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 84 cities in the United States and Canada, including a central sorting facility in Columbus, Ohio and 11 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.

FASI provides pool distribution services throughout the Mid-Atlantic, Southeast, Midwest and Southwest continental United States. Pool distribution involves managing high-frequency handling and distribution of time-sensitive product to numerous destinations in specific geographic regions. Our primary customers for this product are regional and nationwide distributors and retailers, such as mall, strip mall and outlet based retail chains. We service these customers through a network of terminals and service centers located in 19 cities.

Our operations, particularly our network of hubs and terminals, represent substantial fixed costs. Consequently, our ability to increase our earnings 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

Acquisitions

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 added 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, customs, 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 expanded the geographic footprint of the FASI segment in the Southwestern United States. In addition, it provided additional tonnage density to the Forward Air airport-to-airport network, and the acquisition of Pinch's cartage and truckload business provided an opportunity for Forward Air to expand its service options in the Southwestern United States.

Results from Operations

During the three and six months ended June 30, 2009, compared to the same period in 2008, we continued to experience significant year over year decreases in our consolidated revenues and results from operations. We largely attribute the decline in Forward Air revenue and income from operations to the current economic recession and its effects on our overall business volumes and the rates we are able to charge for our core services. FASI revenue continued to increase substantially year over year primarily as a result of our 2008 acquisitions of Pinch and Service Express and new business wins. However, revenues have not reached expected levels and losses have been higher than expected largely due to the economic recession reducing business volumes. Additionally, despite significant new business wins, FASI revenue growth will slow throughout 2009 as we reach the anniversary dates of our 2008 acquisitions.

Declining fuel prices have continued to adversely affect our revenues and results of operations in 2009. Our net fuel surcharge revenue is the result of our fuel surcharge rates, which are set weekly using the national average for diesel price per gallon, and the tonnage transiting our network. The decline in tonnage levels combined with the continuing decline in diesel fuel prices have resulted in a significant reduction in our net fuel surcharge revenue and results from operations during 2009. Total net fuel surcharge revenue decreased 72.3% and 66.2% during the three and six months ended June 30, 2009, respectively, as compared to the same periods in 2008.

Goodwill

During the first quarter of 2009, we determined there were indicators of potential impairment of the goodwill assigned to the FASI segment. This determination was based on the continuing economic recession, declines in current market valuations and FASI operating losses in excess of expectations. As a result, we performed an interim impairment test in accordance with SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142") as of March 31, 2009. We calculated the fair value of the FASI segment, using a combination of discounted cash flows and current market valuations for comparable companies. Based on the results of the interim impairment test, we concluded that an impairment loss was probable and could be reasonably estimated. Consequently, we recorded a non-cash goodwill impairment charge of $7.0 million related to the FASI segment during the first quarter of 2009. We finalized certain valuations related to the March 31, 2009 goodwill impairment during the second quarter of 2009, which did not result in any adjustments to the impairment recorded at March 31, 2009.

In accordance with SFAS 142, we conducted our annual impairment test of goodwill for each reportable segment as of June 30, 2009 and no additional impairment charges were required.

Segments

Our operations can be broadly classified into two principal segments: Forward Air and FASI.

Our Forward Air segment includes our airport-to-airport, Forward Air Complete, 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.

Results of Operations

The following table sets forth our consolidated historical financial data for the three months ended June 30, 2009 and 2008 (in millions):

