Summary of FORWARD INDUSTRIES INC

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, 2012. The following discussion and analysis compares our consolidated results of operations for the three months ended December 31, 2012 (the "2013 Quarter"), with those for the three months ended December 31, 2011 (the "2012 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

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, 2012, 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

Trends and Economic Environment

In June 2012, in connection with our strategic decision to focus solely on growing our OEM business, we embarked on an operational restructuring of the Company in which we implemented several key measures to improve our operating performance and return the Company to profitability. These actions included replacing our legacy sourcing and quality assurance infrastructure with a variable, lower cost, solution through our use of an exclusive, Asia-based sourcing agent (refer to Note 10 in our Notes to Consolidated Financial Statements) and rationalizing our operating expenses. With regard to our operating expenses; we have closed our offices in London, Dubai, and Saarbrucken, and relocated our corporate headquarters from Santa Monica to West Palm Beach, Florida where our costs of operation are lower; we have significantly reduced headcount through elimination of personnel dedicated to our Retail business; and we have taken action with regard to other components of our operating expenses in accordance with a rigorous cost rationalization plan. A portion of the savings generated by these actions are being reinvested towards expanding and incentivizing our sales and sales support teams focused on growing our OEM business, which we believe will result in a more streamlined and efficient use of our working capital. Although we continue to confront some legacy costs associated with the closure of our retail division and relocation of our corporate headquarters, we believe that the restructuring is substantially complete.

Forward Industries, Inc.

Our financial results for the first quarter of Fiscal 2013 have begun to reflect the benefits of this restructuring. The improvement in our gross margin in the 2013 Quarter is largely due to our lower, variable, cost structure of our Asia-based sourcing agent, who has also made meaningful progress in improving the quality of our products and diversifying our supplier base. In addition, since initiating our restructuring plan, we have significantly lowered our operating expenses through the restructuring and cost rationalization actions referred to above, even after reinvesting a portion of these cost savings back into our sales and sales support teams. Our challenge for the remainder of Fiscal 2013 shall be to sustain such operating improvements, although there can be no assurance that we will be successful in doing so.

We also remain challenged by a highly concentrated customer base and product offering. With respect to our Diabetic products line, we operate in a very price sensitive environment in which we continue to experience downward pricing pressure from our major Diabetic Products customers. Moreover, we continue to be challenged by rising costs from our China-based supplier base, which causes our gross margins to narrow when we are not able to fully pass cost increases through to customers. We believe the improvements being contributed by our Asia-based sourcing agent, insofar as supplier diversification and product quality, are better positioning us to meet these challenges.

In connection with the exit of our retail business, we entered into a second Memorandum of Understanding (the "New MOU") with G-Form in June 2012. 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 negotiate 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.

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 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, 2012, 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, 2012.

The notes to our audited consolidated financial statements contained in our Annual Report on Form 10-K for the year ended September 30, 2012, 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.

Forward Industries, Inc.

RESULTS OF OPERATIONS FOR THE 2013 QUARTER COMPARED TO THE 2012 QUARTER

Income (loss) from Continuing Operations

Income from continuing operations was $0.2 million in the 2013 Quarter compared
to a loss from continuing operations of  $0.5 million in the 2012 Quarter. The
improvement is primarily due to increased gross profit on a higher sales base,
lower general and administrative expenses, and higher other income, which were
offset, in part, by higher sales and marketing expenses, as reflected in the
table below:

                                  Main Components of Net Income (Loss) from Continuing Operations
                                                                                                           (thousands of dollars)
                                                                                                         2013     2012    Increase
                                                                                                        Quarter  Quarter  (Decrease)
Net Sales..............................................................................................  $6,973   $6,162        $811

Gross Profit..........................................................................................    1,500    1,211         289
Sales and Marketing Expenses.........................................................                     (477)    (290)         187
General and Administrative Expenses                                                                     (1,074)  (1,423)       (349)
Other Income, net................................................................................           233       28         205
Income taxes expense (benefit).........................................................                      --       --          --
Income (loss) from continuing operations*..................................                                $181   $(473)        $654

* Table may not total due to rounding.

