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U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON DC 20549



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FORM 10-Q



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(Mark One)

|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------

For the quarterly period ended September 29, 2007



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -----------------------------------------------------------------------------------

For the transition period from
 to
 .

Commission File No. 0-28452



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VELOCITY EXPRESS CORPORATION

(Exact name of registrant as specified in its charter)



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|                                               |  |                                  
|---------------------------------------------- |  | ---------------------------------
|Delaware                                       |  | 87-0355929                       
|(State or other jurisdiction of incorporation) |  | (IRS Employer Identification No.)

One Morningside Drive North, Bldg. B, Suite 300,

Westport, Connecticut 06880

(Address
of Principal Executive Offices including Zip Code)

(203) 349-4160

(Registrants telephone number, including area code)



---

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act
of 1934    YES ̈NO  x

As of November 9, 2006, there were 42,468,734 shares of common stock of the registrant issued and outstanding.



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##### Table of Contents

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

INDEX TO FORM 10-Q

September 29, 2007



|          |  |                                                                                                                                        |  |     
|--------- |  | -------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|          |  |                                                                                                                                        |  | Page
|PART I.   |  | FINANCIAL INFORMATION                                                                                                                  |  | 3   
|          |  |                                                                                                                                       
|ITEM 1.   |  | Financial Statements                                                                                                                   |  |     
|          |  |                                                                                                                                       
|          |  | Consolidated Balance Sheets as of September 29, 2007 and June 30, 2007                                                                 |  | 3   
|          |  |                                                                                                                                       
|          |  | Consolidated Statements of Operations for the Three Months Ended September 29, 2007 and September 30, 2006                             |  | 4   
|          |  |                                                                                                                                       
|          |  | Condensed Consolidated Statement of Shareholders Equity and Comprehensive Income (Loss) for the Three Months Ended September 29, 2007 |  | 5   
|          |  |                                                                                                                                       
|          |  | Consolidated Statements of Cash Flows for the Three Months Ended September 29, 2007 and September 30, 2006                             |  | 6   
|          |  |                                                                                                                                       
|          |  | Notes to the Condensed Consolidated Financial Statements                                                                               |  | 7   
|          |  |                                                                                                                                       
|ITEM 2.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                  |  | 18  
|          |  |                                                                                                                                       
|ITEM 3.   |  | Quantitative and Qualitative Disclosures About Market Risk                                                                             |  | 25  
|          |  |                                                                                                                                       
|ITEM 4.   |  | Controls and Procedures                                                                                                                |  | 25  
|          |  |                                                                                                                                       
|PART II.  |  | OTHER INFORMATION                                                                                                                      |  | 26  
|          |  |                                                                                                                                       
|ITEM 1.   |  | Legal Proceedings                                                                                                                      |  | 26  
|          |  |                                                                                                                                       
|ITEM 1A.  |  | Risk Factors                                                                                                                           |  | 27  
|          |  |                                                                                                                                       
|ITEM 2.   |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                            |  | 36  
|          |  |                                                                                                                                       
|ITEM 3.   |  | Defaults Upon Senior Securities                                                                                                        |  | 36  
|          |  |                                                                                                                                       
|ITEM 4.   |  | Submission of Matters to a Vote of Security Holders                                                                                    |  | 36  
|          |  |                                                                                                                                       
|ITEM 5.   |  | Other Information                                                                                                                      |  | 36  
|          |  |                                                                                                                                       
|ITEM 6.   |  | Exhibits                                                                                                                               |  | 36  
|          |  |                                                                                                                                       
|SIGNATURE |  |                                                                                                                                        |  | 37  



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##### Table of Contents

PART I.



|ITEM 1. | FINANCIAL STATEMENTS.
|------- | ---------------------

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Amounts in thousands, except
par value)



|                                                                                                                                                                     |  |                   |          |   |              |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ------------ | - | -------- | -
|                                                                                                                                                                     |  | September 29,2007 |          |   | June 30,2007 |  
|ASSETS                                                                                                                                                               |  |                   |          |   |              |   |          |  
|Current assets:                                                                                                                                                      |  |                   |          |   |              |   |          |  
|Cash                                                                                                                                                                 |  | $                 | 11,020   |   |              | $ | 14,418   |  
|Accounts receivable, net of allowance of $ 3,194 and $ 3,277 at September 29, 2007 and June 30, 2007, respectively                                                   |  |                   | 32,268   |   |              |   | 32,597   |  
|Accounts receivableother                                                                                                                                            |  |                   | 1,112    |   |              |   | 1,250    |  
|Prepaid workers compensation and auto liability insurance                                                                                                           |  |                   | 2,594    |   |              |   | 3,404    |  
|Other prepaid expenses and other current assets                                                                                                                      |  |                   | 502      |   |              |   | 1,031    |  
|                                                                                                                                                                     |  |                   |          |   |              |   |          |  
|Total current assets                                                                                                                                                 |  |                   | 47,496   |   |              |   | 52,700   |  
|Property and equipment, net                                                                                                                                          |  |                   | 8,735    |   |              |   | 8,457    |  
|Assets held for sale                                                                                                                                                 |  |                   |         |   |              |   | 101      |  
|Goodwill                                                                                                                                                             |  |                   | 81,791   |   |              |   | 81,791   |  
|Intangible assets, net                                                                                                                                               |  |                   | 23,646   |   |              |   | 24,327   |  
|Deferred financing costs, net                                                                                                                                        |  |                   | 5,708    |   |              |   | 6,246    |  
|Other assets                                                                                                                                                         |  |                   | 2,727    |   |              |   | 2,888    |  
|                                                                                                                                                                     |  |                   |          |   |              |   |          |  
|Total assets                                                                                                                                                         |  | $                 | 170,103  |   |              | $ | 176,510  |  
|                                                                                                                                                                     |  |                   |          |   |              |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                 |  |                   |          |   |              |   |          |  
|Current liabilities:                                                                                                                                                 |  |                   |          |   |              |   |          |  
|Trade accounts payable                                                                                                                                               |  | $                 | 25,413   |   |              | $ | 28,413   |  
|Accrued wages and benefits                                                                                                                                           |  |                   | 3,908    |   |              |   | 3,643    |  
|Accrued legal and claims                                                                                                                                             |  |                   | 5,426    |   |              |   | 5,854    |  
|Accrued insurance and claims                                                                                                                                         |  |                   | 3,038    |   |              |   | 3,697    |  
|Accrued interest                                                                                                                                                     |  |                   | 3,357    |   |              |   | 5,867    |  
|Related party liabilities                                                                                                                                            |  |                   |         |   |              |   | 574      |  
|Other accrued liabilities                                                                                                                                            |  |                   | 3,922    |   |              |   | 3,383    |  
|Revolving line of credit                                                                                                                                             |  |                   | 8,952    |   |              |   | 7,467    |  
|Current portion of long-term debt                                                                                                                                    |  |                   | 815      |   |              |   | 558      |  
|                                                                                                                                                                     |  |                   |          |   |              |   |          |  
|Total current liabilities                                                                                                                                            |  |                   | 54,831   |   |              |   | 59,456   |  
|Long-term debt, less current portion                                                                                                                                 |  |                   | 57,634   |   |              |   | 55,510   |  
|Accrued insurance and claims                                                                                                                                         |  |                   | 1,799    |   |              |   | 1,882    |  
|Other long-term liabilities                                                                                                                                          |  |                   | 3,960    |   |              |   | 4,018    |  
|Commitments and contingencies                                                                                                                                        |  |                   |          |   |              |   |          |  
|Shareholders equity:                                                                                                                                                |  |                   |          |   |              |   |          |  
|Preferred stock, $ 0.004 par value, 299,515 shares authorized, 12,069 and 12,239 shares issued and outstanding at September 29, 2007 and
June 30, 2007, respectively |  |                   | 68,431   |   |              |   | 68,902   |  
|Common stock, $ 0.004 par value, 700,000 shares authorized, 41,277 and 32,820 shares issued and outstanding at September 29, 2007 and
June 30, 2007, respectively    |  |                   | 165      |   |              |   | 131      |  
|Stock subscription receivable                                                                                                                                        |  |                   | (249     | ) |              |   |         |  
|Additional paid-in-capital                                                                                                                                           |  |                   | 384,278  |   |              |   | 376,041  |  
|Accumulated deficit                                                                                                                                                  |  |                   | (400,641 | ) |              |   | (389,497 | )
|Accumulated other comprehensive (loss) income                                                                                                                        |  |                   | (105     | ) |              |   | 67       |  
|                                                                                                                                                                     |  |                   |          |   |              |   |          |  
|Total shareholders equity                                                                                                                                           |  |                   | 51,879   |   |              |   | 55,644   |  
|                                                                                                                                                                     |  |                   |          |   |              |   |          |  
|Total liabilities and shareholders equity                                                                                                                           |  | $                 | 170,103  |   |              | $ | 176,510  |  
|                                                                                                                                                                     |  |                   |          |   |              |   |          |  

See notes to condensed consolidated financial statements



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##### Table of Contents

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Amounts in thousands, except
per share data)



|                                                                                                              |  |                    |         |   |                   |   |         |  
|------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                                                                                                              |  | Three Months Ended |        
|                                                                                                              |  | September 29,2007  |         |   | September 30,2006 |  
|Revenue                                                                                                       |  | $                  | 93,307  |   |                   | $ | 111,094 |  
|Cost of services                                                                                              |  |                    | 70,167  |   |                   |   | 83,515  |  
|Depreciation                                                                                                  |  |                    | 301     |   |                   |   | 31      |  
|                                                                                                              |  |                    |         |   |                   |   |         |  
|Gross profit                                                                                                  |  |                    | 22,839  |   |                   |   | 27,548  |  
|Operating expenses:                                                                                           |  |                    |         |   |                   |   |         |  
|Occupancy                                                                                                     |  |                    | 4,630   |   |                   |   | 4,657   |  
|Selling, general and administrative                                                                           |  |                    | 18,509  |   |                   |   | 22,330  |  
|                                                                                                              |  |                    |         |   |                   |   |         |  
|                                                                                                              |  |                    | 23,139  |   |                   |   | 26,987  |  
|Transaction and integration costs                                                                             |  |                    | 501     |   |                   |   | 1,756   |  
|Restructuring charges and asset impairments                                                                   |  |                    | 274     |   |                   |   | 1,173   |  
|Depreciation and amortization                                                                                 |  |                    | 1,476   |   |                   |   | 2,065   |  
|                                                                                                              |  |                    |         |   |                   |   |         |  
|Total operating expenses                                                                                      |  |                    | 25,390  |   |                   |   | 31,981  |  
|                                                                                                              |  |                    |         |   |                   |   |         |  
|Loss from operations                                                                                          |  |                    | (2,551  | ) |                   |   | (4,433  | )
|Other income (expense):                                                                                       |  |                    |         |   |                   |   |         |  
|Interest expense, net                                                                                         |  |                    | (4,872  | ) |                   |   | (6,174  | )
|Other                                                                                                         |  |                    | 1       |   |                   |   | 180     |  
|                                                                                                              |  |                    |         |   |                   |   |         |  
|Loss before income taxes and minority interest                                                                |  |                    | (7,422  | ) |                   |   | (10,427 | )
|Income taxes                                                                                                  |  |                    | 100     |   |                   |   | 9       |  
|Minority interest                                                                                             |  |                    |        |   |                   |   | 367     |  
|                                                                                                              |  |                    |         |   |                   |   |         |  
|Net loss                                                                                                      |  | $                  | (7,522  | ) |                   | $ | (10,803 | )
|                                                                                                              |  |                    |         |   |                   |   |         |  
|Net loss applicable to common shareholders                                                                    |  | $                  | (11,144 | ) |                   | $ | (30,890 | )
|                                                                                                              |  |                    |         |   |                   |   |         |  
|Basic and diluted net loss per share                                                                          |  | $                  | (0.28   | ) |                   | $ | (1.42   | )
|                                                                                                              |  |                    |         |   |                   |   |         |  
|Weighted average common stock shares outstanding used in the basic and diluted net loss per share calculation |  |                    | 39,631  |   |                   |   | 21,830  |  
|                                                                                                              |  |                    |         |   |                   |   |         |  

See notes to condensed consolidated financial statements



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VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
AND COMPREHENSIVE INCOME (LOSS)

