon assumptions and assessments that we believe to be reasonable as of the date of this Quarterly Report on Form 10-Q. Whether those assumptions and assessments will be realized will be determined by future factors, developments, and events, which are difficult to predict and may be beyond our control. Actual results, factors, developments, and events may differ materially from those we assumed and assessed. Risks, uncertainties, contingencies, and developments, including those discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations and those identified in "Risk Factors" in Item 1A of Forward's Annual Report on Form 10-K for the fiscal year ended September 30, 2011, could cause our future operating results to differ materially from those set forth in any forward-looking statement. There can be no assurance that any such forward-looking statement, projection, forecast or estimate contained can be realized or that actual returns, results, or business prospects will not differ materially from those set forth in any forward-looking statement.

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

BUSINESS OVERVIEW

We design, market, and distribute carry and protective solutions, primarily for hand-held electronic devices. Our primary customer market is original equipment manufacturers, or "OEMs" (or the contract manufacturing firms of these OEM customers), that either package our products as accessories "in box" together with their product offerings, or sell them through their retail distribution channels. Our OEM products include carrying cases and accessories for medical monitoring and diagnostic kits, portable electronic devices (such as smartphones, tablets, personnel computers, notebooks, and GPS devices), and a variety of other portable electronic and non-electronic products (such as firearms, sporting, and other recreational products). Our OEM customers are located in the Americas, EMEA Region, and the APAC Region. We source substantially all our products from independent suppliers in China. Historically, our suppliers custom manufacture our OEM carry and protective solutions to our order, based on our designs and know-how, and to our OEM customer's specifications.

Forward Industries, Inc.

TRENDS AND ECONOMIC ENVIRONMENT

On June 21, 2012, we determined to exit our global retail business and focus solely on growing our OEM business. Our decision to eliminate our retail division was based primarily on the longer than estimated path to bring it to profitability and the strong top-line growth and cost rationalizations achieved in the OEM business over the past two years.

In connection with the exit of our retail business, we entered into a second Memorandum of Understanding (the "New MOU") with G-Form. In accordance with this New MOU we have assisted G-Form on a short term basis with transitioning certain operational and sales functions previously performed by Forward for G-Form products. We continue to work with G-Form to distribute our remaining retail product inventory and are working with them to settle on the amount of funds owed to us as a result of the net effect of certain transactions between G-Form and us, as contemplated under the New MOU.

In restructuring our business, we expect to eliminate a significant level of annualized operating expense by: i) reducing headcount; ii) closing our Santa Monica, London, Dubai, and Saarbrucken offices, and re-establishing our corporate headquarters in Florida, where costs of operations are lower, and iii) rationalizing other overhead cost components. In addition, we have implemented a contracted, variable, lower cost sourcing and quality assurance solution by partnering with an Asia-based sourcing agent. We believe that this partnership will also yield meaningful longer-term benefits, in terms of negotiating favorable material costs, improving the quality of our products, and diversifying our supplier base. We have absorbed the majority of the charges associated with our restructuring efforts in the 2012 Quarter. We also expect to implement a rigorous cost rationalization plan that aims to streamline and improve our operations on a go forward basis.

Our OEM business remains highly concentrated by customer and product type, especially with respect to our Diabetic Products line, where we continue to operate in a very challenging price sensitive environment. We continue to experience pricing pressure from our major Diabetic Products customers, but especially with respect to certain of our longer-lived programs for which price concessions are expected to be granted to them over an extended period of time. Moreover, we are encountering higher costs from our China-based suppliers due to materials and labor price increases that place continuing pressure on our profit margins. In many cases, we are not able to pass these higher costs through to customers, particularly when replacement program products resemble their predecessors or historically similar products, for which customers have become accustomed to a narrow price range. We are actively looking at alternative sources of supply to expand and diversify our manufacturing capabilities in order to mitigate this trend.

We were recently awarded several large programs by two major Diabetic Products customers that contributing meaningfully to our revenues and overall product
mix. As we expected, these new programs increased our sales volume, but depressed our overall gross margin in the 2012 Quarter, as the gross margins on these programs are lower than those seen in Fiscal 2011. We expect that these new programs will continue to represent a significant portion of our overall product mix for the remainder of Fiscal 2012 and anticipate that our overall gross margin for will continue reflect this.