Net income (loss) from continuing operations per basic and diluted share was $0.02 and $(0.06) for the 2013 Quarter and 2012 Quarter, respectively.

Net Sales

Net sales increased $0.8 million, or 13%, to $7.0 million in the 2013 Quarter
from $6.2 million in the 2012 Quarter due to higher sales of Diabetic Products,
which were offset, in part, by lower sales of Other Products, which decreased
$0.3 million. The tables below set forth sales by channel, product line, and
geographic location of our customers for the periods indicated

                         Net Sales for 2013 Quarter
                            (millions of dollars)
                                                 Americas APAC Europe Total*
Diabetic products.............................       $1.8 $1.6   $1.8   $5.2
Other products..................................      1.1  0.5    0.2    1.8
Total net sales.............................         $2.9 $2.1   $2.0   $7.0

                         Net Sales for 2012 Quarter
                            (millions of dollars)
                                                 Americas APAC Europe Total*
Diabetic products.............................       $0.6 $2.6   $0.9   $4.0
Other products..................................      1.4  0.3    0.4    2.1
Total net sales.............................         $2.0 $2.8   $1.3   $6.2

* Tables may not total due to rounding.

Forward Industries, Inc.

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 $1.2 million, or 27%, to $5.2 million in the 2013 Quarter, from $4.0 million in the 2012 Quarter. This increase was primarily due to sales contributed in the 2013 Quarter from the addition of a new major Diabetic products customer (Diabetic Customer D), which had not yet begun to contribute in the 2012 Quarter. In addition, higher sales in respect of

new and replacement programs with two long-standing, major, Diabetic products
customers (Diabetic Customers B and C) also contributed to the increase. These
increases were offset, in part, by lower sales to our historically largest
Diabetic products customer (Diabetic Customer A).

The following table sets forth our sales by Diabetic Products customer for the
periods indicated.

(millions of dollars)
2013 Quarter 2012 Quarter Increase
(Decrease)
Diabetic Customer A......................................................................... $1.2 $2.4 $(1.2)
Diabetic Customer B......................................................................... 1.0 0.5 0.5
Diabetic Customer C......................................................................... 1.5 0.7 0.8
Diabetic Customer D......................................................................... 1.1 -- 1.1
All other Diabetic Customers........................................................... 0.4 0.4 --
Totals*......................................................................................... $5.2 $4.0 $1.2

* Table may not total due to rounding.

Sales of carrying cases for blood glucose monitoring kits represented 74% of our total net sales in the 2013 Quarter compared to 66% of 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, tablets, 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.

Sales of Other Products decreased $0.3 million, or 13%, to $1.8 million in the 2013 Quarter from $2.1 million in the 2012 Quarter. This decrease was primarily due to lower sales to a long-standing cellular customer, which decreased $0.6 million to $46 thousand in the 2013 Quarter, as well as the loss of a GPS customer, which had contributed $0.2 million to our net sales in the 2012 Quarter. These decreases were offset, in part, by higher sales to a second GPS customer, which increased $0.5 million in the 2013 Quarter, as well as the addition of camera customer, which contributed $0.2 million of new sales in the 2013 Quarter. Lesser fluctuations in other customer accounts were not individually material.

Sales of Other Products represented 26% of our net sales in the 2013 Quarter compared to 34% of our total net sales in the 2012 Quarter.

Gross Profit

Gross profit increased $0.3 million, or 24%, to $1.5 million in the 2013 Quarter from $1.2 million in the 2012 Quarter. As a percentage of sales, our gross profit improved to 22% in the 2013 Quarter from 20% in the 2012 Quarter.

Forward Industries, Inc.

This improvement was driven primarily by cost savings realized in the 2013 Quarter from the restructure of our Asia-based sourcing and quality assurance operations (refer to Note 10 - "Buying Agency and Supply Agreement" to our consolidated financial statements), which were initiated in March 2012 and substantially completed as of September 30, 2012. Such sourcing and quality assurance costs were 4% of our net sales in the 2013 Quarter compared to 7% of net sales in the 2012 Quarter. To a lesser extent, new customer accounts, as well as changes in product mix, within our "Other" products division also contributed to the improvement in our gross margin.