Unaudited

(Amounts in thousands)



|                                                       |  |                          |   |  |                          |        |   |                          |      |                          |        |                          |        |        |  |        |  |        |       |        |       |        |   |       |        |       |   |  |   |        |  
|------------------------------------------------------ |  | ------------------------ | - |  | ------------------------ | ------ | - | ------------------------ | ---- | ------------------------ | ------ | ------------------------ | ------ | ------ |  | ------ |  | ------ | ----- | ------ | ----- | ------ | - | ----- | ------ | ----- | - |  | - | ------ | -
|                                                       |  | Series M Preferred Stock |   |  | Series N Preferred Stock |        |   | Series O Preferred Stock |      | Series P Preferred Stock |        | Series Q Preferred Stock |       
|                                                       |  | Shares                   |   |  | Amount                   |        |   | Shares                   |      |                          | Amount |                          |        | Shares |  | Amount |  | Shares |       | Amount |       | Shares |   |       | Amount |      
|Balance at June 30, 2007                               |  | 4,209                    |   |  | $                        | 14,732 |   |                          | 992  |                          |        | $                        | 3,422  |        |  | 504    |  | $      | 1,939 |        | 1,872 |        | $ | 4,572 |        | 4,662 |   |  | $ | 44,237 |  
|                                                       |  |                          |   |  |                          |        |   |                          |      |                          |        |                          |        |        |  |        |  |        |       |        |       |        |   |       |        |       |   |  |   |        |  
|Stock option and warrant expense                       |  |                         |   |  |                          |       |   |                          |     |                          |        |                          |       |        |  |       |  |        |      |        |      |        |   |      |        |      |   |  |   |       |  
|Issuance of Common Stock                               |  |                         |   |  |                          |       |   |                          |     |                          |        |                          |       |        |  |       |  |        |      |        |      |        |   |      |        |      |   |  |   |       |  
|Offering costs                                         |  |                         |   |  |                          |       |   |                          |     |                          |        |                          |       |        |  |       |  |        |      |        |      |        |   |      |        |      |   |  |   |       |  
|Conversion of preferred stock to Common Stock          |  | (34                      | ) |  |                          | (127   | ) |                          | (279 | )                        |        |                          | (1,027 | )      |  |       |  |        |      |        |      |        |   |      |        | (43   | ) |  |   | (434   | )
|Preferred Stock PIK dividends earned                   |  |                         |   |  |                          |       |   |                          |     |                          |        |                          |       |        |  |       |  |        |      |        |      |        |   |      |        |      |   |  |   |       |  
|Issuance of preferred stock for dividends paid-in-kind |  | 64                       |   |  |                          | 234    |   |                          | 13   |                          |        |                          | 46     |        |  | 8      |  |        | 32    |        | 31    |        |   | 102   |        | 70    |   |  |   | 703    |  
|Beneficial conversion of preferred stock               |  |                         |   |  |                          |       |   |                          |     |                          |        |                          |       |        |  |       |  |        |      |        |      |        |   |      |        |      |   |  |   |       |  
|Net loss                                               |  |                         |   |  |                          |       |   |                          |     |                          |        |                          |       |        |  |       |  |        |      |        |      |        |   |      |        |      |   |  |   |       |  
|Foreign currency translation                           |  |                         |   |  |                          |       |   |                          |     |                          |        |                          |       |        |  |       |  |        |      |        |      |        |   |      |        |      |   |  |   |       |  
|Comprehensive loss                                     |  |                         |   |  |                          |       |   |                          |     |                          |        |                          |       |        |  |       |  |        |      |        |      |        |   |      |        |      |   |  |   |       |  
|                                                       |  |                          |   |  |                          |        |   |                          |      |                          |        |                          |        |        |  |        |  |        |       |        |       |        |   |       |        |       |   |  |   |        |  
|Balance at September 29, 2007                          |  | 4,239                    |   |  | $                        | 14,839 |   |                          | 726  |                          |        | $                        | 2,441  |        |  | 512    |  | $      | 1,971 |        | 1,903 |        | $ | 4,674 |        | 4,689 |   |  | $ | 44,506 |  
|                                                       |  |                          |   |  |                          |        |   |                          |      |                          |        |                          |        |        |  |        |  |        |       |        |       |        |   |       |        |       |   |  |   |        |  



|                                                       |  |                 |   |  |              |        |              |        |        |         |   |            |             |   |         |          |  |         |         |   |             |   |          |       |  |   |      |   |  |   |        |  
|------------------------------------------------------ |  | --------------- | - |  | ------------ | ------ | ------------ | ------ | ------ | ------- | - | ---------- | ----------- | - | ------- | -------- |  | ------- | ------- | - | ----------- | - | -------- | ----- |  | - | ---- | - |  | - | ------ | -
|                                                       |  | Total           |   |  |              |        |              |        | Stock  |         |   | Additional |             |   |         |          |  | Foreign |         |   |             |  
|                                                       |  | Preferred Stock |   |  | Common Stock |        | Subscription |        |        | Paid-in |   |            | Accumulated |   |         | Currency |  |         |         |  
|                                                       |  | Shares          |   |  | Amount       |        |              | Shares |        | Amount  |   | Receivable |             |   | Capital |          |  | Deficit |         |   | Translation |   |          | Total | 
|Balance at June 30, 2007                               |  | 12,239          |   |  | $            | 68,902 |              |        | 32,820 |         | $ | 131        |             | $ |        |          |  | $       | 376,041 |   |             | $ | (389,497 | )     |  | $ | 67   |   |  | $ | 55,644 |  
|                                                       |  |                 |   |  |              |        |              |        |        |         |   |            |             |   |         |          |  |         |         |   |             |   |          |       |  |   |      |   |  |   |        |  
|Stock option and warrant expense                       |  |                |   |  |              |       |              |        |       |         |   |           |             |   |        |          |  |         | 86      |   |             |   |         |       |  |   |     |   |  |   | 86     |  
|Issuance of Common Stock                               |  |                |   |  |              |       |              |        | 7,481  |         |   | 30         |             |   | (249    | )        |  |         | 4,311   |   |             |   |         |       |  |   |     |   |  |   | 4,092  |  
|Offering costs                                         |  |                |   |  |              |       |              |        |       |         |   |           |             |   |        |          |  |         | (249    | ) |             |   |         |       |  |   |     |   |  |   | (249   | )
|Conversion of preferred stock to Common Stock          |  | (356            | ) |  |              | (1,588 | )            |        | 976    |         |   | 4          |             |   |        |          |  |         | 1,584   |   |             |   |         |       |  |   |     |   |  |   |       |  
|Preferred Stock PIK dividends earned                   |  |                |   |  |              |       |              |        |       |         |   |           |             |   |        |          |  |         | 183     |   |             |   | (886     | )     |  |   |     |   |  |   | (703   | )
|Issuance of preferred stock for dividends paid-in-kind |  | 186             |   |  |              | 1,117  |              |        |       |         |   |           |             |   |        |          |  |         |        |   |             |   | (414     | )     |  |   |     |   |  |   | 703    |  
|Beneficial conversion of preferred stock               |  |                |   |  |              |       |              |        |       |         |   |           |             |   |        |          |  |         | 2,322   |   |             |   | (2,322   | )     |  |   |     |   |  |   |       |  
|Net loss                                               |  |                |   |  |              |       |              |        |       |         |   |           |             |   |        |          |  |         |        |   |             |   | (7,522   | )     |  |   |     |   |  |   | (7,522 | )
|Foreign currency translation                           |  |                |   |  |              |       |              |        |       |         |   |           |             |   |        |          |  |         |        |   |             |   |         |       |  |   | (172 | ) |  |   | (172   | )
|                                                       |  |                 |   |  |              |        |              |        |        |         |   |            |             |   |         |          |  |         |         |   |             |   |          |       |  |   |      |   |  |   |        |  
|Comprehensive loss                                     |  |                |   |  |              |       |              |        |       |         |   |           |             |   |        |          |  |         |        |   |             |   |         |       |  |   |     |   |  |   | (7,694 | )
|                                                       |  |                 |   |  |              |        |              |        |        |         |   |            |             |   |         |          |  |         |         |   |             |   |          |       |  |   |      |   |  |   |        |  
|Balance at September 29, 2007                          |  | 12,069          |   |  | $            | 68,431 |              |        | 41,277 |         | $ | 165        |             | $ | (249    | )        |  | $       | 384,278 |   |             | $ | (400,641 | )     |  | $ | (105 | ) |  | $ | 51,879 |  
|                                                       |  |                 |   |  |              |        |              |        |        |         |   |            |             |   |         |          |  |         |         |   |             |   |          |       |  |   |      |   |  |   |        |  

See notes to condensed consolidated financial statements



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##### Table of Contents

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)



|                                                                                  |  |                    |        |   |                   |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------- | -
|                                                                                  |  | Three Months Ended |       
|                                                                                  |  | September 29,2007  |        |   | September 30,2006 |  
|OPERATING ACTIVITIES                                                              |  |                    |        |   |                   |   |         |  
|Net loss                                                                          |  | $                  | (7,522 | ) |                   | $ | (10,803 | )
|Adjustments to reconcile net loss to net cash flows used in operating activities: |  |                    |        |   |                   |   |         |  
|Depreciation and amortization of intangibles                                      |  |                    | 1,777  |   |                   |   | 2,096   |  
|Accretion of interest and amortization of debt issue costs                        |  |                    | 2,501  |   |                   |   | 4,582   |  
|Stock option and warrant expense                                                  |  |                    | 86     |   |                   |   | 235     |  
|Change in fair value of settlement liability                                      |  |                    |       |   |                   |   | (180    | )
|Provision for doubtful accounts                                                   |  |                    |       |   |                   |   | 345     |  
|Asset impairments                                                                 |  |                    |       |   |                   |   | 18      |  
|Loss on the sale of assets                                                        |  |                    | 9      |   |                   |   | 66      |  
|Change in operating assets and liabilities:                                       |  |                    |        |   |                   |   |         |  
|Accounts receivable                                                               |  |                    | 329    |   |                   |   | 1,621   |  
|Other current assets                                                              |  |                    | 1,477  |   |                   |   | (3,544  | )
|Other assets                                                                      |  |                    | 157    |   |                   |   | (249    | )
|Accounts payable                                                                  |  |                    | (3,000 | ) |                   |   | (7,039  | )
|Accrued liabilities                                                               |  |                    | (3,667 | ) |                   |   | 5,163   |  
|                                                                                  |  |                    |        |   |                   |   |         |  
|Cash used in operating activities                                                 |  |                    | (7,853 | ) |                   |   | (7,689  | )
|                                                                                  |  |                   
|INVESTING ACTIVITIES                                                              |  |                    |        |   |                   |   |         |  
|Proceeds from sale of assets                                                      |  |                    | 157    |   |                   |   | 76      |  
|Purchases of property and equipment                                               |  |                    | (511   | ) |                   |   | (298    | )
|Acquisition of CD&L (net of cash acquired of $ 531)                               |  |                    |       |   |                   |   | (53,145 | )
|                                                                                  |  |                    |        |   |                   |   |         |  
|Cash used in investing activities                                                 |  |                    | (354   | ) |                   |   | (53,367 | )
|                                                                                  |  |                   
|FINANCING ACTIVITIES                                                              |  |                    |        |   |                   |   |         |  
|Proceeds from new revolving credit facility, net                                  |  |                    | 1,485  |   |                   |   |        |  
|Repayments of revolving credit agreements, net                                    |  |                    |       |   |                   |   | (20,547 | )
|Repayment of CD&Ls line of credit facility                                       |  |                    |       |   |                   |   | (9,371  | )
|Proceeds from notes payable and warrants, net                                     |  |                    |       |   |                   |   | 63,596  |  
|Payments of notes payable and long-term debt                                      |  |                    | (256   | ) |                   |   | (7,396  | )
|Proceeds from issuance of preferred stock, net                                    |  |                    |       |   |                   |   | 42,813  |  
|Proceeds from issuance of common stock, net                                       |  |                    | 3,580  |   |                   |   |        |  
|                                                                                  |  |                    |        |   |                   |   |         |  
|Cash provided by financing activities                                             |  |                    | 4,809  |   |                   |   | 69,095  |  
|                                                                                  |  |                    |        |   |                   |   |         |  
|Net change in cash                                                                |  |                    | (3,398 | ) |                   |   | 8,039   |  
|                                                                                  |  |                    |        |   |                   |   |         |  
|Cash, beginning of period                                                         |  |                    | 14,418 |   |                   |   | 1,715   |  
|                                                                                  |  |                    |        |   |                   |   |         |  
|Cash, end of period                                                               |  | $                  | 11,020 |   |                   | $ | 9,754   |  
|                                                                                  |  |                    |        |   |                   |   |         |  

See notes to condensed consolidated financial statements



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##### Table of Contents

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements



---

1. DESCRIPTION OF BUSINESS

Velocity Express Corporation and its subsidiaries (collectively, the Company) are engaged in the business of providing same-day
time-critical logistics solutions to individual consumers and businesses. The Company operates primarily in the United States with limited operations in Canada. The Company currently operates in a single-business segment.