                                                     Three months ended
                                   June 30,       June 30,
                                     2009           2008         Change       % Change
     Operating revenue            $     99.7     $    121.6     $   (21.9 )      (18.0 ) %
     Operating expenses:
       Purchased transportation         42.0           47.9          (5.9 )      (12.3 )
       Salaries, wages, and
     employee benefits                  29.2           29.4          (0.2 )       (0.7 )
       Operating leases                  6.8            5.9           0.9         15.3
       Depreciation and
     amortization                        4.8            4.0           0.8         20.0
       Insurance and claims              2.2            1.6           0.6         37.5
       Fuel expense                      1.6            3.3          (1.7 )      (51.5 )
       Other operating expenses          8.2            9.2          (1.0 )      (10.9 )
        Total operating expenses        94.8          101.3          (6.5 )       (6.4 )
     Income from operations              4.9           20.3         (15.4 )      (75.9 )
     Other income (expense):
       Interest expense                 (0.2 )         (0.3 )        (0.1 )      (33.3 )
       Other, net                         --             --            --           --
        Total other (expense)
     income                             (0.2 )         (0.3 )        (0.1 )      (33.3 )
     Income before income taxes          4.7           20.0         (15.3 )      (76.5 )
     Income taxes                        1.9            7.9          (6.0 )      (75.9 )
     Net income                   $      2.8     $     12.1     $    (9.3 )      (76.9 ) %

The following table sets forth our historical financial data by segment for the three months ended June 30, 2009 and 2008 (in millions):

                                                      Three months ended
                      June 30,      Percent of       June 30,      Percent of                   Percent
                        2009         Revenue           2008         Revenue        Change       Change
Operating revenue
   Forward Air       $     83.3           83.6 %    $    110.9           91.2 %   $   (27.6 )     (24.9 )%
   FASI                    16.7           16.7            11.4            9.4           5.3        46.5
   Intercompany            (0.3 )         (0.3 )          (0.7 )         (0.6 )         0.4       (57.1 )
Eliminations
      Total                99.7          100.0           121.6          100.0         (21.9 )     (18.0 )

Purchased
transportation
   Forward Air             38.7           46.5            45.9           41.4          (7.2 )     (15.7 )
   FASI                     3.6           21.5             2.7           23.7           0.9        33.3
   Intercompany            (0.3 )        100.0            (0.7 )        100.0           0.4       (57.1 )
Eliminations
      Total                42.0           42.2            47.9           39.4          (5.9 )     (12.3 )

Salaries, wages and
employee benefits
   Forward Air             21.1           25.3            24.7           22.3          (3.6 )     (14.6 )
   FASI                     8.1           48.5             4.7           41.2           3.4        72.3
      Total                29.2           29.3            29.4           24.2          (0.2 )      (0.7 )

Operating leases
   Forward Air              4.7            5.6             4.6            4.2           0.1         2.2
   FASI                     2.1           12.6             1.3           11.4           0.8        61.5
      Total                 6.8            6.8             5.9            4.8           0.9        15.3

Depreciation and
amortization
   Forward Air              3.9            4.7             3.6            3.2           0.3         8.3
   FASI                     0.9            5.4             0.4            3.5           0.5       125.0
      Total                 4.8            4.8             4.0            3.3           0.8        20.0

Insurance and claims
   Forward Air              1.7            2.0             1.6            1.4           0.1         6.2
   FASI                     0.5            3.0              --             --           0.5       100.0
      Total                 2.2            2.2             1.6            1.3           0.6        37.5

Fuel expense
   Forward Air              0.7            0.8             1.8            1.6          (1.1 )     (61.1 )
   FASI                     0.9            5.4             1.5           13.2          (0.6 )     (40.0 )
      Total                 1.6            1.6             3.3            2.7          (1.7 )     (51.5 )

Other operating
expenses
   Forward Air              6.7            8.1             8.0            7.2          (1.3 )     (16.3 )
   FASI                     1.5            9.0             1.2           10.5           0.3        25.0
      Total                 8.2            8.2             9.2            7.6          (1.0 )     (10.9 )

Income (loss) from
operations
   Forward Air              5.8            7.0            20.7           18.7         (14.9 )     (72.0 )
   FASI                    (0.9 )         (5.4 )          (0.4 )         (3.5 )        (0.5 )     125.0
      Total          $      4.9            4.9 %    $     20.3           16.7 %   $   (15.4 )     (75.9 )%

The following table presents the components of the Forward Air segment's operating revenue and purchased transportation for the three months ended June 30, 2009 and 2008 (in millions):

