Overview and Executive Summary

Our operations can be broadly classified into two principal segments: Forward Air, Inc. (Forward Air) and Forward Air Solutions, Inc. (FASI).

Through our Forward Air segment, we are a leading provider of time-definite surface transportation and related logistics services to the North American deferred air freight market. We offer our customers local pick-up and delivery (Forward Air Complete™) and scheduled surface transportation of cargo as a cost-effective, reliable alternative to air transportation. We transport cargo that must be delivered at a specific time, but is less time-sensitive than traditional air freight. This type of cargo is frequently referred to in the transportation industry as deferred air freight. We operate our Forward Air segment through a network of terminals located on or near airports in 83 cities in the United States and Canada, including a central sorting facility in Columbus, Ohio and eleven regional hubs serving key markets. We also offer our customers an array of logistics and other services including: expedited truckload brokerage (TLX); dedicated fleets; warehousing; customs brokerage; and shipment consolidation, deconsolidation and handling.

On July 30, 2007, through our subsidiary and reporting segment, FASI, and in conjunction with the acquisition of USA Carriers, Inc. ("USAC"), we began providing pool distribution services throughout the Mid-Atlantic, Southeast, Midwest and Southwest continental United States. Pool distribution involves the consolidation and shipment of several smaller less-than-truckload shipments to a common area or region. Once at the regional destination, the consolidated loads are then deconsolidated and delivered to their unique destinations. Our primary customers for this product are regional and nationwide distributors and retailers. We service these customers through a network of 20 terminals.

Our operations, particularly our network of hubs and terminals, represent substantial fixed costs. Consequently, our continued growth depends in significant part on our ability to increase the amount of freight and the revenue per pound for the freight shipped through our networks and to grow other lines of businesses, such as TLX, which will allow us to maintain revenue growth in challenging shipping environments.

Trends and Developments

During the three and nine months ended September 30, 2008 we experienced significant revenue growth across all product lines and segments over the same periods in the prior year. The revenue growth was primarily driven by our 2008 and 2007 acquisitions, partially offset by the challenging economic conditions. On September 8, 2008, we acquired certain assets and liabilities of Service Express, Inc. ("Service Express"). Service Express was a privately held provider of pool distribution services primarily in the Mid-Atlantic and Southeastern continental United States. Service Express generated approximately $39.0 million in revenue during the year ended December 31, 2007. The acquisition of Service Express' pool distribution services adds to the geographic footprint of the FASI segment in the Mid-Atlantic and Southeastern United States.

On March 17, 2008, we acquired certain assets and liabilities of Pinch Holdings, Inc. and its related company AFTCO Enterprises, Inc. and certain of their respective wholly-owned subsidiaries ("Pinch"). Pinch was a privately held provider of pool distribution, airport-to-airport, truckload, custom, and cartage services primarily to the Southwestern continental United States. Pinch generated approximately $35.0 million in revenue during the year ended December 31, 2007. The acquisition of Pinch's pool distribution services expands the geographic footprint of the FASI segment in the Southwestern United States. In addition to providing additional tonnage density to the Forward Air airport-to-airport network, the acquisition of Pinch's cartage and truckload business provides an opportunity for Forward Air to expand its service options in the Southwestern United States.

Further, on December 3, 2007 we acquired certain assets and liabilities of Black Hawk Freight Services, Inc. ("Black Hawk") to increase the penetration of our airport-to-airport network in the Midwest, Southwest and West continental United States. Also, on July 30, 2007, we acquired certain assets and liabilities of USAC. Through this acquisition we began providing pool distribution services throughout the Southeast, Midwest and Southwest continental United States.

Despite providing different benefits, these acquisitions fit into our "Completing the Model" strategic initiative of using acquisitions to grow existing business and to expand into new services and lines of business that will provide for revenue growth in any market conditions. We will continue to evaluate acquisitions that can increase our penetration of a geographic area, add new customers, increase freight, or enable us to offer additional services.