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The condensed consolidated financial statements included herein have been prepared by the Company, pursuant to the rules and regulations of
the Securities and Exchange Commission. In the opinion of the Company, all adjustments consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company as of September 29, 2007 and the results
of its operations and its cash flows for the three months ended September 29, 2007, have been included. The results of operations for the three months ended September 29, 2007 are not necessarily indicative of the results that may be
expected for the fiscal year ending June 28, 2008. Certain information in footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant
to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.

These condensed consolidated financial statements should be read in conjunction with the financial statements for the year ended June 30, 2007, and the footnotes thereto, included in the Companys Report on Form 10-K, as amended,
filed with the Securities and Exchange Commission for such fiscal year. In connection with the preparation of such consolidated financial statements for the years ended June 30, 2007 and July 1, 2006, due to resource constraints, a
material weakness became evident to management regarding the Companys inability to simultaneously close the books on a timely basis each month and generate all the necessary disclosures for inclusion in its filings with the Securities and
Exchange Commission. A material weakness is a significant deficiency in one or more of the internal control components that alone or in the aggregate precludes the Companys internal controls from reducing to an appropriately low level the risk
that material misstatements in its financial statements will not be prevented or detected on a timely basis.

Principles of Consolidation

The consolidated financial statements include the accounts of Velocity Express Corporation and its wholly-owned subsidiaries. All
intercompany balances and transactions have been eliminated in consolidation.

On July 3, 2006, the Company entered into a merger
agreement with CD&L, Inc., (CD&L) another leading provider of time-definite logistics services. Contemporaneously with the signing of the merger agreement, the Company acquired approximately 49% of CD&Ls outstanding
common stock. Also on July 3, 2006, the Company entered into voting agreements with certain officers and directors of CD&L, whereby they agreed to vote in favor of the merger. As a result of the foregoing, the Company had control over a
majority of CD&Ls voting shares. Consequently, the financial statements of CD&L have been consolidated with those of the Company since July 3, 2006. On August 17, 2006, the Company acquired the remaining outstanding common
stock. For the period from July 3, 2006 to August 17, 2006, the Company recorded minority interest for the portion of the CD&L voting shares not controlled. Because of the merger, period-to-period comparisons of the Companys
financial results are not necessarily meaningful and should not be relied upon as an indication of future performance.

The consolidated
financial statements include the financial position and results of operations of Peritas LLC (Peritas) as required by FASB Interpretation No. 46R, Consolidation of Variable Interest



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##### Table of Contents

Entities (FIN No. 46). The accompanying financial statements for the quarters ended September 29, 2007 and September 30,
2006 include nil and $0.2 million, respectively, in revenue related to Peritas. Net loss related to Peritas was de minimis for both the quarter ended September 29, 2007 and the quarter ended September 30, 2006.

Use of Estimates

The preparation of financial
statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Concentrations of Credit Risk

The Company places its cash with federally insured financial
institutions. At times, such cash balances may be in excess of the federally insured limit. Concentrations of credit risk with respect to accounts receivable is limited due to the wide variety of customers to which the Companys services are
sold and the dispersion of those services across many industries and geographic areas. The Company has one customer that accounted for 15.2% and 11.2% of its revenues for the three months ended September 29, 2007 and September 30, 2006,
respectively. No other customers have revenues in excess of 10%. The Company performs credit evaluation procedures on its customers and generally does not require collateral on its accounts receivable. An allowance for doubtful accounts is reviewed
periodically based on the Companys historical collection experience, current trends, credit policy and a percentage of accounts receivable by aging category. At September 29, 2007 and June 30, 2007, no single customer had an accounts
receivable balance greater than 10% of the Companys total trade accounts receivable.

Comprehensive Loss

Comprehensive loss is as follows (in thousands):



|                             |  |                    |        |   |                    |   |         |  
|---------------------------- |  | ------------------ | ------ | - | ------------------ | - | ------- | -
|                             |  | Three Months Ended |       
|                             |  | September 29, 2007 |        |   | September 30, 2006 |  
|Net loss                     |  | $                  | (7,522 | ) |                    | $ | (10,803 | )
|Foreign currency translation |  |                    | (172   | ) |                    |   | 2       |  
|                             |  |                    |        |   |                    |   |         |  
|Comprehensive loss           |  | $                  | (7,694 | ) |                    | $ | (10,801 | )
|                             |  |                    |        |   |                    |   |         |  



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##### Table of Contents

Earnings Per Share

Basic earnings per share is computed based on the weighted average number of common shares outstanding by dividing net income or loss applicable to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other obligations to issue common stock such as options, warrants or convertible preferred stock, were exercised or converted
into common stock that then shared in the earnings of the Company.

The following table sets forth a reconciliation of the numerators and
denominators of basic and diluted net loss per common share:



|                                                     |  |                                               |         |   |                    |   |         |  
|---------------------------------------------------- |  | --------------------------------------------- | ------- | - | ------------------ | - | ------- | -
|                                                     |  | Three Months                                  |        
|                                                     |  | September 29, 2007                            |         |   | September 30, 2006 |  
|                                                     |  | (Amounts in thousands, except per share data) |        
|Numerator                                            |  |                                               |         |   |                    |   |         |  
|Net loss                                             |  | $                                             | (7,522  | ) |                    | $ | (10,803 | )
|Beneficial conversion feature for Series N Preferred |  |                                               | (154    | ) |                    |   | (2,325  | )
|Beneficial conversion feature for Series O Preferred |  |                                               | (61     | ) |                    |   | (918    | )
|Beneficial conversion feature for Series P Preferred |  |                                               | (194    | ) |                    |   | (2,295  | )
|Beneficial conversion feature for Series Q Preferred |  |                                               | (1,913  | ) |                    |   | (13,349 | )
|Series M Preferred dividends paid-in-kind            |  |                                               | (312    | ) |                    |   | (295    | )
|Series N Preferred dividends paid-in-kind            |  |                                               | (62     | ) |                    |   | (84     | )
|Series O Preferred dividends paid-in-kind            |  |                                               | (42     | ) |                    |   | (30     | )
|Series P Preferred dividends paid-in-kind            |  |                                               | (171    | ) |                    |   | (124    | )
|Series Q Preferred dividends paid-in-kind            |  |                                               | (713    | ) |                    |   | (667    | )
|                                                     |  |                                               |         |   |                    |   |         |  
|Net loss applicable to common shareholders           |  | $                                             | (11,144 | ) |                    | $ | (30,890 | )
|                                                     |  |                                               |         |   |                    |   |         |  
|Denominator for basic and diluted loss per share     |  |                                               |         |   |                    |   |         |  
|Weighted average common stock shares outstanding     |  |                                               | 39,631  |   |                    |   | 21,830  |  
|                                                     |  |                                               |         |   |                    |   |         |  
|Basic and Diluted Loss Per Share                     |  | $                                             | (0.28   | ) |                    | $ | (1.42   | )
|                                                     |  |                                               |         |   |                    |   |         |  

The following table presents securities that could be converted into common shares and potentially
dilute basic earnings per share in the future. In the three-month periods ended September 29, 2007 and September 30, 2006, the potentially dilutive securities were not included in the computation of diluted earnings per share because to do
so would have been antidilutive:



|                               |  |                        |  |                  
|------------------------------ |  | ---------------------- |  | -----------------
|                               |  | September 29,2007      |  | September 30,2006
|                               |  | (Amounts in thousands)
|Stock options                  |  | 424                    |  | 1,357            
|Common stock warrants          |  | 28,981                 |  | 30,023           
|Convertible preferred stock:   |  |                        |  |                  
|Series M Convertible Preferred |  | 7,802                  |  | 9,460            
|Series N Convertible Preferred |  | 1,839                  |  | 2,494            
|Series O Convertible Preferred |  | 1,015                  |  | 924              
|Series P Convertible Preferred |  | 5,277                  |  | 5,029            
|Series Q Convertible Preferred |  | 43,749                 |  | 44,082           
|                               |  |                        |  |                  
|                               |  | 89,086                 |  | 93,368           
|                               |  |                        |  |                  



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##### Table of Contents

New Accounting Pronouncements

In June 2006 the FASB issued Financial Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes.FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in an enterprises financial statements in accordance with SFAS 109, Accounting for Income Taxes.FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006, which means that it is effective for our current fiscal year beginning July 1, 2007. The adoption of FIN 48 did not have a material effect on the Companys financial statements.

In February 2007 the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities.SFAS 159
provides companies with an option to report selected financial assets and liabilities at fair value at specific election dates. SFAS 159s objective is to improve financial reporting by reducing both complexity in accounting for financial
instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS 159 requires companies to provide additional information that will help users of financial statements to more easily understand the
effect of the Companys choice to use fair value on its earnings. SFAS 159 also requires companies to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet.
The new standard does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in SFAS 157, Fair Value Measurements,and SFAS 107,
Disclosures about Fair Value of Financial Instruments.SFAS 159 is effective for fiscal years beginning after November 15, 2007, which means that it will be effective for the Companys fiscal year beginning June 29,
2008. The Company is in the process of evaluating SFAS 159 and therefore has not yet determined the effect that the adoption will have on its financial statements.

3. RESTRUCTURING CHARGES AND ASSET IMPAIRMENTS

During fiscal 2007, in connection with the integration of CD&L, the
Companys management commenced its integration plan which included staff reduction of approximately 200 employees due to redundant positions, a retention incentive program for key individuals of CD&L and the designation of 39 operating
centers for closure. In connection with this integration plan, the Company recorded restructuring charges of approximately $1.0 million (reduced by $0.6 million in the second quarter of fiscal 2007) related to severance costs and retention
incentives and approximately $0.1 million in lease termination costs related to five facilities which closed during the three month period ended September 30, 2006. In addition, a charge of approximately $87,000 was recorded related to
revisions in the Companys estimates of previously recorded costs associated with prior period restructurings.

During the three month
period ended September 29, 2007, in response to the previously announced loss of the Companys largest financial services customer, the Companys management commenced a restructuring plan which primarily included severance costs of
approximately $0.2 million which is included with current accrued liabilities on the consolidated balance sheet.

A summary of the
restructuring liabilities and the activity for the period ended September 29, 2007 is as follows (amounts in thousands):



|                              |  |                                       |     |                    |   |          |  |   |                                    |   |                                            |   |     |  |   |    
|----------------------------- |  | ------------------------------------- | --- | ------------------ | - | -------- |  | - | ---------------------------------- | - | ------------------------------------------ | - | --- |  | - | ---
|                              |  | RestructuringLiabilitiesJune 30, 2007 |     | RestructuringCosts |   | Payments |  |   | Adjustmentsand Changesin Estimates |   | RestructuringLiabilitiesSeptember 29, 2007
|Employee termination benefits |  | $                                     | 32  |                    | $ | 171      |  | $ | (2                                 | ) |                                            | $ |    |  | $ | 201
|Lease termination costs       |  |                                       | 939 |                    |   |         |  |   | (346                               | ) |                                            |   | 103 |  | $ | 696
|                              |  |                                       |     |                    |   |          |  |   |                                    |   |                                            |   |     |  |   |    
|                              |  | $                                     | 971 |                    | $ | 171      |  | $ | (348                               | ) |                                            | $ | 103 |  | $ | 897
|                              |  |                                       |     |                    |   |          |  |   |                                    |   |                                            |   |     |  |   |    



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##### Table of Contents

4.DEBT

Revolving Credit Facility

Borrowings under the revolving credit agreement bear interest at a rate equal to, at the
borrowers option, either a base rate, or a LIBOR rate plus an applicable margin of 2.50%. The base rate is the rate of interest announced from time to time by Wells Fargo Bank, N.A. as the prime rate. The Companys borrowing rate at
September 29, 2007 was 7.75% and, in accordance with the terms of the agreement, the Company had $0.1 million in available borrowings.