Our gross margin in the 2012 Quarter was further negatively impacted by a significant level of quality remediation charges, as well as transition and termination costs in respect of the restructure of our sourcing and quality operations. We believe these to be non-reoccurring and when stripped out from the 2012 Quarter results, we estimate our gross profit margin would be closer to those seen in the first half of Fiscal 2012.

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.

Forward Industries, Inc.

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 of America. The preparation of these 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.

We discuss the material accounting 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, 2011, under the caption "Management's Discussion and Analysis-Critical Accounting Policies and Estimates". There has been no material change in critical accounting policies or estimates since September 30, 2011.

The notes to our audited consolidated financial statements contained in our Annual Report on Form 10-K for the year ended September 30, 2011, and the notes to our unaudited 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.

RESULTS OF CONTINUING OPERATIONS FOR THE 2012 QUARTER COMPARED TO THE 2011
QUARTER

Loss from continuing operations

Loss from continuing operations increased $0.2 million, or 55%, to $0.6 million
in the 2012 Quarter from $0.4 million in the 2011 Quarter. The increase is
primarily due to decreased gross profit on a higher sales base, which was
offset, in part, by lower sales and marketing expenses and general and
administrative expenses, as reflected in the table below:

                         Main Components of Net Loss from Continuing Operations
                                                                               (thousands of dollars)

                                                                              2012    2011    Increase
                                                                             Quarter Quarter (Decrease)*
Net Sales                                                                     $7,664  $6,157       1,508

Gross Profit                                                                     757   1,443       (685)
Sales and Marketing                                                            (282)   (674)
Expenses.............................................................                              (392)
General and Administrative Expenses                                          (1,089) (1,263)       (175)
Other (Expense)                                                                 (18)      31
Income......................................................................                        (49)
Benefit from Income                                                               --      56
Taxes..................................................................                             (56)
Loss from Continuing                                                          $(631)  $(408)
Operations*................................................                                        (223)

* Table may not total due to rounding.

Loss from continuing operations per basic and diluted share was $(0.08) and $(0.05) for the 2012 Quarter and 2011 Quarter, respectively.

Net Sales

Net sales increased $1.5 million, or 25%, to $7.7 million in the 2012 Quarter from $6.2 million in the 2011 Quarter due to higher sales of Diabetic Products, which increased $1.8 million. The increase in Diabetic Products sales was offset, in part, by a decrease in Other Products sales of $0.3 million. The tables below set forth sales by channel, product line, and geographic location of our customers for the periods indicated.

Forward Industries, Inc.

                        Net Sales for 2012 Quarter
                       3 Months ended June 30, 2012
                           (millions of dollars)
                                                APAC Americas Europe Total*
Diabetic Products.............................  $3.1     $2.0   $1.0   $6.1
Other Products.................................  0.2      1.2    0.3    1.6
Total net sales*....................            $3.3     $3.2   $1.2   $7.7

                        Net Sales for 2011 Quarter
                       3 Months ended June 30, 2011
                           (millions of dollars)
                                                APAC Americas Europe Total*
Diabetic Products.............................  $2.3     $0.7   $1.3   $4.3
Other Products.................................  0.4      1.1    0.4    1.9
Total net sales*....................            $2.7     $1.8   $1.6   $6.2

* Tables may not total due to rounding.

Diabetic Product Sales

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

Sales of Diabetic Products increased $1.8 million, or 41%, to $6.1 million in the 2012 Quarter, from $4.3 million in the 2011 Quarter. This increase was primarily due to the addition of a new major Diabetic Products customer in Fiscal 2012, and to higher sales to our largest Diabetic Products customer. The following table sets forth our sales by Diabetic Products customer for the periods indicated.

                                                                                            (millions of dollars)
                                                                                            2012    2011
                                                                                           Quarter Quarter Increase
Diabetic Customer A...................................................................        $2.6    $2.0     $0.6
Diabetic Customer B....................................................................        1.0     0.9      0.1
Diabetic Customer C....................................................................        0.9     1.1    (0.2)
Diabetic Customer D...................................................................         1.2      --      1.2
All other Diabetic Product Customers.....................................                      0.5     0.3      0.2
Totals*..................................................................................     $6.1    $4.3     $1.8

* Table may not total due to rounding.