During the three and nine months ended September 30, 2008, we continued to experience a year over year decrease in our income from operations as a percentage of operating revenue. The decrease in income from operations as a percentage of operating revenue was driven primarily by changes in our revenue mix and increasing fuel expense. Revenue increases from our lower margin Forward Air services and FASI have continued to outpace the revenue growth from Forward Air's higher margin airport-to-airport service resulting in negative pressure on our operating margins. In addition, revenue growth in airport-to-airport service has been primarily driven by shorter distance lower yielding business. These changes in revenue mix have been accelerated by our recent acquisitions. In addition to the revenue mix, the recent acquisitions have increased the number of Company-employed drivers and Company-owned or operated equipment. These increases have significantly increased our salaries, wages and benefits, fuel and other operating expenses as we, not independent owner-operators, now incur these costs directly.

Segments

Effective July 30, 2007 in conjunction with FASI's acquisition of certain assets and liabilities of USAC, we began reporting our operations as two segments:
Forward Air and FASI.

Our Forward Air segment includes our pre-existing airport-to-airport and TLX services as well as our other accessorial related services such as warehousing; customs brokerage; and value-added handling services.

Our FASI segment includes our pool distribution business and the related assets and liabilities purchased from USAC, Pinch and Service Express.

Results of Operations

The following table sets forth our consolidated historical financial data for
the three months ended September 30, 2008 and 2007 (in millions):

                                                      Three months ended
                                September 30,       September 30,
                                    2008                2007             Change        % Change
Operating revenue              $         121.5     $          97.8     $     23.7           24.2 %
Operating expenses:
  Purchased transportation                48.9                41.3            7.6           18.4
  Salaries, wages, and
employee benefits                         28.5                22.0            6.5           29.5
  Operating leases                         6.2                 4.5            1.7           37.8
  Depreciation and
amortization                               4.1                 2.9            1.2           41.4
  Insurance and claims                     1.8                 1.6            0.2           12.5
  Fuel expense                             3.1                 0.6            2.5          416.7
  Other operating expenses                 9.6                 8.0            1.6           20.0
   Total operating expenses              102.2                80.9           21.3           26.3
Income from operations                    19.3                16.9            2.4           14.2
Other income (expense):
  Interest expense                        (0.2 )              (0.1 )         (0.1 )        100.0
  Other, net                               0.1                 0.3           (0.2 )        (66.7 )
   Total other (expense)
income                                    (0.1 )               0.2           (0.3 )       (150.0 )
Income before income taxes                19.2                17.1            2.1           12.3
Income taxes                               7.1                 6.4            0.7           10.9
Net income                     $          12.1     $          10.7     $      1.4           13.1 %

The following table sets forth our historical financial data by segment for the three months ended September 30, 2008 and 2007 (in millions):

                                                 Three months ended
                          September 30,      Percent of      September 30,      Percent of
                              2008            Revenue            2007            Revenue
Operating revenue
   Forward Air           $         108.6           89.4 %   $          92.7           94.8 %
   FASI                             13.6           11.2                 5.1            5.2
   Intercompany                     (0.7 )         (0.6 )                --             --
Eliminations
      Total                        121.5          100.0                97.8          100.0

Purchased transportation
   Forward Air                      46.5           42.8                40.6           43.8
   FASI                              3.1           22.8                 0.7           13.7
   Intercompany                     (0.7 )        100.0                  --             --
Eliminations
      Total                         48.9           40.2                41.3           42.2

Salaries, wages and
employee benefits
   Forward Air                      23.0           21.2                19.7           21.3
   FASI                              5.5           40.5                 2.3           45.1
      Total                         28.5           23.5                22.0           22.5

Operating leases
   Forward Air                       4.7            4.3                 4.1            4.4
   FASI                              1.5           11.0                 0.4            7.8
      Total                          6.2            5.1                 4.5            4.6

Depreciation and
amortization
   Forward Air                       3.6            3.3                 2.6            2.8
   FASI                              0.5            3.7                 0.3            5.9
      Total                          4.1            3.4                 2.9            3.0

Insurance and claims
   Forward Air                       1.7            1.6                 1.5            1.6
   FASI                              0.1            0.7                 0.1            2.0
      Total                          1.8            1.5                 1.6            1.6

Fuel expense
   Forward Air                       1.6            1.5                 0.3            0.3
   FASI                              1.5           11.0                 0.3            5.9
      Total                          3.1            2.5                 0.6            0.6

Other operating expenses
   Forward Air                       8.2            7.5                 7.4            8.0
   FASI                              1.4           10.3                 0.6           11.8
      Total                          9.6            7.9                 8.0            8.2