In September 2007, the letter of credit securing the Company and its subsidiaries cash management obligations was reduced to zero as the Company moved its cash management obligations to another financial institution.

The revolving credit agreement contains a number of customary covenants that, among other things, restrict the borrowers and guarantors
ability to incur additional debt, create liens on assets, sell assets, pay dividends, engage in mergers and acquisitions, change the business conducted by the borrowers or guarantors, make capital expenditures and engage in transactions with
affiliates. The revolving credit agreement also includes a specified financial covenant requiring the borrowers to achieve a minimum EBITDA (as defined in the revolving credit agreement), measured on a month-end basis at the end of each calendar
quarter, and to certify compliance on a monthly basis. In connection with the revolving credit agreement, the Company also entered into a security agreement whereby the Companys obligations under the revolving credit agreement are secured by
substantially all of the assets of each borrower and each guarantor subject to the rights of the holders of the Senior Notes.

The Company
did not meet its minimum EBITDA levels contained in its credit agreement for the period ending July 28, 2007 and August 25, 2007. Wells, in its capacity as agent and lender, under the credit agreement granted the Company waivers. The
Company and the lenders entered into an amended agreement dated October 15, 2007 which provided for (1) revised monthly minimum EBITDA requirements and (2) an increase in the interest rate of 75 basis points in LIBOR margin (from 2.5%
to 3.25%) until trailing twelve month EBITDA equals $15.0 million, dropping 25 basis points when trailing twelve month EBITDA is greater than $15.0 million and reverting back to the original interest rate when trailing twelve month EBITDA is greater
than $20.0 million.

As a condition to and in connection with executing the Supplemental Indenture to the Senior Notes described below, the
Company entered into an amendment, effective as of July 13, 2007, to the revolving credit agreement. The Amendment: (i) permits the sale of the Companys Canadian subsidiary (or the assets thereof), (ii) provides that the Company
need not apply to repay borrowings under the Credit Agreement proceeds of the sale of the Companys Canadian subsidiary or certain treasury stock or offerings of equity, (iii) permits the increase of the interest rate on the Senior Notes
from 12.0% to 13.0% and (iv) establishes a borrowing base reserve of $400,000, which reserve shall be reduced to zero when the Company delivers to Wells, in its capacity as agent, its financial statements for its fiscal quarter ending
December 31, 2007, provided no event of default under the Credit Agreement then exists.



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##### Table of Contents

Long Term Debt

Long-term debt consists of the following:



|                                                       |  |                        |        |   |             |   |        |  
|------------------------------------------------------ |  | ---------------------- | ------ | - | ----------- | - | ------ | -
|                                                       |  | September 29,2007      |        |   | June 302007 |  
|                                                       |  | (Amounts in thousands) |       
|Senior Notes, net of discount of $ 21,548 at September |  | $                      | 56,657 |   |             | $ | 54,698 |  
|29, 2007 and $23,507 at June 30, 2007                  |  |                        |        |   |             |   |        |  
|Variable interest entity note                          |  |                        | 28     |   |             |   | 230    |  
|Capital leases                                         |  |                        | 1,616  |   |             |   | 982    |  
|Other                                                  |  |                        | 148    |   |             |   | 158    |  
|                                                       |  |                        |        |   |             |   |        |  
|                                                       |  |                        | 58,449 |   |             |   | 56,068 |  
|Less current maturities                                |  |                        | (815   | ) |             |   | (558   | )
|                                                       |  |                        |        |   |             |   |        |  
|Total Long Term Debt                                   |  | $                      | 57,634 |   |             | $ | 55,510 |  
|                                                       |  |                        |        |   |             |   |        |  

Senior Notes

The Company is accreting the difference between the carrying amount of the Senior Notes and their face value over the remaining term using the effective interest method. Total accretion in the three month period ended
September 29, 2007 was $2.0 million.

The Senior Notes bore interest at an annual rate of 12% at June 30, 2007. As discussed
below, the annual interest rate increased to 13% in July 2007. They may be redeemed at the Companys option after June 30, 2009, upon payment of the then applicable redemption price. Beginning 90 days after issuance, the Company may
also redeem up to 35% of the aggregate principal amount of the Senior Notes, with proceeds derived from the sale of Velocity capital stock. The Company may also redeem Senior Notes with proceeds derived from the exercise of warrants subject to
specified limits. In each instance, the optional redemption price is 112% of the principal balance of the Senior Notes redeemed if the redemption occurs before June 30, 2007; 106% if the redemption occurs between June 30, 2007 and
June 29, 2009; and 100% if the redemption occurs thereafter.

The Company must maintain $4.0 million of cash and cash equivalents on a
temporary basis, and a minimum of $31.0 million of cash, cash equivalents and qualified accounts receivable, increasing by $2.0 million per year on each anniversary date of the merger until maturity. If certain conditions are met, the $4.0
million of cash and cash equivalents will become permanent. If the conditions are not met, the minimum required cash and cash equivalents will increase to $8.5 million on May 15, 2008 and increasing $1.0 million per year on each anniversary date of
the merger. The indenture contains customary events of default.

On July 25, 2007, the Company entered into a third supplemental
indenture modifying the indenture governing their Senior Notes. The supplemental indenture (1) temporarily reduces the requirement that the Company maintain at all times cash and cash equivalents subject to specified liens under the minimum
cash covenant to $4.0 million through May 15, 2008, which becomes a permanent reduction upon satisfaction of certain conditions; (2) waives the requirement in the debt incurrence covenant regarding the reduction of the credit facility
basket with respect to the possible sale of the Companys Canadian subsidiary and (3) waives the requirement in the asset sales covenant that requires a permanent reduction in credit facilities from the net proceeds of asset sales with
respect to the possible sale of the Companys Canadian subsidiary. An allonge to the existing Senior Notes also raises the interest rate payable on the Notes from 12.0% to 13.0%.

5. AUTOMOBILE AND WORKERS COMPENSATION LIABILITIES

During the third quarter of fiscal year 2005, we
initiated an insurance program with minimal or no deductibles. Prior to that time, we maintained an insurance program with policies that had various higher deductible levels; and thus were partially self-insured for automobile and workers
compensation claims incurred during that period. The Company is also partially self-insured through high deductible policies for cargo claims. Provisions for losses expected under these programs are recorded based upon the Companys estimates
of the aggregate liability for claims incurred and applicable deductible levels. These estimates include the Companys actual experience based on information received from the Companys insurance



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##### Table of Contents

carriers and historical assumptions of development of unpaid liabilities over time. As of September 29, 2007 and June 30, 2006, the Company has
deposits with its insurance carrier of $0.4 million and $0.5 million, respectively.

The Company has established accruals for automobile
and workers compensation liabilities, which it believes are adequate. The Company reviews these matters, internally and with outside brokers, on a regular basis to evaluate the likelihood of losses, settlements and litigation related expenses.
The Company has managed to fund settlements and expenses through cash flow and believes that it will be able to do so going forward. There have not been any losses that have differed materially from the accrued estimated amounts. As of
September 29, 2007 and June 30, 2007, the Company has accrued approximately $2.3 million and $2.4 million, respectively, for case reserves plus development reserves and estimated losses incurred, but not reported.

In January 2007, the Company began insuring its workers compensation risks through insurance policies with substantial deductibles and retains risk
as a result of its deductibles related to such insurance policies. The Companys deductible for workers compensation is $500,000 per loss with an annual aggregate stop loss of approximately $1,600,000. The Company reserves the estimated
amounts of uninsured claims and deductibles related to such insurance retentions for claims that have occurred in the normal course of business. These reserves are established by management based upon the recommendations of third party
administrators who perform a specific review of open claims, which include fully developed estimates of both reported claims and incurred but not reported claims, as of the balance sheet date. Actual claim settlements may differ materially from
these estimated reserve amounts. As of September 29, 2007 and June 30, 2007, the Company has accrued approximately $1.5 million and $1.8 million, respectively for case reserves plus development reserves and estimated losses incurred,
but not reported.

6. SHAREHOLDERS EQUITY

The Company received a notice on June 29, 2007 from the NASDAQ Capital Stock Market (NASDAQ) that we are not in compliance with the Marketplace Rule 4310(c)(4) regarding the minimum bid requirement for the continued listing
of our common stock on the NASDAQ. We have a period of 180 days, until December 26, 2007, to attain compliance by maintaining a bid price of $1 for ten consecutive trading days. If we are unable to demonstrate bid price compliance by
December 26, 2007, but are found to meet all other initial listing requirements for the NASDAQ, we may receive an additional 180-day compliance period. If we do not meet compliance requirements within the second 180-day period, NASDAQ will
notify us that our common stock will be de-listed. Upon receiving this notice, we will file a current report on Form 8-K with the SEC disclosing that and related details. Although we may regain compliance with the NASDAQ listing requirements, the
negative publicity surrounding the receipt of this notice will likely have a material adverse effect on the price of our Common Stock, our ability to raise capital, whether debt or equity, in the future unless and until this situation is resolved
and will likely cause a negative perception of, and confidence in, us by our investors, customers, vendors, creditors and employees. Further failing to maintain our NASDAQ listing will result in our breaching covenants made to holders of our
preferred stock and certain warrants. We cannot assure you that we will be successful in regaining compliance with NASDAQs listing requirements. The Companys board of directors adopted a reverse stock split of the Companys
outstanding common stock whereby the Company will issue one new post-split share of common stock for ten pre-split shares. The reverse stock split is subject to shareholder approval.

In the event of delisting, trading, if any, would be conducted in the over-the-counter market in the so-called pink sheets or on the OTC
Bulletin Board. In addition, our securities could become subject to the SECs penny stock rules. These rules would impose additional requirements on broker-dealers who effect trades in our securities, other than trades with their
established customers and accredited investors. Consequently, the delisting of our securities and the applicability of the penny stock rules may adversely affect the ability of broker-dealers to sell our securities, which may adversely affect the
ability of our shareholders to resell our securities. If any of these events take place, shareholders may not be able to sell as many securities as they desire, you may experience delays in the execution of your transactions and our securities may
trade at a lower market price than they otherwise would.



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##### Table of Contents

Common stock

During the three month period ended September 29, 2007, the Company issued approximately 64,000; 505,000 and 407,000 shares of common stock as a result of shareholder conversions of Series M Convertible Preferred Stock, Series N
Convertible Preferred Stock, and Series Q Convertible Preferred Stock, respectively, within original terms of each respective agreement.

Warrant
Conversions

In connection with a consent solicitation from the holders of the Senior Notes, in July 2007, the Company raised
approximately $3.0 million from the exercise of approximately 6.0 million warrants in exchange for 6,481,203 shares of common stock. The warrants were exercised by the holders of the Senior Notes at an exercise price of $0.50 per warrant.
Conditions for the consents included the sale of the warrants and an increase of the interest rate on the Senior Notes to 13%. The warrants exercised contained an original exercise price of $1.45 per warrant; the inducement reducing the exercise
price by $0.95, from $1.45 to $0.50. The reduction in exercise price did not have any accounting consequence since the fair value of the modified warrant was less than the fair value of the original warrant immediately prior to the modification.