                                                 For three months ended
                       June 30,    Percent of      June 30,    Percent of                   Percent
                         2009       Revenue          2008       Revenue        Change       Change
Forward Air revenue
   Airport-to-airport $     65.3         78.4 %   $     89.2         80.4 %   $   (23.9 )     (26.8 ) %
   Logistics                12.3         14.8           15.5         14.0          (3.2 )     (20.6 )
   Other                     5.7          6.8            6.2          5.6          (0.5 )      (8.1 )
      Total           $     83.3        100.0 %   $    110.9        100.0 %   $   (27.6 )     (24.9 ) %

Forward Air purchased
transportation
   Airport-to-airport $     27.9         42.7 %   $     33.5         37.6 %   $    (5.6 )     (16.7 ) %
   Logistics                 9.5         77.2           10.8         69.7          (1.3 )     (12.0 )
   Other                     1.3         22.8            1.6         25.8          (0.3 )     (18.8 )
      Total           $     38.7         46.5 %   $     45.9         41.4 %   $    (7.2 )     (15.7 ) %

Three Months Ended June 30, 2009 compared to Three Months Ended June 30, 2008

Revenues

Operating revenue decreased by $21.9 million, or 18.0%, to $99.7 million for the three months ended June 30, 2009 from $121.6 million in the same period of 2008.

Forward Air

Forward Air operating revenue decreased $27.6 million, or 24.9%, to $83.3 million from $110.9 million, accounting for 83.6% of consolidated operating revenue for the three months ended June 30, 2009 compared to 91.2% for the same period in 2008. Airport-to-airport revenue, which is the largest component of our consolidated operating revenue, decreased $23.9 million, or 26.8%, to $65.3 million from $89.2 million, accounting for 78.4% of the segment's operating revenue during the three months ended June 30, 2009 compared to 80.4% for the three months ended June 30, 2008. A significant decrease in tonnage and a decrease in our base revenue per pound, excluding net fuel surcharge revenue and Forward Air Complete revenue, accounted for $19.0 million of the decline in airport-to-airport revenue. Our airport-to-airport business is priced on a per pound basis and the average revenue per pound, excluding the impact of fuel surcharges and Forward Air Complete, decreased 3.6% for the three months ended June 30, 2009 versus the three months ended June 30, 2008. Tonnage that transited our network decreased by 22.2% in the three months ended June 30, 2009 compared with the three months ended June 30, 2008. The decrease in tonnage was primarily driven by the impact of the continuing economic recession and the resulting reduction in shipping activity. Average base revenue per pound decreased due to the continued shift in revenue mix to shorter distance and lower price per pound routes as well as increased pricing competition brought on by the current economic environment. The remaining decrease in airport-to-airport revenue is the result of reduced net fuel charge revenue offset by increased revenue from our Forward Air Complete pick-up and delivery service. Net fuel surcharge revenue decreased $6.2 million during the three months ended June 30, 2009 as compared to three months ended June 30, 2008 as a result of decreasing fuel prices as well as decreased overall business volumes. Partially offsetting these decreases was a $1.3 million increase in Forward Air Complete ("Complete") revenue during the three months ended June 30, 2009 compared to the same period of 2008. The increase in Complete revenue is attributable to an increased frequency of airport-to-airport shippers opting to utilize our Complete service.

Logistics revenue, which is primarily truckload brokerage (TLX) and priced on a per mile basis, decreased $3.2 million, or 20.6%, to $12.3 million in the second quarter of 2009 from $15.5 million in the same period of 2008. TLX revenue decreased $2.9 million as miles driven to support our TLX revenue decreased by approximately 6.8% during the three months ended June 30, 2009 compared to the same period in 2008. Also, TLX average revenue per mile decreased approximately 14.6%. The decrease in average revenue per mile is mainly attributable to decreased fuel surcharges as a result of decreased fuel prices and reduced yields as a result of increased truckload price competition. The remaining decrease in logistics revenue was primarily driven by a $0.3 million decrease in other non-mileage based logistic revenues which decreased in conjunction with the overall decline in TLX business volumes.

Other revenue, which includes warehousing services and terminal handling, accounts for the final component of Forward Air operating revenue. Other revenue decreased $0.5 million, or 8.1%, to $5.7 million in the second quarter of 2009 from $6.2 million in the same period of 2008. The decline in revenue was primarily due to volume decreases in conjunction with the decline in our airport-to-airport business. These declines were partially offset by increases in dedicated pick up and delivery services.