Income from operations
   Forward Air                      19.3           17.8                16.5           17.8
   FASI                               --             --                 0.4            7.8
      Total              $          19.3           15.9 %   $          16.9           17.3 %

The following table presents the components of the Forward Air segment's operating revenue and purchased transportation for the three months ended September 30, 2008 and 2007 (in millions):

                                                    For three months ended
                                September 30,      Percent of      September 30,      Percent of
                                    2008            Revenue            2007            Revenue
Forward Air revenue
   Airport-to-airport          $          87.0           80.1 %   $          75.7           81.7 %
   Logistics                              15.1           13.9                11.8           12.7
   Other                                   6.5            6.0                 5.2            5.6
      Total                    $         108.6          100.0 %   $          92.7          100.0 %

Forward Air purchased
transportation
   Airport-to-airport          $          33.4           38.4 %   $          29.8           39.4 %
   Logistics                              11.3           74.8                 9.3           78.8
   Other                                   1.8           27.7                 1.5           28.8
      Total                    $          46.5           42.8 %   $          40.6           43.8 %

Three Months Ended September 30, 2008 compared to Three Months Ended September 30, 2007

Revenues

Operating revenue increased by $23.7 million, or 24.2%, to $121.5 million for the three months ended September 30, 2008 from $97.8 million in the same period of 2007.

Forward Air

Forward Air operating revenue increased $15.9 million, or 17.2%, to $108.6 million from $92.7 million, accounting for 89.4% of consolidated operating revenue for the three months ended September 30, 2008. Airport-to-airport revenue, which is the largest component of our consolidated operating revenue, increased $11.3 million, or 14.9%, to $87.0 million from $75.7 million, accounting for 80.1% of the segment's operating revenue during the three months ended September 30, 2008 compared to 81.7% for the three months ended September 30, 2007. The increase in airport-to-airport revenue was driven by an increase in tonnage and a minor increase in revenue per pound. Our airport-to-airport business is priced on a per pound basis and the average revenue per pound, including the impact of fuel surcharges, increased 5.6% for the three months ended September 30, 2008 versus the three months ended September 30, 2007. Tonnage that transited our network increased by 8.8% in the three months ended September 30, 2008 compared with the three months ended September 30, 2007. The increase in tonnage was primarily driven by the increased activity resulting from our acquisitions of Pinch and Black Hawk in March 2008 and December 2007, respectively. Average revenue per pound increased due to increased utilization of our Forward Air Complete pick-up and delivery service in addition to increased fuel surcharges to offset increased fuel costs. These increases were offset by yield decreases resulting from a shift in our revenue mix to shorter distance lower price per pound routes. This shift was primarily the result of new business obtained with the Pinch and Black Hawk acquisitions as well as increased business from international and domestic airlines.

Logistics revenue, which is primarily truckload brokerage (TLX) and priced on a per mile basis, increased $3.3 million, or 28.0%, to $15.1 million in the third quarter of 2008 from $11.8 million in the same period of 2007. The increase in logistics revenue is the result of our continuing efforts as part of our "Completing the Model" strategic initiative to grow TLX and $1.1 million in revenue from new service lines obtained with the Pinch and Black Hawk acquisitions. We continue to place emphasis on capturing a larger percentage of truckload opportunities and correspondingly increasing our access to sufficient truckload capacity through the expansion of our owner-operator fleet and the use of third-party transportation providers. Through these efforts we increased the number of miles driven to support our TLX revenue by 12.0% during the three months ended September 30, 2008 compared to the same period in 2007. The average revenue per mile of our TLX product, including the impact of fuel surcharges, increased 6.5% for the three months ended September 30, 2008 versus the three months ended September 30, 2007. The increase in revenue per mile is mainly attributable to increased fuel surcharges to offset increased fuel costs and improved pricing as a result of favorable changes in business mix.

Other revenue, which includes warehousing services and terminal handling, accounts for the final component of Forward Air operating revenue. Other revenue increased $1.3 million to $6.5 million, a 25.0% increase from $5.2 million for the same period in 2007. The increase was primarily due to increased cartage, handling and storage revenue due to new services offered through our newly expanded facilities. The increased cartage revenue is also the result of new business obtained in conjunction with the Pinch and Black Hawk acquisitions.