A summary of the status of the Companys common stock warrants outstanding as of September 29, 2007 and activity during the
three-month period then ended is presented below:



|                                                           |  |                   |   |  |                               |      |                                          |            |                                        |   |    
|---------------------------------------------------------- |  | ----------------- | - |  | ----------------------------- | ---- | ---------------------------------------- | ---------- | -------------------------------------- | - | ---
|                                                           |  | Number ofWarrants |   |  | WeightedAverageExercise Price |      | WeightedAverageRemainingContractual Life |            | AggregateIntrinsic Value(in thousands)
|Warrants Outstanding Beginning of Period                   |  | 29,771,987        |   |  | $                             | 4.34 |                                          |            |                                        |   |    
|Granted                                                    |  |                  |   |  | $                             |     |                                          |            |                                        |   |    
|Exercised                                                  |  | (6,003,788        | ) |  | $                             | 0.50 |                                          |            |                                        |   |    
|Forfeit/Expired                                            |  | (74,867           | ) |  | $                             | 2.72 |                                          |            |                                        |   |    
|                                                           |  |                   |   |  |                               |      |                                          |            |                                        |   |    
|Warrants outstanding and exercisable at September 29, 2007 |  | 23,693,332        |   |  | $                             | 1.49 |                                          | 2.76 years |                                        | $ | 531
|                                                           |  |                   |   |  |                               |      |                                          |            |                                        |   |    

Management Stock Purchase

In June 2007, management of the Company and certain key advisors entered into binding agreements to purchase approximately 1 million shares of Common Stock at a purchase price of $1.10 per share. As of
June 30, 2007, the Company received $573,000 from management as advances related to the stock purchase. An additional $68,000 was received in July 2007 and the Company recorded a stock subscription receivable of $417,000. The remainder of the
balance due from management of approximately $249,000 as of September 29, 2007 is classified as a subscription receivable on the consolidated balance sheet and will be paid by payroll deductions or scheduled monthly payments.

7. LITIGATION

The Company is subject to legal
proceedings and claims that arise in the ordinary course of their business. The Company determined the amount of its legal accrual with respect to these matters in accordance with generally accepted accounting principles based on managements
estimate of the probable liability. In the opinion of management, none of these legal proceedings or claims is expected to have a material adverse effect upon the Companys financial position or results of operations. However, the impact on
cash flows might be material in the periods such claims are settled and paid.



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Office Depot, Inc., previously one of the Companys largest customers, terminated its agreements
with the Company in late October 2006. The Company believes that Office Depot did so in violation of the agreements, which provided for termination only upon: (a) 60 days prior notice if the termination is without cause; and (b) if the
termination is with cause, then upon 30 days notice, with the opportunity to cure. Office Depots termination was for alleged cause and provided no opportunity to cure as the termination was effective virtually immediately.

Consequently, on Friday, May 4, 2007, Velocity filed suit against Office Depot in Superior Court of Kent County, Delaware. That suit seeks three
separate forms of relief. The first claim is for almost $600,000 for unpaid invoices. The second claim is for approximately $3.1 million resulting from Office Depots failure to pay the minimums required of it pursuant to the agreements. The
third claim is for damages resulting from the improper termination, including loss of contributions to Velocitys profit resulting from the alleged improper termination. The damages for the last claim assume that the improperly cancelled
agreements would have remained in effect at least another year. Office Depot filed its answer on July 18, 2007. Discovery is ongoing. There is no assurance the Company will be successful in pursuing this lawsuit, that Office Depot will not file
a claim against us, or that the legal costs in doing so will outweigh any amounts received from Office Depot.

In connection with the
CD&L acquisition, the Company assumed a reserve for a tentative settlement of a tax assessment against CD&L in the State of California. The assessment resulted from an audit of CD&Ls subsidiary, Clayton/National Courier Systems,
Inc. by the California Employment Development Department (the EDD). On July 13, 2007, the Company finalized the settlement with the EDD which requires the Company to make certain payments and provide certain insurance coverage for
its independent contractor drivers. The agreement does not constitute an admission or determination as to worker classification related to any of the drivers covered by the agreement.

In January 2007, two Notices of Assessment seeking payroll taxes were issued by the EDD against Velocity Express, Inc. The first Notice of Assessment
covers the period July 1, 2003 to December 31, 2004. The second Notice of Assessment covers the period of January 1, 2005 to June 30, 2006. In February 2007, the Company filed a Petition for Reassessment disputing both
assessments in their entirety and requesting that this matter be referred to an administrative law judge for resolution.

In connection
with the CD&L acquisition, the Company assumed a reserve for a class action suit filed in December, 2003 in the Superior Court of the State of California for the County of Los Angeles, seeking to certify a class of California based independent
contractors from December 1999 to the present. The complaint seeks unspecified damages for various employment related claims, including, but not limited to overtime and minimum wage claims. CD&L filed an Answer to the Complaint on or about
January 2, 2004 denying all allegations. Discovery on this matter is ongoing. In January 2007, the Company was served another summons and complaint which was pled as a wage and hour class action suit. The suit covers California drivers who had
been engaged by Clayton/National Courier Systems, Inc. between 2001 and the present. The Company believes that this second suit will be consolidated with the first suit because it covers the same group of independent contractor drivers over the same
period of time. Velocity intends to vigorously defend these cases through trial if necessary and continues to reject all allegations of the Complaint as amended.

On August 1, 2005, the Company received notice from the Superior Court for the State of California, County of Santa Clara, that the Court had entered an order granting certain motions for summary judgment against
the Company in the matter styled Velocity Express, Inc. v. Banc of America Commercial Finance Corporation, Banc of America Leasing and Capital, LLC, John Hancock Life Insurance Company and John Hancock Mezzanine Lenders, LP, Charles F. Short III,
Sidewinder Holdings Ltd. and Sidewinder N. A. Ltd. Corp., (the Plaintiffs). The motions sought to resolve the substantive liability issues in the case and to recover in excess of $10 million for breach of contract, fees, interest and
other charges arising from a contract entered into in 1997 between the company (formerly Corporate Express Delivery Systems, Inc.) and Mobile Information Systems, Inc. (MIS). By granting the motions, the court did resolve the liability
issues and held that Banc of America/Hancock was entitled to recover the amounts sued for. On December 7, 2005 the parties executed a negotiated settlement outside of the court; with the Company making scheduled payments totaling $2.9 million
after an initial good faith payment of $0.3 million.



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8. LIQUIDITY

Liquidity

In 2007, the Company reported a loss from operations of approximately $19.6 million, which resulted in negative
working capital of approximately $6.8 million at June 30, 2007. In the three month period ended September 29, 2007, the Company reported a loss from operations of approximately $2.6 million, which resulted in negative working capital of
approximately $7.3 million at September 29, 2007. The reasons for the losses are described under Managements Discussion and Analysis of Financial Condition and Results of OperationsHistorical Results of Operations
contained in this Report, including, in particular, the continued cost of the integration of CD&L. The CD&L integration has taken 9 months longer and cost approximately $7 million more than the Companys original estimates. Due to an
unanticipated degree of customer losses related to the migration of financial services customers to electronic check clearing under the Federal Check 21 initiative and unfavorable contracts the Company assumed with the CD&L acquisition, the
Company did not meet its minimum EBITDA levels contained in its credit agreement for the periods ending July 28, 2007 and August 25, 2007. Wells, in its capacity as agent and lender under the credit agreement, granted the Company waivers
and entered into another amended agreement dated October 15, 2007 which included (1) lower monthly minimum EBITDA requirements through December 2008 and (2) an increase in the interest rate of 75 basis points in LIBOR margin (from
2.5% to 3.25%) until trailing twelve month EBITDA equals $15.0 million, dropping to a 25 basis point increase when trailing twelve month EBITDA is greater than $15.0 million and reverting back to the original interest rate when trailing twelve month
EBITDA is greater than $20.0 million.

The Company is managing to an operating plan which it expects to result in positive cash flow over
the next year. Key components of the operating plan include the following:



| |  |  | improving gross margins by using our newly integrated route information database to identify and correct a number of specific, predominately legacy CD&L
routesfewer than 10% of all routeswhere our average driver settlement has exceeded competitive market norms for the work performed;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | winding down payments related to restructuring and integration related activities from $10 million in fiscal 2007 to less than $2 million in fiscal 2008;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | lowering operating and SG&A expenses by reducing headcount, restoring our historical market-based deductions from independent contractor settlements to recoup
driver support costs not recovered during fiscal 2007, and changing or eliminating services and the related costs associated with telecommunications, workforce acquisition, and miscellaneous other activities;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | further improving gross margins compared to prior quarters, and based on the continuing roll-out of the Companys route optimization software, which was made
possible by the completion of route data migration in fiscal 2007;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increasing profitable revenue growth from recently announced, existing and potential customers in targeted markets; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | further improving accounts receivable collections resulting from the customer database integration which was completed in fiscal 2007.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------

In addition, we expect to further improve our cash position in fiscal 2008 with the sale of our Canadian subsidiary in the second quarter of fiscal 2008, as
negotiations with interested parties have progressed favorably.

The Company believes that, based on its operating plan, cash to be received
from the sale of its Canadian subsidiary, and results to date, it will have sufficient cash flow to meet its expected cash needs and to satisfy the covenants contained in the agreements governing its debt (including the revised minimum EBITDA
covenant under the credit agreement) in the next twelve month period. The Company is factoring



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into its plan, among other things, the requirements under the Indenture governing the Senior Notes to maintain a minimum cash balance of $4.0 million through
May 15, 2008 and $8.5 million thereafter through June 28, 2008, which is subject to adjustment in the event that certain conditions are not met, and to make the December 2007 and June 2008 interest payments on the Senior Notes in cash of
$5.1 million each. As of September 29, 2007, the Company had $11.0 million in cash and $0.1 million in available borrowings under its revolving credit facility. Based on the current operating plan (including the related assumptions), cash to be
received from the sale of a subsidiary, and results from operations and qualitative feedback from field management since September 29, 2007, the Company believes it will be in compliance with its covenants, including those summarized above. As
such, the Company believes it will continue to meet its obligations in the ordinary course of business as they become due through June 28, 2008.

As with any operating plan, there are risks associated with the Companys ability to execute it. Therefore, there can be no assurance that the Company will be able to satisfy the revised minimum EBITDA
requirement or other applicable covenants to its lenders, or achieve the operating improvements described above. If the Company is unable to execute this plan in general or if, after making the December 30, 2007 or June 30, 2008 interest
payment, the Company cannot remain in compliance with the minimum cash requirement, it will need to find additional sources of cash not contemplated by the current operating plan and/or raise additional capital to sustain continuing operations as
currently contemplated. Further, the Company will take additional actions if necessary to reduce expenses. In that case, the Company would need to amend, or seek one or more further waivers of, the minimum EBITDA covenant under the credit agreement
and the minimum cash requirement under the Indenture. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of
liabilities that may result from the outcome of this uncertainty. For a discussion of these risks and related matters discussed above, see Risk Factors.



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

Certain statements in this report, and other written or oral statements made by or on behalf of the Company, may constitute forward-looking
statements within the meaning of the federal securities laws. Statements regarding future events and developments and the Companys future performance that are not historical facts, as well as managements expectations, beliefs,
plans, objectives, assumptions and projections about future events or future performance, are forward looking statements within the meaning of these laws. Forward-looking statements include statements that are preceded by, followed by, or include
words such as believes, expects, anticipates, plans, estimates, intends, or similar expressions. Forward-looking statements are only predictions and are not guarantees of
performance. These statements are based on beliefs and assumptions of the Companys management, which in turn are based on currently available information. These assumptions could prove inaccurate. Forward-looking statements are also affected
by known and unknown risks that may cause the actual results of the Company to differ materially from any future results expressed or implied by such forward-looking statements. Many of these risks are beyond the ability of the Company to control or
predict. Such factors include, but are not limited to, the following: we may never achieve or sustain profitability; we may not be successful in integrating CD&L and may fail to achieve the expected cost savings from the CD&L acquisition,
including due to the challenges of combining the two companies, reducing overlapping functions, retaining key employees and other related risks; we may be unable to fund our future capital needs, and we may need funds sooner than anticipated; our
large customers could reduce or discontinue using our services; we may be unable to successfully compete in our markets; we could be exposed to litigation stemming from the accidents or other activities of our drivers; we could be required to pay
withholding taxes and extend employee benefits to our independent contractors; we have a substantial amount of debt and preferred stock outstanding, and our ability to operate and financial flexibility are limited by the agreements governing our
debt and preferred stock; we may be required to redeem our debt at a time when we do not have the proceeds to do so; and the other risks identified in the section entitled Risk Factors in this Report, as well as in the other documents
that the Company files from time to time with the Securities and Exchange Commission.

Management believes that the forward-looking
statements contained in this report are reasonable; however, undue reliance should not be placed on any forward-looking statements contained herein, which are based on current expectations. Further, forward-looking statements speak only as of the
date they are made, and management undertakes no obligation to publicly update any of them in light of new information or future events.