FASI

FASI operating revenue increased $5.3 million and 46.5% to $16.7 million for the three months ended June 30, 2009 from $11.4 million for the same period in 2008. The increase in revenue is the result of additional activity from the Service Express acquisition on September 8, 2008 and new business awards which began throughout the second quarter of 2009. These increases were slightly offset by reduced fuel surcharge revenues as a result of declining fuel prices and reduced shipping volumes at pre-acquisition terminals resulting from the current economic recession.

Intercompany Eliminations

Intercompany eliminations decreased $0.4 million, or 57.1% to $0.3 million in the second quarter of 2009 from $0.7 million in the same period of 2008. The intercompany eliminations are the result of truckload and airport-to-airport services Forward Air provided to FASI during the three months ended June 30, 2009. FASI also provided cartage services to Forward Air. The decrease in intercompany eliminations was the result of reduced Forward Air truckload services provided to FASI. These decreases were partially offset by FASI providing cartage services in support of Forward Air's Complete service.

Purchased Transportation

Purchased transportation decreased by $5.9 million, or 12.3%, to $42.0 million in the second quarter of 2009 from $47.9 million in the same period of 2008. As a percentage of total operating revenue, purchased transportation was 42.2% during the three months ended June 30, 2009 compared to 39.4% for the same period in 2008.

Forward Air

Forward Air's purchased transportation decreased by $7.2 million, or 15.7%, to $38.7 million for the three months ended June 30, 2009 from $45.9 million for the three months ended June 30, 2008. The decrease in purchased transportation is primarily attributable to a 18.7% decrease in miles driven offset by a 3.6% increase in the total cost per mile for the second quarter of 2009 versus the same period in 2008. As a percentage of segment operating revenue, Forward Air purchased transportation was 46.5% during the three months ended June 30, 2009 compared to 41.4% for the same period in 2008.

Purchased transportation costs for our airport-to-airport network decreased $5.6 million, or 16.7%, to $27.9 million for the three months ended June 30, 2009 from $33.5 million for the three months ended June 30, 2008. For the three months ended June 30, 2009, purchased transportation for our airport-to-airport network increased to 42.7% of airport-to-airport revenue from 37.6% for the same period in 2008. The $5.6 million decrease is mostly attributable to a 22.2% decrease in miles driven by our network of owner-operators or third party transportation providers and slightly offset by a 0.3% increase in the cost per mile paid to our network of owner-operators or third party transportation providers. The reduction in miles decreased purchased transportation by $6.7 million while the increase in cost per mile increased purchased transportation by less than $0.1 million. Miles driven by our network of owner-operators or third party transportation providers decreased in conjunction with the tonnage decline discussed above. Offsetting these decreases in airport-to-airport purchased transportation was a $1.0 million increase in expenses for third party transportation costs associated with the increased customer utilization of Complete.

Purchased transportation costs for our logistics revenue decreased $1.3 million, or 12.0%, to $9.5 million for the three months ended June 30, 2009 from $10.8 million for the three months ended June 30, 2008. For the three months ended June 30, 2009, logistics' purchased transportation costs represented 77.2% of logistics revenue versus 69.7% for the three months ended June 30, 2008. In conjunction with the decline in per mile TLX revenue, the decrease in logistics purchased transportation was primarily due to a 6.8% decrease in miles driven during the three months ended June 30, 2009 compared to the same period in 2008. In addition, cost per mile decreased by approximately 5.3%. The reduction in miles decreased purchased transportation by $0.7 million while the decrease in cost per mile decreased purchased transportation by $0.4 million. The reduction in cost per mile was mostly the result of increased utilization of our less costly network of owner-operators. The remaining decrease in logistics purchase transportation was primarily driven by a $0.2 million decrease in transportation costs associated with other non-mileage based logistic revenues.