Sales of Diabetic Products represented 79% of our total net sales in the 2012 Quarter compared to 69% of our total net sales in the 2011 Quarter. This increase is due to the growth of our Diabetic Product sales in the 2012 Quarter, combined with the lower sales contribution of Other products to our total net sales in the 2012 Quarter.

Other Product Sales

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

Forward Industries, Inc.

Sales of Other Products decreased $0.3 million, or 17%, to $1.6 million in the 2012 Quarter from $1.9 million in the 2011 Quarter. This decrease was primarily due to the loss of a major Other Products customer in the 2012 Quarter, which had contributed $0.3 million to our net sales in the 2011 Quarter, and to lower sales to our largest Other Products customer in the 2012 and 2011 Quarters, which decreased $0.3 million. We experienced smaller changes in a number of Other Products customers, none of which changes were individually material, but in the aggregate, the net effect increased net sales in the 2012 Quarter by $0.3 million, which offset, in part, the decreases from the two major Other Products customers.

In the 2011 Quarter, we sold $72 thousand of products to Flash Ventures, Inc. (refer to Note 4 - Note Receivable in the Notes to Financial Statements), under their brand, which we considered as non-recurring business.

Sales of Other Products represented 21% of our net sales in the 2012 Quarter compared to 31% of our net sales in the 2011 Quarter.

Gross Profit

Gross profit decreased $0.7 million, or 48%, to $0.8 million in the 2012 Quarter from $1.4 million in the 2011 Quarter. As a percentage of sales, our gross profit declined to 10% in the 2012 Quarter, compared to 23% in the 2011 Quarter.

In the 2012 Quarter, our materials costs, as a percentage of net sales, was approximately 7% higher than the 2011 Quarter. This increase was primarily driven by our Diabetic Products business, and in particular, factors specific to three of our major Diabetic Customers, as discussed more fully below:

º Our total unit sales to Diabetic Customer B increased in the 2012 Quarter; however, we are experiencing lower average sales prices as a result of price concessions granted on two large longer-lived programs. In addition, we are generally experiencing higher average materials, labor, and other production costs from our suppliers, which we have been unable to pass on to Diabetic Customer B for these two large programs.

º Our total unit sales to Diabetic Customer C decreased in the 2012 Quarter; however, our average sales price in respect of several new and replacement programs are significantly higher than the average sales price of their predecessor programs in the 2011 Quarter. In addition, our average cost for such new and replacement programs have also increased, partly as a result of product mix, and partly as a result of the general increase in materials, labor, and other production costs we are experiencing from our APAC suppliers.

º Several large programs that we were recently awarded by Customer D contributed meaningfully to our net sales in the 2012 Quarter. However, as expected, our gross margins on these new programs are lower than average gross margins seen from our other major Diabetic Products customers in the 2011 Quarter.

Throughout the 2012 Quarter, we continued to implement a restructuring plan with respect to our Asia-based sourcing and quality assurance operations (refer to "Buying and Sourcing Agreement" under Note 10 - Commitments and Contingencies to our consolidated financial statements). As a result of such implementation, during the 2012 Quarter, we continued to incur operating costs and severance costs, in addition to service fees to our agent, which raised our costs of such operations above levels incurred in recent reporting periods. As such, our gross profit margin was negatively impacted by nearly 4% in the 2012 Quarter.

During the 2012 Quarter, we experienced several quality issues with two of our major Diabetic Products customers. As a result, we incurred a significantly higher level of inspection, warehousing, handling, and freight costs in connection with our efforts to remediate these quality issues, which negatively impacted our gross profit margin by approximately 4% in the 2012 Quarter.

Forward Industries, Inc.

Sales and Marketing Expenses

Sales and marketing expenses decreased $0.4 million, or 58%, to $0.3 million in the 2012 Quarter compared to $0.7 million in the 2011 Quarter due primarily to the following:

º $0.3 million decrease in personnel expense resulting from the restructure of our sales, marketing, and product development team, as well as the recovery of share-based compensation for stock option awards we estimate will be forfeited.

º $29 thousand decrease in travel and entertainment expenses resulting from reduced travel and related costs by our restructured and scaled down sales and design team during the 2012 Quarter and cost control actions, generally.

º $28 thousand decrease in advertising, promotion and samples expenses resulting from narrowing our focus on primarily supporting our major Diabetic Product customers.