We present below Managements Discussion and Analysis of Financial Condition and Results of Operations of Velocity Express Corporation and its subsidiaries on a consolidated basis. The following discussion should be read in conjunction
with our historical financial statements and related notes contained elsewhere in this report.

Overview

The Company is engaged in the business of providing time definite logistics services. We operate primarily in the United States with limited operations in
Canada. The Company operates in a single-business segment.

The Company has one of the largest nationwide networks of time-definite
logistics solutions in the United States and is a leading provider of scheduled, distribution and expedited logistics services. Its customers are comprised of multi-location, blue chip customers in the healthcare, office products, financial,
commercial, transportation & logistics, retail & consumer products, technology, and energy sectors.

Our service
offerings are divided into the following categories:



| |  |  | scheduled logistics, consisting of the daily pickup and delivery of parcels with narrowly defined time schedules predetermined by the customer.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | distribution logistics, consisting of the receipt of customer bulk shipments that are divided and sorted at major metropolitan locations for delivery to multiple
locations within broadly defined time schedules.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | expedited logistics, consisting of unique and expedited point-to-point service for customers with extremely time sensitive delivery requirements.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------

The Companys customers represent a variety of industries and utilize the Companys services across multiple
service offerings. Revenue categories and percentages of total revenue for the quarters ended September 29, 2007 and September 30, 2006 were as follows:



|                             |  |                    |   |  |                   |  
|---------------------------- |  | ------------------ | - |  | ----------------- | -
|                             |  | Three Months Ended |  
|                             |  | September 29,2007  |   |  | September 30,2006 |  
|Healthcare                   |  | 29.9               | % |  | 24.8              | %
|Office products              |  | 27.4               | % |  | 26.1              | %
|Financial services           |  | 14.9               | % |  | 18.9              | %
|Commercial                   |  | 12.8               | % |  | 9.8               | %
|Transportation and logistics |  | 6.8                | % |  | 8.1               | %
|Retail and consumer products |  | 6.5                | % |  | 7.1               | %
|Energy                       |  | 1.0                | % |  | 2.2               | %
|Technology                   |  | 0.7                | % |  | 2.9               | %

With the enactment of the Federal law known as Check 21, on October 28, 2004, we anticipate
that financial services revenue will continue to decline as financial institutions migrate to electronically scanned and processed checks, without the need to move the physical documents to the clearing institution. Off-setting this relative decline
in revenue in the financial services industry, we believe we will benefit from the growth in healthcare and retail industries (including office supplies) within the United States, and be able to effectively leverage our broad coverage footprint to
capitalize on this national growth industry.

Restructurings

During fiscal 2007, in connection with the integration of CD&L, the Companys management commenced its integration plan which included staff reduction of approximately 200 employees due to redundant
positions, a retention incentive program for key individuals of CD&L and the designation of 39 operating centers for closure. In connection with this integration plan, the Company recorded restructuring charges of approximately $1.0 million
(reduced by $0.6 million in the second quarter of fiscal 2007) related to severance costs and retention incentives and approximately $0.1 million in lease termination costs related to five facilities which closed during the three month period ended
September 30, 2006. In addition, a charge of approximately $87,000 was recorded related to revisions in the Companys estimates of previously recorded costs associated with prior period restructurings.

During the three month period ended September 29, 2007, in response to the previously announced loss of the Companys largest financial
services customer, the Companys management commenced a restructuring plan which primarily included severance costs of approximately $0.2 million which are included with current accrued liabilities on the consolidated balance sheet.

Critical Accounting Policies and Estimates

The
Companys discussion and analysis of financial condition and results of operations are based upon the Companys consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to bad debts, goodwill, insurance reserves, income taxes and contingencies and litigation. The Company bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets



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and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
For a discussion of the Companys critical accounting policies, see the Companys Annual Report on Form 10-K, as amended, for the year ended June 30, 2007.

Historical Results of Operations

Three Months Ended September 29, 2007 Compared to Three Months Ended
September 30, 2006

Revenue for the quarter ended September 29, 2007 decreased $17.8 million or 16.0% to $93.3
million from $111.1 million for the quarter ended September 30, 2006. Factors increasing revenue were $1.4 million of new business start-ups with new customers, primarily in retail replenishment, and expansion of our business with existing
customers of $5.5 million. More than offsetting these increases were: (1) the loss of the Office Depot account in October 2006 ($6.5 million), (2) merger-related customer losses ($4.9 million), (3) declines in revenue from
financial services institutions as these organization adopt electronic check clearing technologies under the Federal Check 21 legislation ($4.4 million), (4) cancellation of unfavorable legacy-CD&L customer contracts ($2.5 million) and
(5) an 8% customer attrition rate, equivalent to $7.6 million.

Cost of services for the quarter ended September 30, 2007 was
$70.2 million, a decrease of $13.4 million or 16.0% from $83.5 million for the quarter ended September 30, 2006. Payments to independent contractors and purchased transportation vendors declined by 17%, slightly more than the revenue
decline described above. Other costs of delivery declined by 5.6%, a slower rate of decline than revenue because of costs incurred to roll out the new V-Trac 5.0 scanner technology and add warehouse staff to accommodate the new retail
replenishment business started in the quarter. In addition to the costs for the V-Trac 5.0 roll-out noted above, depreciation expense commenced for the related capitalized software development and recently procured scanners. As a result, gross
margin decreased from 24.8% in the prior year quarter to 24.4% for the quarter ended September 29, 2007.

Occupancy expense for the
quarter ended September 29, 2007 were $4.6 million, no change from the quarter ended September 30, 2006. Closures of redundant facilities were offset with increased costs for larger new facilities, occupied to accommodate anticipated
volume growth.

Selling, general and administrative expenses for the quarter ended September 29, 2007 were $18.5 million or 19.8% of
revenue, a decrease of $3.8 million or 17.1% as compared with $22.3 million or 20.1% of revenue for the quarter ended September 30, 2006. The decrease in SG&A for the quarter resulted primarily from a reduction in compensation,
benefits, and travel expenses resulting from the integration of the CD&L workforce and eliminating redundant positions ($2.0 million), a reduction of legal fees by $0.7 million as the prior year quarter included many nonrecurring CD&L legal
fees, a reduction in insurance premiums resulting from the combination of legacy Velocity Express policies with legacy CD&L policies ($0.4 million), favorable bad debt experience ($0.2 million), and various other miscellaneous items each
individually less than $0.2 million.

Transaction and integration costs for the quarter ended September 29, 2007 were $0.5 million or
0.5% of revenue, a decrease of $1.3 million or 71.5% as compared with $1.8 million or 1.6% of revenue for the quarter ended September 30, 2006. The decrease reflects $450,000 in bonuses paid for the successful conclusion of the CD&L
transaction in the prior year quarter and reduced use of outside consultants to assist with the integration of CD&L.

Restructuring
charges and asset impairments for the quarter ended September 29, 2007 were $0.3 million or 0.3% of revenue, a decrease of $0.9 million or 76.6% as compared with $1.2 million or 1.1% of revenue for the quarter ended September 30,
2006. During the quarter ended September 30, 2006, in connection with our integration of CD&L, the Company recorded restructuring charges of approximately $1.0 million related to severance costs and retention incentives. After experiencing
greater than expected voluntary attrition in staff, these expenses were reduced by $0.6 million in the second quarter of fiscal 2007. During the three month period ended September 29, 2007, in response to the previously announced loss of the
Companys largest financial services customer, the Companys management commenced a restructuring plan which primarily included severance costs of approximately $0.2 million.



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Depreciation and amortization for the quarter ended September 29, 2007 was $1.5 million or 1.6% of
revenue, a decrease of $0.6 million or 28.5% as compared with $2.1 million or 1.9% of revenue for the quarter ended September 30, 2006, of which $0.5 million pertains to a decrease in depreciation and $0.1 million pertains to a decrease in
amortization expense.

Net interest expense for the quarter ended September 29, 2007 decreased $1.3 million to $4.9 million from
$6.2 million for the quarter ended September 30, 2006. In the quarter ended September 30, 2006, there was an acceleration of deferred financing cost of $2.2 million in interest expense associated with the legacy Velocity and CD&L
debt paid off in July of 2006 from the proceeds from the Senior Notes due 2010 and the Series Q Convertible Preferred Stock. Offsetting this decrease in interest expense is amortization of deferred fees related to the revolving credit facility
entered into in December 2006, a 1% higher interest on the Senior Notes due 2010 during August and September of 2007, and $0.2 million lower interest income as the Company had more cash proceeds earning interest during the quarter ended
September 30, 2006.

Other income for the quarter ended September 30, 2006 included a fair market value adjustment of $0.2
million related to the present value of a settlement liability. Other income had no comparable adjustment during the quarter ended September 29, 2007 as the Company issued settled the liability in the fourth quarter of fiscal 2007.

As a result of the above, the Company had a net loss of $7.5 million for the quarter ended September 29, 2007 compared to a net loss of $10.8
million in the quarter ended September 30, 2006.

Net loss applicable to common stockholders was $11.1 million for the quarter ended
September 29, 2007 compared with $30.9 million for the quarter ended September 30, 2006. For September 29, 2007 quarter, the difference between net loss applicable to common stockholders and net loss relates to the beneficial
conversion associated with the anti-dilution provisions of Series N, Series O, Series P, and Series Q Convertible Preferred Stock resulting from the modification of warrants, dividends paid-in-kind on Series M, Series N, Series O, Series P and
Series Q Convertible Preferred Stock, and the beneficial conversion associated with dividends paid-in-kind on Series N, Series O, Series P and Series Q Convertible Preferred Stock. In the quarter ended September 30, 2006, the difference between
net loss applicable to common stockholders and net loss related to the beneficial conversion associated with the sale of the Series Q Convertible Preferred Stock, beneficial conversion associated with the anti-dilution provisions of Series N, Series
O, Series P, and Series Q Convertible Preferred Stock resulting from the issuance of Series Q Convertible Preferred Stock, dividends paid-in-kind on Series M, Series N, Series O, Series P and Series Q Convertible Preferred Stock, and the beneficial
conversion associated with dividends paid-in-kind on Series N, Series O, Series P and Series Q Convertible Preferred Stock.

Liquidity and Capital
Resources

Overview

In 2007,
the Company reported a loss from operations of approximately $19.6 million, which resulted in negative working capital of approximately $6.8 million at June 30, 2007. In the three month period ended September 29, 2007, the Company reported
a loss from operations of approximately $2.6 million, which resulted in negative working capital of approximately $7.3 million at September 29, 2007. The reasons for the losses are described under Managements Discussion and Analysis
of Financial Condition and Results of OperationsHistorical Results of Operations contained in this Report, including, in particular, the continued cost of the integration of CD&L. The CD&L integration has taken 9 months longer
and cost approximately $7 million more than the Companys original estimates. Due to an unanticipated degree of customer losses related to the migration of financial services customers to electronic check clearing under the Federal Check 21
initiative and unfavorable contracts the Company assumed with the CD&L acquisition, the Company did not meet its minimum EBITDA levels contained in



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its credit agreement for the periods ending July 28, 2007 and August 25, 2007. Wells, in its capacity as agent and lender under the credit
agreement, granted the Company waivers and entered into another amended agreement dated October 15, 2007 which included (1) lower monthly minimum EBITDA requirements through December 2008 and (2) an increase in the interest rate of 75
basis points in LIBOR margin (from 2.5% to 3.25%) until trailing twelve month EBITDA equals $15.0 million, dropping to a 25 basis point increase when trailing twelve month EBITDA is greater than $15.0 million and reverting back to the original
interest rate when trailing twelve month EBITDA is greater than $20.0 million.