These improvements to our gross margin, were offset, in part, by a decline in the overall gross margin of our Diabetic Products business, and in particular, factors specific to two major Diabetic customers, as discussed more fully below:

� Net sales to Diabetic Customer C increased 110% in the 2013 Quarter from the 2012 Quarter; however, our average sales price in respect of several new and replacement programs was significantly lower than the average sales price of their predecessor programs in the 2012 Quarter. As a result, overall gross margin on net sales to Diabetic Customer C was 9% lower in the 2013 Quarter.

� Net sales to Diabetic Customer B increased 81% in the 2013 Quarter from the 2012 Quarter; however, increases in materials, labor, and other production costs passed on to us from our suppliers, combined with lower average sales prices on several newer programs, compressed our overall gross margin for this customer by 6% in the 2013 Quarter.

Sales and Marketing Expenses

Sales and marketing expenses increased $0.2 million, or 65%, to $0.5 million in the 2013 Quarter compared to $0.3 million in the 2012 Quarter due primarily to higher personnel costs. The increase in personnel costs of $0.2 million in the 2013 Quarter was primarily as a result of: i) restructuring of the sales force compensation scheme, ii) higher sales commissions earned on higher gross profit in the 2013 Quarter, and iii) our expansion of our sales support team. Lesser fluctuations in other components of sales and marketing expenses, none of which were individually material, served to offset each other.

General and Administrative Expenses

General and administrative expenses decreased $0.3 million, or 25%, to $1.1 million in the 2013 Quarter from $1.4 million in the 2012 Quarter due primarily to the following:

� $0.2 million decrease in professional fees resulting primarily from consulting fees, expense reimbursements, and equity compensation paid to our Chief Executive Officer prior to his appointment to such position while serving as a strategic consultant to the Company, and to a lesser extent, lower legal fees. These decreases were offset, in part, by higher accounting fees in the 2013 Quarter.

� $0.1 million decrease in personnel costs resulting primarily from restructuring our finance and information technology departments, which included headcount reductions and salary decreases made in conjunction with the relocation of our corporate headquarters from California to Florida.

� Decreases in telecommunications, public, office, and other general and administrative expenses, which were individually immaterial, were $0.1 million in the aggregate and were offset in part by a decrease in travel, meals, and entertainment expenses.

Other Income, net

Other income, net, consisting of realized gains on investments in marketable securities, foreign currency transaction gains and losses, and interest income on cash and cash equivalent balances, increased to $0.2 million in the 2013 Quarter from $28 thousand in the 2012 Quarter. This increase was due primarily to $0.2 million of net realized and unrealized gains on investments in marketable securities in the 2013 Quarter for which there was no such activity in the 2012 Quarter, and to a lesser extent a favorable change in foreign transaction losses. These increases were offset, in part, by a $43 thousand decrease in interest income.

Forward Industries, Inc.

RESULTS OF DISCONTINUED OPERATIONS FOR THE 2013 QUARTER COMPARED TO THE 2012 QUARTER

On June 21, 2012, we determined to exit our global Retail business and focus solely on growing our OEM business. The decision to eliminate the Retail division was primarily driven by the longer than estimated path to bring it to profitability and the strong top line growth and cost rationalizations in the OEM business. Accordingly, the results of operations for the Retail division have been recorded as discontinued operations in the accompanying consolidated financial statements for the fiscal years presented.

Loss from Discontinued Operations

Loss from discontinued operations was $42 thousand in the 2013 Quarter compared to $1.0 million in the 2012 Quarter. This improvement was due primarily to decreases in operating expenses in the 2013 Quarter of $1.0 million. Loss from discontinued operations per basic and diluted share was $(0.01) and $(0.13) for the 2013 Quarter and 2012 Quarter, respectively.

Net Sales

Net sales from discontinued operations of $0.4 million in the 2013 Quarter included $0.1 million in product sales to various Retail customers and adjustments of $0.3 million for changes in estimated sales returns and price protection reserves resulting from settlements reached with certain Retail customers in the 2013 Quarter. In the 2012 Quarter, sales from discontinued operations were $0.7 million, which were net of sales returns, discounts, markdowns, and co-op advertising programs of $46 thousand.