º $22 thousand decrease in telecommunication cost resulting from cost reduction measures taken and the reduction in sales, marketing and product development personnel.

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

General and Administrative Expenses

General and administrative expenses decreased $0.2 million, or 14%, to $1.1 million in the 2012 Quarter from $1.3 million in the 2011 Quarter due primarily to the following:

º $73 thousand decrease in telecommunication costs resulting from cost reduction measures taken in conjunction with our restructuring of our global IT infrastructure.

º $57 thousand decrease in office expenses due to lower computer and postage costs, and a result of our cost reduction efforts, generally.

º $54 thousand decrease in public costs resulting from lower meeting fees and share-based compensation to directors, as well as lower filing fees.

º $28 thousand decrease in personnel costs resulting from lower relocation, contract employee, and share based compensation costs.

These decreases in general and administrative expenses were offset, in part, by a $46 thousand increase in professional fees, primarily legal, relating to litigation, Board of Directors matters, and preparation of filings with the Commission. Lesser fluctuations in other components of general and administrative expenses were immaterial.

Other Income (Expense)

Other income (expense), consisting primarily of interest income on cash and cash equivalent balances and on short term notes receivable (refer to Note 4 - Note Receivable in Notes to Financial Statements), as well as foreign currency transaction gains and losses, changed $49 thousand, to $18 thousand of expense in the 2012 Quarter from $31 thousand of income in the 2011. This decline resulted primarily from a $24 thousand decrease in interest income and, to a lesser extent, higher foreign currency transaction in the 2012 Quarter compared to the 2011 Quarter.

Forward Industries, Inc.

RESULTS OF DISCONTINUED OPERATIONS FOR THE 2012 QUARTER COMPARED TO THE 2011 QUARTER

Loss from Discontinued Operations

Loss from discontinued operations increased $2.4 million to $2.7 million in the 2012 Quarter from $0.3 million in the 2011 Quarter. The increase is due to a $1.5 million gross loss and a $0.8 million increase in operating expenses. Loss from discontinued operations per basic and diluted share was $(0.33) and $(0.03) for the 2012 Quarter and 2011 Quarter, respectively.

Net Sales

Net sales from discontinued operations was $0.4 million in the 2012 Quarter as a result of first time sales of Retail Products to several new customers in the Americas and EMEA regions of which none were individually material. There were no sales from discontinued operations in the 2011 Quarter.

Gross Loss

In the 2012 Quarter, we realized a gross loss on sales from discontinued operations of $1.5 million primarily as a result of a provision of $0.9 million taken against Retail Product inventory to mark it down to estimated net realizable value; a provision for sales returns and credits of $0.7 million; and $0.2 million of write-downs against advances made to suppliers for Retail Product inventory that are forfeited. There was no gross profit from discontinued operations in the 2011 Quarter.

Operating Expenses

Operating expenses of discontinued operations were $1.1 million in the 2012 Quarter compared to $0.3 million in the 2011 Quarter. This increase was due primarily to higher personnel expenses, which increased $0.6 million in the 2012 Quarter; and to a lesser extent, higher royalties and commission, which increased $0.1 million in the 2012 Quarter. Lesser fluctuations in other components of operating expenses were immaterial.

Other Income (Expense)

Other income (expense) of discontinued operations was $15 thousand of expense in the 2012 Quarter. There was no operating income (expense) from discontinued operations in the 2011 Quarter.

RESULTS OF OPERATIONS FOR THE 2012 PERIOD COMPARED TO THE 2011 PERIOD

Loss from Continuing Operations

Loss from continuing operations increased $0.8 million to $1.6 million in the 2012 Period from $0.8 million in the 2011 Period. The increase is primarily due to decreased gross profit on a higher sales base, and to a lesser extent, higher general and administrative expenses, which were offset, in part, by lower sales and marketing expenses, as reflected in the table below:

Forward Industries, Inc.





                                        Main Components of Net Loss from Continuing Operations
                                                                                                             (thousands of dollars)
                                                                                                             2012    2011    Increase
                                                                                                            Period  Period  (Decrease)
Net Sales.................................................................................................  $20,049 $17,121      2,928

Gross Profit.............................................................................................     3,060   3,981      (921)
. . .