The Saddlers dramatically turned defeat into an amazing win with three goals in an incredible eight minute spell early in the second half.
Walsall's win was their seventh successive victory and equalled a club record achieved in 1959.
For Forest boss Gary Megson he re-lived the nightmare when his former West Bromwich Albion side were similarly humiliated by the Saddlers before they went on to gain promotion two years ago.
There was little indication of a Walsall's success in the first half Forest played with the confidence of a team predicted to be promotion favourites but everything turned against the East Midland club in the second half.
With Megson as vocal as ever on the touchline the Trent-side club appeared to have an edge before the game turned upside down in a dramatic second half.
Danny Cullip demonstrated Forest's early superiority as he completely shut out the threat of Matty Fryatt in the opening 45 minutes with the result being that Walsall were ineffective as an attacking unit in sharp contrast to their second half performance.
As a result it was hardly a surprise when Forest went ahead in the 36th minute when Nicky Eaden whipped in a cross from the right which Kris Commons hammered
first time past Andy Oakes.
But Forest were unable to add to their advantage before the break which corresponded with the introduction of Walsall's Mark Wright for Michael Standing.
The effect was immediate and startling in as much that Wright popped up just outside Forest's penalty area to hit a rasping shot past Rune Pedersen for the equaliser in the 50th minute.
There was ever more joy two minutes later when a Kris Taylor free-kick was parried by Pedersen and Chris Westwood was on hand to tap the ball home from close range.
Walsall's good fortune continued in a hectic spell which culminated in them increasing their lead in the 58th minute to the consternation of Megson.
Jorge Leitao chased a cross-ball from the left and clashed with Pedersen, who was alleged to have impeded the Walsall striker.
Pedersen was sent off and, from the resultant penalty, Fryatt increased Walsall's lead to the amazement of the home fans and a demoralised Forest side who snatched an 85th second goal through David Friio.