Gross Profit

Gross profit from discontinued operations of $0.2 million in the 2013 Quarter benefited $0.3 million from changes in estimated sales returns that resulted from settlements reached with certain Retail customers in the 2013 Quarter (referred to above). Gross profit from discontinued operations in the 2012 Quarter was $0.2 million.

Operating Expenses

Operating expenses of discontinued operations decreased $1.0 million to $0.2 million in the 2013 Quarter from $1.2 million in the 2012 Quarter. This decrease was due primarily to lower personnel expenses, which decreased $0.7 million in the 2013 Quarter; and to a lesser extent, decreases in travel and entertainment expenses, and product development and design costs, of $0.1 million and $0.1 million, respectively. Lesser fluctuations in other components of operating expenses were not material.

Other Expense

Operating income (expense) from discontinued operations was not material in the 2013 Quarter. In the 2012 Quarter, other expense of discontinued operations, consisting of foreign currency losses, was $22 thousand.

Liquidity and Capital Resources

During the 2013 Quarter, we used $0.3 million of cash in operations, which consisted of net income of $0.1 million adjusted by $0.1 million for non-cash items (primarily realized and unrealized gains on sales of marketable securities and share based compensation), and a net use in working capital items of $0.3 million. As to working capital items, cash used in operating activities consisted of decreases in accounts payable and accrued expenses and other current liabilities of $2.5 million and $0.8 million, respectively. These changes were offset, in part, by decreases in accounts receivable, inventories, and prepaid and other current assets of $2.6 million, $0.1 million, and $0.3 million, respectively. The decrease in accounts receivable was primarily due to the timing and lower volume of sales recorded in the 2013 Quarter compared to the three-month period ended September 30, 2012. The decrease in accounts payable is due to lower materials purchases made in support of the lower sales level in the 2013 Quarter compared to the three month-period ended September 30, 2012. The decrease in accrued expenses and other current liabilities is primarily due to payment of certain accrued expenses including professional fees incurred in connection with the settlement of the Targus lawsuit, and severances incurred in connection with our restructuring.

Forward Industries, Inc.

In the 2012 Quarter, we used $4.0 million of cash in operations, which consisted of a net loss of $1.5 million, adjusted by $0.2 million for non-cash items (primarily share-based compensation), and a net use in working capital items of $2.7 million. As to working capital items, cash used in operating activities consisted of increases in accounts receivable, inventories, and prepaid and other current assets of $2.4 million, $1.1 million, and $1.0 million, respectively. These changes were offset, in part, by increases in accounts payable and accrued expenses and other current liabilities of $1.1 million and $0.6 million, respectively, which had the effect of generating cash from operating activities.

In the 2013 Quarter, net investing activities used $0.6 million of cash, which consisted of $0.6 million used for investments in marketable equity securities and $8 thousand used for purchases of property and equipment. In the 2012 Quarter, net investing activities generated $0.2 million of cash, which consisted of a partial repayment of a short-term loan made to a prospective strategic partner and $59 thousand used for purchases of property and equipment, primarily computer and telecommunications hardware and software.

There were no financing activities in the 2013 Quarter or 2012 Quarter.

At December 31, 2012, our current ratio (current assets divided by current liabilities) was 3.01; our quick ratio (current assets less inventories divided by current liabilities) was 2.22; and our working capital (current assets less current liabilities) was $9.3 million. As of such date, we had no short or long-term debt outstanding.

Our primary source of liquidity is our cash and cash equivalents, and marketable securities on hand. The primary demands on our working capital currently are: i) operating losses, should they occur, and ii) accounts payable arising in the ordinary course of business, the most significant of which arise when we order products 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 next twelve months will be adequate to manage our operating and financial requirements. We expect to complete our exit of our Retail business by March 31, 2013 and do not expect to have any continuing involvement in the Retail business after this date. We anticipate an additional loss from discontinued operations of approximately $0.1 million, which we anticipate incurring during our second quarter of Fiscal 2013.