The Company is managing to an operating plan which it
expects to result in positive cash flow over the remaining fiscal year. Key components of the operating plan include the following:



| |  |  | improving gross margins by using our newly integrated route information database to identify and correct a number of specific, predominately legacy CD&L
routesfewer than 10% of all routeswhere our average driver settlement has exceeded competitive market norms for the work performed;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | winding down payments related to restructuring and integration related activities from $10 million in fiscal 2007 to less than $2 million in fiscal 2008;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | lowering operating and SG&A expenses by reducing headcount, restoring our historical market-based deductions from independent contractor settlements to recoup
driver support costs not recovered during fiscal 2007, and changing or eliminating services and the related costs associated with telecommunications, workforce acquisition, and miscellaneous other activities;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | further improving gross margins compared to prior quarters, and based on the continuing roll-out of the Companys route optimization software, which was made
possible by the completion of route data migration in fiscal 2007; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increasing profitable revenue growth from recently announced, existing and potential customers in targeted markets;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | further improving accounts receivable collections resulting from the customer database integration which was completed in fiscal 2007.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------

In addition, we expect to further improve our cash position in fiscal 2008 with the sale of our Canadian subsidiary in the second quarter of fiscal 2008, as
negotiations with interested parties have progressed favorably.

The Company believes that, based on its operating plan, cash to be received
from the sale of its Canadian subsidiary, and results to date, it will have sufficient cash flow to meet its expected cash needs and to satisfy the covenants contained in the agreements governing its debt (including the revised minimum EBITDA
covenant under the credit agreement) in the next twelve month period. The Company is factoring into its plan, among other things, the requirements under the Indenture governing the Senior Notes to maintain a minimum cash balance of $4.0 million
through May 15, 2008 and $8.5 million thereafter through June 28, 2008, which is subject to adjustment in the event that certain conditions are not met, and to make the December 2007 and June 2008 interest payments on the Senior Notes in
cash of $5.1 million each. As of September 29, 2007, the Company had $11.0 million in cash and $0.1 million in available borrowings under its revolving credit facility. Based on the current operating plan (including the related assumptions),
cash to be received from the sale of a subsidiary, and results from operations and qualitative feedback from field management since September 29, 2007, the Company believes it will be in compliance with its covenants, including those summarized
above. As such, the Company believes it will continue to meet its obligations in the ordinary course of business as they become due through June 28, 2008. Results for the quarter ended September 29, 2007 are consistent with the business
plan that formed the basis for the new revolving credit agreement covenants.

As with any operating plan, there are risks associated with
the Companys ability to execute it. Therefore, there can be no assurance that the Company will be able to satisfy the revised minimum EBITDA requirement or other applicable covenants to its lenders, or achieve the operating improvements



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described above. If the Company is unable to execute this plan in general or if, after making the December 30, 2007 or June 30, 2008 interest
payment, the Company cannot remain in compliance with the minimum cash requirement, it will need to find additional sources of cash not contemplated by the current operating plan and/or raise additional capital to sustain continuing operations as
currently contemplated. Further, the Company will take additional actions if necessary to reduce expenses. In that case, the Company would need to amend, or seek one or more further waivers of, the minimum EBITDA covenant under the credit agreement
and the minimum cash requirement under the Indenture. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of
liabilities that may result from the outcome of this uncertainty. For a discussion of these risks and related matters discussed above, see Risk Factors.

Operating Activities, Investing Activities & Financing Activities

During the quarter
ended September 29, 2007, the net decrease in quarter-end cash was $3.4 million compared to a net increase of $8.0 million during the quarter ended September 30, 2006. As reported in our consolidated statements of cash flows, the
(decrease) increase in cash during the quarters ended September 29, 2007 and September 30, 2006 is summarized as follows (in thousands):



|                                          |  |                   |        |   |                   |   |         |  
|----------------------------------------- |  | ----------------- | ------ | - | ----------------- | - | ------- | -
|                                          |  | Quarter Ended     |       
|                                          |  | September 29,2007 |        |   | September 30,2006 |  
|Net cash used in operating activities     |  | $                 | (7,853 | ) |                   | $ | (7,689  | )
|Net cash used in investing activities     |  |                   | (354   | ) |                   |   | (53,367 | )
|Net cash provided by financing activities |  |                   | 4,809  |   |                   |   | 69,095  |  
|                                          |  |                   |        |   |                   |   |         |  
|Total (decrease) increase in cash         |  | $                 | (3,398 | ) |                   | $ | 8,039   |  
|                                          |  |                   |        |   |                   |   |         |  

Cash used in operations was $7.8 million for the quarter ended September 29, 2007. This use
of funds was comprised of a net loss of $7.5 million offset by non-cash expenses of $4.4 million and by net cash used as a result of working capital changes of $4.7 million. The use of cash in working capital includes a decrease in accounts
payable/accrued expenses of $6.7 million partly offset by decreases of accounts receivable of $0.3 million and a $1.6 million decrease in prepaid insurance and other prepaid expenses.

Cash used in investing activities was $0.4 million for the quarter ended September 29, 2007 and primarily consisted of capital expenditures less
proceeds from the sale of Peritas trucks.

Cash provided from financing activities for the quarter ended September 29, 2007 amounted
to $4.8 million. The primary sources of cash were net proceeds of $3.6 million from the exercise of warrants and collection of subscriptions receivable from the management stock purchase program and $1.5 million additional borrowings from the
revolving credit facility.

Revolving Credit Facility

Borrowings under the revolving credit agreement bear interest at a rate equal to, at the borrowers option, either a base rate, or a LIBOR rate plus an applicable margin of 2.50%. The base rate is the rate of
interest announced from time to time by Wells Fargo Bank, N.A. as the prime rate. The Companys borrowing rate at September 29, 2007 was 7.75% and, in accordance with the terms of the agreement, the Company had $0.1 million in available
borrowings.

In September 2007, the letter of credit securing the Company and its subsidiaries cash management obligations was
reduced to zero as the Company moved its cash management obligations to another financial institution.

The revolving credit agreement
contains a number of customary covenants that, among other things, restrict the borrowers and guarantors ability to incur additional debt, create liens on assets, sell assets, pay dividends, engage in mergers and acquisitions, change the
business conducted by the borrowers or guarantors, make capital expenditures and engage in transactions with affiliates. The revolving credit



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agreement also includes a specified financial covenant requiring the borrowers to achieve a minimum EBITDA (as defined in the revolving credit agreement),
measured on a month-end basis at the end of each calendar quarter, and to certify compliance on a monthly basis. In connection with the revolving credit agreement, the Company also entered into a security agreement whereby the Companys
obligations under the revolving credit agreement are secured by substantially all of the assets of each borrower and each guarantor subject to the rights of the holders of the Senior Notes.

The Company did not meet its minimum EBITDA levels contained in its credit agreement for the period ending July 28, 2007 and August 25, 2007.
Wells, in its capacity as agent and lender, under the credit agreement granted the Company waivers. The Company and the lenders entered into an amended agreement dated October 15, 2007 which provided for (1) revised monthly minimum EBITDA
requirements and (2) an increase in the interest rate of 75 basis points in LIBOR margin (from 2.5% to 3.25%) until trailing twelve month EBITDA equals $15.0 million, dropping 25 basis points when trailing twelve month EBITDA is greater than
$15.0 million and reverting back to the original interest rate when trailing twelve month EBITDA is greater than $20.0 million.

As a
condition to and in connection with executing the Supplemental Indenture to the Senior Notes described below, the Company entered into an amendment, effective as of July 13, 2007, to the revolving credit agreement. The Amendment:
(i) permits the sale of the Companys Canadian subsidiary (or the assets thereof), (ii) provides that the Company need not apply to repay borrowings under the Credit Agreement proceeds of the sale of the Companys Canadian
subsidiary or certain treasury stock or offerings of equity, (iii) permits the increase of the interest rate on the Senior Notes from 12.0% to 13.0% and (iv) establishes a borrowing base reserve of $400,000, which reserve shall be reduced
to zero when the Company delivers to Wells, in its capacity as agent, its financial statements for its fiscal quarter ending December 31, 2007, provided no event of default under the Credit Agreement then exists.

Senior Notes

The Senior Notes bore interest
at an annual rate of 12% at June 30, 2007. As discussed below, the annual interest rate increased to 13% in July 2007. They may be redeemed at the Companys option after June 30, 2009, upon payment of the then applicable redemption
price. Beginning 90 days after issuance, the Company may also redeem up to 35% of the aggregate principal amount of the Senior Notes, with proceeds derived from the sale of Velocity capital stock. The Company may also redeem Senior Notes with
proceeds derived from the exercise of warrants subject to specified limits. In each instance, the optional redemption price is 112% of the principal balance of the Senior Notes redeemed if the redemption occurs before June 30, 2007; 106% if the
redemption occurs between June 30, 2007 and June 29, 2009; and 100% if the redemption occurs thereafter.

The Company must
maintain $4.0 million of cash and cash equivalents, and a minimum of $31.0 million of cash, cash equivalents and qualified accounts receivable, increasing by $2.0 million per year on each anniversary date of the merger until maturity. The
indenture contains customary events of default.

On July 25, 2007, the Company entered into a third supplemental indenture modifying
the indenture governing their Senior Notes. The supplemental indenture (1) temporarily reduces the requirement that the Company maintain at all times cash and cash equivalents subject to specified liens under the minimum cash covenant to $4.0
million through May 15, 2008, which becomes a permanent reduction upon satisfaction of certain conditions; (2) waives the requirement in the debt incurrence covenant regarding the reduction of the credit facility basket with respect to the
possible sale of the Companys Canadian subsidiary and (3) waives the requirement in the asset sales covenant that requires a permanent reduction in credit facilities from the net proceeds of asset sales with respect to the possible sale
of the Companys Canadian subsidiary. An allonge to the existing Senior Notes also raises the interest rate payable on the Notes from 12.0% to 13.0%.



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|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|------- | -----------------------------------------------------------

We are exposed to market risk from changes in interest rates on our long-term debt obligations. We estimate our market risk using sensitivity analysis. Market risk is defined as the potential change in the fair market value of a fixed-rate
long-term debt obligation due to hypothetical adverse change in interest rates and the potential change in interest expense on variable rate long-term debt obligations due to a change in market interest rates. The fair value on long-term debt
obligations is determined based on discounted cash flow analysis, using the rates and the maturities of these obligations compared to terms and rates currently available in long-term debt markets.

As of September 29, 2007, we had $78.2 million in aggregate principal amount of fixed rate long-term debt obligations with an estimated fair market
value of $70.4 million, based on current asking prices for trades at 90% of face value, with an overall weighted average interest rate of 13.0% and an overall weighted maturity of 2.75, years, compared to rates and maturities currently available in
long-term debt markets. Market risk is estimated as the potential loss in fair value of our fixed rate long-term debt resulting from a hypothetical increase of 10.0% in interest rates. Such an increase in interest rates would have resulted in a
decrease of $1.6 million in the fair market value of our fixed-rate long-term debt.

The Company has revolving debt of $9.0 million at
September 29, 2007 that is subject to variable interest rates. A 1% change in the interest would result in an impact of $0.1 million in interest expense. Except as described above, we are not currently subject to material market risks for
interest rates, foreign currency rates or other market price risks.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

We maintain disclosure
controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in
the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of September 29, 2007. Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were deficient.

In connection with the preparation of our consolidated
financial statements for the year ended July 1, 2006, due to resource constraints, a material weakness became evident to management regarding our inability to simultaneously close the books on a timely basis each month and generate all the
necessary disclosure for inclusion in our filings with the Securities and Exchange Commission. A material weakness is a significant deficiency in one or more of the internal control components that alone or in the aggregate precludes our internal
controls from reducing to an appropriately low level the risk that material misstatements in our financial statements will not be prevented or detected on a timely basis. This material weakness was still present at September 29, 2007.

We have aggressively recruited experienced professionals to augment and upgrade our financial staff to address issues of timeliness in
financial reporting even during periods when we are preparing filings for the Securities and Exchange Commission. Although we believe that this corrective step will enable management to conclude that the internal controls over our financial
reporting are effective when all of the additional financial staff positions are filled and the staff is trained and the current surge of integration-related tasks have been completed, we cannot assure you these steps will be sufficient. We may be
required to expend additional resources to identify, assess and correct any additional weaknesses in internal control.



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PART II



|ITEM 1. | LEGAL PROCEEDINGS.
|------- | ------------------

We are a party to litigation
and have claims asserted against us in the normal course of our business. Most of these claims are routine litigation that involve workers compensation claims, claims arising out of vehicle accidents and other claims arising out of the
performance of same-day transportation services. We and our subsidiaries are also named as defendants in various employment-related lawsuits arising in the ordinary course of our business. We vigorously defend against all of the foregoing claims.