Purchased transportation costs related to our other revenue decreased $0.3 million, or 18.8%, to $1.3 million for the three months ended June 30, 2009 from $1.6 million for the three months ended June 30, 2008. Other purchased transportation costs as a percentage of other revenue decreased to 22.8% of other revenue for the three months ended June 30, 2009 from 25.8% for the same period in 2008. 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 certain dedicated pick up and delivery services. Further, due to the economic recession we have ceased providing other ancillary services in circumstances in which the overall yield was insufficient.

FASI

FASI purchased transportation increased to $3.6 million for the three months ended June 30, 2009 from $2.7 million for the same period in 2008. FASI purchased transportation as a percentage of revenue was 21.5% for the three months ended June 30, 2009 compared to 23.7% for the three months ended June 30, 2008. The decrease in purchased transportation as percentage of revenue is largely attributable to operational efficiencies gained as we integrate our 2008 acquisitions.

Intercompany Eliminations

Intercompany eliminations decreased $0.4 million, or 57.1% to $0.3 million in the second quarter of 2009 from $0.7 million in the same period of 2008. The intercompany eliminations are the result of truckload and airport-to-airport services Forward Air provided to FASI during the three months ended June 30, 2009. FASI also provided cartage services to Forward Air. The decrease in intercompany eliminations was the result of reduced FAI truckload services provided to FASI. These decreases were offset by FASI providing cartage services in support of FAI's Complete service.

Salaries, Wages, and Benefits

Salaries, wages and employee benefits decreased by $0.2 million, or 0.7%, to $29.2 million in the second quarter of 2009 from $29.4 million in the same period of 2008. As a percentage of total operating revenue, salaries, wages and employee benefits was 29.3% during the three months ended June 30, 2009 compared to 24.2% for the same period in 2008.

Forward Air

Salaries, wages and employee benefits of Forward Air decreased by $3.6 million, or 14.6%, to $21.1 million in the second quarter of 2009 from $24.7 million in the same period of 2008. Salaries, wages and employee benefits were 25.3% of Forward Air's operating revenue in the second quarter of 2009 compared to 22.3% for the same period of 2008. The $3.6 million decrease in salaries, wages, and benefits was driven by a reduction in employee incentives and our efforts to reduce personnel costs in conjunction with the overall decline in Forward Air revenue. Expenses for employee incentives decreased $1.4 million, or 1.3% as a percentage of revenue, as a result of failures to meet internal performance goals during the second quarter of 2009. Our efforts to reduce personnel costs to date have primarily focused on controlling airport-to-airport variables wages, such as dock personnel. Through these reductions we have reduced terminal related pay by approximately $1.8 million, or 0.9% as a percentage of revenue. The remaining $0.4 million decrease was driven by reductions in sales force and various back-office functions. However, we have not been able to reduce the fixed components of our salaries and benefits, such as management pay, share-based compensation, and health insurance costs at the same rate at which our revenue has declined, and as a result salaries, wages, and benefits increased as a percentage of revenue.

FASI

FASI salaries, wages and employee benefits increased to $8.1 million for the three months ended June 30, 2009 compared to $4.7 million for the three months ended June 30, 2008. As a percentage of FASI operating revenue, salaries, wages and benefits increased to 48.5% for the three months ended June 30, 2009 compared to 41.2% for the same period in 2008. FASI salaries, 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. The increase in salaries, wages and employee benefits as a percentage of revenue is attributable to the acquisition of Service Express in September 2008 and increases to our reserves for FASI worker's compensation claims. The terminals we acquired with the Service Express acquisition utilize a much higher percentage of contract labor for its dock personnel than used by preexisting FASI terminals. Contract labor is more expensive in the short term than Company-employed cargo handlers and dock personnel. Contract labor increased to 9.4% of revenue during the three months ended June 30, 2009 from 4.0% in the same period in 2008. We continue to evaluate the proper utilization of contract labor in these terminals. In addition, worker's compensation expense increased $0.3 million, or 1.6% as a percentage of revenue, due to a $0.1 million increase in current claims and a $0.2 million increase in our loss development reserves resulting from an actuarial analysis of our workers' compensation claims.

Operating Leases

. . .