FASI

FASI operating revenue increased $8.5 million to $13.6 million for the three months ended September 30, 2008 from $5.1 million for the same period in 2007. The increase in revenue is the result of additional activity from the Pinch acquisition on March 17, 2008 and the Service Express acquisition on September 9, 2008. In addition, the third quarter of 2008 includes a full three months of revenue compared to only two months in the third quarter of 2007 as FASI began operations on July 30, 2007 in conjunction with the acquisition of USAC.

Intercompany Eliminations

Intercompany eliminations of $0.7 million are the result of truckload and airport-to-airport services Forward Air provided to FASI during the three months ended September 30, 2008. FASI also provides cartage services to Forward Air.

Purchased Transportation

Purchased transportation increased by $7.6 million, or 18.4%, to $48.9 million in the third quarter of 2008 from $41.3 million in the same period of 2007. As a percentage of total operating revenue, purchased transportation was 40.2% during the three months ended September 30, 2008 compared to 42.2% for the same period in 2007.

Forward Air

Forward Air's purchased transportation increased by $5.9 million, or 14.5%, to $46.5 million for the three months ended September 30, 2008 from $40.6 million for the three months ended September 30, 2007. The increase in purchased transportation is primarily attributable to an increase of approximately 7.0% in miles in addition to a 6.9% increase in the total cost per mile for the third quarter of 2008 versus the same period in 2007. As a percentage of segment operating revenue, Forward Air purchased transportation was 42.8% during the three months ended September 30, 2008 compared to 43.8% for the same period in 2007.

Purchased transportation costs for our airport-to-airport network increased $3.6 million, or 12.1%, to $33.4 million for the three months ended September 30, 2008 from $29.8 million for the three months ended September 30, 2007. For the three months ended September 30, 2008, purchased transportation for our airport-to-airport network decreased to 38.4% of airport-to-airport revenue from 39.4% for the same period in 2007. The $3.6 million increase is attributable to a 5.8% increase in miles driven by our network of owner-operators or third party transportation providers plus a 6.3% increase in cost per mile. The increase in miles increased purchased transportation by $1.7 million while the change in cost per mile increased purchased transportation $1.9 million. Miles driven by our network of owner-operators or third party transportation providers increased to support the increased revenue activity discussed above. The increase in cost per mile is attributable to increased customer utilization of Forward Air Complete offset by increased utilization of our network of owner operators as opposed to more costly third party transportation providers. Additionally, the increase in cost per mile was also offset by the increased use of Company-employed drivers. The number of Company-employed drivers and their use in the airport-to-airport network is mainly a result of the Pinch and Black Hawk acquisitions. The cost for the company-employed drivers is included in salaries, wages and benefits instead of purchased transportation.

Purchased transportation costs for our logistics revenue increased $2.0 million, or 21.5%, to $11.3 million for the three months ended September 30, 2008 from $9.3 million for the three months ended September 30, 2007. For the three months ended September 30, 2008, logistics' purchased transportation costs represented 74.8% of logistics revenue versus 78.8% for the three months ended September 30, 2007. The 21.5% increase is partially attributable to a $0.7 million increase in costs associated with new logistics business obtained through the acquisition of Pinch and Black Hawk. The remaining increase is attributable to a 12.0% increase in miles driven by our network of owner-operators or third party transportation providers plus a 1.6% increase in the related cost per mile. Miles driven by our network of owner-operators or third party transportation providers increased to support our continuing efforts to grow our TLX business as discussed above, and accounted for $1.1 million of the increase in logistics purchased transportation. The change in the cost per mile increased the logistics purchased transportation by $0.2 million. The increase in cost per mile was mostly the result of increased rates from third party transportation providers mostly offset by increased use of our network of owner operators. The decrease in logistics transportation as a percentage of revenue is the result of the favorable change in business mix as well as the addition of the new business from the Pinch and Black Hawk acquisitions.

Purchased transportation costs related to our other revenue increased $0.3 million, or 20.0%, to $1.8 million for the three months ended September 30, 2008 from $1.5 million for the three months ended September 30, 2007. Other purchased transportation costs as a percentage of other revenue decreased to 27.7% of other revenue for the three months ended September 30, 2008 from 28.8% for the same period in 2007. The improvement in other purchased transportation costs as a percentage of other revenue is attributable to the use of Company-employed drivers to provide the transportation services associated with new business obtained from the Pinch and Black Hawk acquisitions.

FASI

FASI purchased transportation increased to $3.1 million for the three months ended September 30, 2008 from $0.7 million for the same period in 2007. FASI purchased transportation as a percentage of revenue was 22.8% for the three months ended September 30, 2008 compared to 13.7% for the three months ended September 30, 2007. The increase in purchased transportation is mainly due to our continued expansion of the FASI business through the acquisitions of Pinch and Service Express in March 2008 and September 2008, respectively. In addition, the third quarter of 2008 includes a full three months of activity compared to only two months in the third quarter of 2007 as FASI began operations on July 30, 2007. Purchased transportation has increased as a percentage of FASI revenue mainly due to the increased use of owner operators particularly in conjunction with the acquisition of Pinch.

Intercompany Eliminations

Intercompany eliminations increased to $0.7 million and are the result of truckload and airport-to-airport services Forward Air provided to FASI during the three months ended September 30, 2008. During the three months ended September 30, 2008, FASI also provided cartage services to Forward Air.

Salaries, Wages, and Benefits

Salaries, wages and employee benefits increased by $6.5 million, or 29.5%, to $28.5 million in the third quarter of 2008 from $22.0 million in the same period of 2007. As a percentage of total operating revenue, salaries, wages and employee benefits was 23.5% during the three months ended September 30, 2008 compared to 22.5% for the same period in 2007.

Forward Air

Salaries, wages and employee benefits of Forward Air increased by $3.3 million, or 16.8%, to $23.0 million in the third quarter of 2008 from $19.7 million in the same period of 2007. Salaries, wages and employee benefits were 21.2% of Forward Air's operating revenue in the third quarter of 2008 compared to 21.3% for the same period of 2007. The improvement in salaries, wages and employee benefits as a percentage of revenue was the result of overall improvement in workers' compensation and health insurance costs and operating efficiencies offset by increases in employee incentives and share-based compensation. Share-based compensation increased $0.5 million, or 0.3% as a percentage of Forward Air operating revenue, due to the annual grants of stock options and non-vested shares of common stock to key members of management and non-employee directors from 2006 to the present. Employee incentives increased $0.5 million, or 0.4% as a percentage of revenue due to increased accruals for quarterly and annual incentives for key employees based on achievement of performance goals. Workers' compensation and health insurance costs remained materially consistent year over year increasing less than $0.1 million, but decreasing 0.3% as a percentage of Forward Air operating revenue. The remaining 0.5% improvement as a percentage of Forward Air operating revenue was the result of revenue increasing at higher rate than salaries and wages. The remaining increase in total dollars is attributable to the increased headcount of mainly terminal and Company-employed drivers associated with our acquisitions of Pinch and Black Hawk.

FASI

FASI salaries, wages and employee benefits increased to $5.5 million for the three months ended September 30, 2008 compared to $2.3 million for the three months ended September 30, 2007. As a percentage of FASI operating revenue, salaries, wages and benefits decreased to 40.5% for the three months ended September 30, 2008 compared to 45.1% for the same period in 2007. FASI salary, wages and employee benefits are higher as a percentage of operating revenue than our Forward Air segment, as a larger percentage of the transportation services are performed by Company-employed drivers. However, 1.1% of the decrease as a percentage of FASI revenue is a decrease in driver pay as a percentage of revenue which is the result of the higher utilization of owner operators during the third quarter of 2008 versus the same period in 2007. The remaining improvement is attributable to management salaries and insurance costs decreasing as a percentage of operating revenue as revenue increases have outpaced increases in management staffing and insurance costs.

Operating Leases

Operating leases increased by $1.7 million, or 37.8%, to $6.2 million in the third quarter of 2008 from $4.5 million in the same period of 2007. Operating leases, the largest component of which is facility rent, were 5.1% of consolidated operating revenue for the three months ended September 30, 2008 compared with 4.6% in the same period of 2007.

Forward Air

Operating leases increased $0.6 million and 14.6% to $4.7 million in the third quarter of 2008 from $4.1 million in the same period of 2007. Operating leases were 4.3% of Forward Air operating revenue for the three months ended September 30, 2008 compared with 4.4% in the same period of 2007. The increase in operating leases in total dollars was attributable to $0.3 million in higher . . .