From time to time, our independent contractor drivers are involved in accidents. We attempt to manage this risk by requiring our
independent contractor drivers to maintain commercial motor vehicle liability insurance of at least $300,000 with a minimal deductible and by carrying additional liability insurance in our name totaling an additional $5.0 million. In addition, we
perform extensive screening of all prospective drivers to ensure that they have acceptable driving records and pass a criminal background and drug tests, among other criteria. We believe our driver screening programs have established an
important competitive advantage for us.

We also carry workers compensation insurance coverage for our employees and have arranged
for the availability of occupational accident insurance for all of our independent contractor drivers of at least the minimum amounts required by applicable state laws. We also have insurance policies covering cargo, property and fiduciary
trust liability, which coverage includes all of our drivers and messengers.

We review our litigation matters on a regular basis to
evaluate the demands and likelihood of settlements and litigation related expenses. Based on this review, we do not believe that any pending lawsuits, if resolved or settled unfavorably to us, would have a material adverse effect upon our financial
condition or results of operations. We have established reserves for litigation, which we believe are adequate.

In connection with the
CD&L acquisition, the Company assumed a reserve for a tentative settlement of a tax assessment against CD&L in the State of California. The assessment resulted from an audit of CD&Ls subsidiary, Clayton/National Courier Systems,
Inc. by the California Employment Development Department (the EDD). On July 13, 2007, the Company finalized the settlement with the EDD which requires the Company to make certain payments and provide certain insurance coverage for
its independent contractor drivers. The agreement does not constitute an admission or determination as to worker classification related to any of the drivers covered by the agreement.

In January 2007, two Notices of Assessment seeking payroll taxes were issued by the EDD against Velocity Express, Inc. The first Notice of Assessment
covers the period July 1, 2003 to December 31, 2004. The second Notice of Assessment covers the period of January 1, 2005 to June 30, 2006. In February 2007, the Company filed a Petition for Reassessment disputing both
assessments in their entirety and requesting that this matter be referred to an administrative law judge for resolution.

In connection
with the CD&L acquisition, the Company assumed a reserve for a class action suit filed in December 2003 in the Los Angeles Superior Court, , seeking to certify a class of California based independent contractors from December 1999 to the
present. The complaint seeks unspecified damages for various employment related claims, including, but not limited to overtime, minimum wage claims, and claims for unreimbursed business expenses. CD&L filed an Answer to the Complaint on or about
January 2, 2004 denying all allegations. Plaintiffs motion for Class Certification was granted in part and denied in part on January 28, 2007. Discovery on this matter is ongoing. In January 2007, the Company was served another
summons and complaint which was pled as a wage and hour class action suit. The suit covers California drivers who had been engaged by Clayton/National Courier Systems, Inc. between 2001 and the present. The Company believes that this second suit
will be consolidated with the first suit because it covers the same group of independent contractor drivers over the same period of time. Velocity intends to vigorously defend these cases through trial if necessary and continues to reject all
allegations of the Complaint as amended.



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|ITEM 1A. | RISK FACTORS
|-------- | ------------

The following are certain risk
factors that could affect our business, financial condition, operating results and cash flows. These risk factors should be considered in connection with evaluating the forward-looking statements contained in this report because these risk factors
could cause our actual results to differ materially from those expressed in any forward-looking statement. The risks we have highlighted below are not the only ones we face. If any of these events actually occur, our business, financial condition,
results of operations or cash flows could be negatively affected and the market price of our common stock could decline. We caution you to keep in mind these risk factors and to refrain from attributing undue certainty to any forward-looking
statements, which speak only as of the date of this report.

Risks Related to Our Business

Given our history of losses and our recent acquisition of CD&L, we cannot predict whether we will be able to achieve or sustain profitability or positive cash
flow. If we cannot achieve or sustain profitability or positive cash flow, the market price of our common stock could decline significantly.

Our net
losses applicable to common stockholders for the three-month periods ended September 29, 2007 and September 30, 2007, were $11.1 million and $30.9 million, respectively. The respective periods net losses were $7.5 million and $10.8
million. The increased amount of net losses applicable to common stockholders for such periods was caused by beneficial conversion charges of $2.3 million and $18.9 million, and preferred stock dividends paid-in-kind of $1.3 million and $1.2 million
for the respective periods. Our net losses applicable to common stockholders for the fiscal years ended June 30, 2007 and July 1, 2006, were $66.0 million and $23.6 million, respectively. The respective periods net losses were $39.5
million and $16.0 million. The increased amount of net losses applicable to common stockholders for such periods was caused by beneficial conversion charges of $21.2 million and $5.0 million, and preferred stock dividends paid-in-kind of $5.2
million and $2.6 million for the respective periods. To achieve profitability, we will be required to pursue new revenue opportunities, effectively limit the impact of competitive pressures on pricing and freight volumes, and fully implement our
technology initiatives and other cost-saving measures. The integration process has been more expensive and taken longer to accomplish than originally expected. We cannot assure you that we will ever achieve or sustain profitability or positive cash
flow. If we cannot achieve or sustain profitability or positive cash flow, the market price of our common stock could decline significantly.

We may be
unable to fund our future capital needs, and we may need additional funds sooner than anticipated.

We have depended, and if we are
unable to execute against our business plans, are likely to continue to depend, on our ability to obtain additional financing to fund our future liquidity and capital needs. We may not be able to continue to obtain additional capital when needed,
and additional capital may not be available on satisfactory terms. Achieving our financial goals involves maximizing the effectiveness of the variable cost model, the implementation of customer-driven technology solutions and continued leverage of
the consolidated back office selling, general and administrative platform. To date, we have primarily relied upon debt and equity investments to fund these activities. We may be required to engage in additional financing activities to raise capital
required for our operations. If we issue additional equity securities or convertible debt to raise capital, the issuance may be dilutive to the holders of our common stock. In addition, any additional issuance may require us to grant rights or
preferences that adversely affect our business, including financial or operating covenants.

Early termination or non-renewal of contracts could
negatively affect our operating results.

Our contracts with our commercial customers typically have a term of one to three years, but
are often terminable earlier at will upon 30 or 60 days notice. We often have significant start-up costs when we begin servicing a new customer in a new location. Additionally, upon completion of the integration of customers acquired from
CD&L into our operating system, we identified contracts originally entered into by CD&L that contain terms and conditions that are unfavorable when compared to contractual provisions of comparable customers in the same vertical
markets. We are in the process and plan to continue renegotiating these unfavorable contracts with these customers. Termination or non-renewal of these contracts, including contracts originally entered into by CD&L, could have a material
adverse effect on our business, financial condition, operating results and cash flows.



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We are highly dependent upon sales to a few customers. The loss of any of these customers, or any material reduction
in the amount of our services they purchase, could materially and adversely affect our business, financial condition, results of operations and cash flows.

For the three-month period ended September 29, 2007 we had one customer that accounted for more than 15% of our revenue and our top ten customers in aggregate account for approximately 53% of our revenue. For the fiscal year end
June 30, 2007 we had one customer that accounted for more than 12% of our revenue and our top ten customers in aggregate account for approximately 46% of our revenue. The loss of the one large customer or some of the top ten customers or a
material reduction in their purchases of our services could materially and adversely affect our business, financial condition, results of operations and cash flows. In the second fiscal quarter of 2007, the Company lost two customers, a major office
supply customer and a significant bank customer, which negatively affected the results of operations for the current year.

The industry in which we
operate is highly competitive, and competitive pressures from existing and new companies could materially and adversely affect our business, financial condition, results of operations and cash flows.

We face intense competition, particularly for basic delivery services. The industry is characterized by high fragmentation, low barriers to entry,
competition based on price and competition to retain qualified drivers, among other things. Nationally, we compete with other large companies having same-day transportation operations in multiple markets, many of which have substantial resources and
experience in the same-day transportation business. Price competition could erode our margins and prevent us from increasing our prices to our customers commensurate with cost increases. We cannot assure you that we will be able to effectively
compete with existing or future competitors.

As a time definite logistics company, our ability to service our clients effectively often depends upon
factors beyond our control.

Our revenues and earnings are especially sensitive to events beyond our control that can affect our
industry, including:



| |  |  | extreme weather conditions;
| | - |  | ---------------------------



| |  |  | economic factors affecting our significant customers;
| | - |  | -----------------------------------------------------



| |  |  | mergers and consolidations of existing customers;
| | - |  | -------------------------------------------------



| |  |  | ability to purchase insurance coverage at reasonable prices;
| | - |  | ------------------------------------------------------------



| |  |  | U.S. business activity; and
| | - |  | ---------------------------



| |  |  | the levels of unemployment.
| | - |  | ---------------------------

If we lose any of
our executive officers, or are unable to recruit, motivate and retain qualified personnel, our ability to manage our business could be materially and adversely affected.

Our success depends on the skills, experience and performance of certain key members of our management. The loss of the services of any of these key
employees could have a material adverse effect on our business, financial condition, results of operations and cash flows. Our future success and plans for growth also depend on our ability to attract and retain skilled personnel in all areas of our
business. There is strong competition for skilled management personnel in the time definite logistics businesses and many of our competitors have greater resources than we have to hire qualified personnel. Accordingly, if we are not successful in
attracting or retaining qualified personnel in the future, our ability to manage our business could be materially and adversely affected.

Because we
are exposed to litigation stemming from the accidents or other activities of our drivers and messengers, if we were to experience a material increase in the frequency or severity of accidents, liability claims, workers compensation claims,
unfavorable resolutions of claims or insurance costs, our business, financial condition, results of operations and cash flows could be materially adversely affected.



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We utilize the services of approximately 4,600 drivers and messengers. From time to time, these persons
are involved in accidents or other activities that may give rise to liability claims against us. We cannot assure you that claims against us will not exceed the applicable amount of our liability insurance coverage, that our insurer will be solvent
at the time of settlement of an insured claim, that the liability insurance coverage held by our independent contractors will be sufficient or that we will be able to obtain insurance at acceptable levels and costs in the future. If we were to
experience a material increase in the frequency or severity of accidents, liability claims, workers compensation claims, unfavorable resolutions of claims or insurance costs, our business, financial condition, results of operations and cash
flows could be materially adversely affected.

If the IRS or any state were to successfully assert that our independent contractors are in fact our
employees, we would be required to pay withholding taxes and extend employee benefits to these persons, and could be required to pay penalties or be subject to other liabilities as a result of incorrectly classifying employees.

Substantially all of our drivers are independent contractors and not our employees. From time to time, federal and state taxing authorities have sought
to assert that independent contractor drivers in the same-day transportation and transportation industries are employees. We do not pay or withhold federal employment taxes with respect to drivers who are independent contractors. Although we believe
that the independent contractors we utilize are not employees under existing interpretations of federal and state laws, we cannot guarantee that federal and state authorities will not challenge this position or that other laws or regulations,
including tax laws and laws relating to employment and workers compensation, will not change. If the IRS or any state were to successfully assert that our independent contractors are in fact our employees, we would be required to pay
withholding taxes and extend employee benefits to these persons, and could be required to pay penalties or be subject to other liabilities as a result of incorrectly classifying employees. If drivers are deemed to be employees rather than
independent contractors, we could be required to increase their compensation. Any of the foregoing possibilities could increase our operating costs and have a material adverse effect on our business, financial condition, operating results and cash
flows.

If we are unable to recruit, motivate and retain qualified delivery personnel, our business, financial condition, results of operations and cash
flows could be materially and adversely affected.

We depend upon our ability to attract and retain, as employees or through
independent contractor or other arrangements, qualified delivery personnel who possess the skills and experience necessary to meet the needs of our operations. We compete in markets in which unemployment is generally relatively low and the
competition for independent contractors and other employees is intense. In addition, the independent contractors we utilize are responsible for all vehicle expense including maintenance, insurance, fuel and all other operating costs. We make every
reasonable effort to include fuel cost adjustments in customer billings that are paid to independent contractors to offset the impact of fuel price increases. However, if future fuel cost adjustments are insufficient to offset independent
contractors costs, we may be unable to attract a sufficient number of independent contractors.

We must continually evaluate and
upgrade our pool of available independent contractors to keep pace with demands for delivery services. We cannot assure you that qualified delivery personnel will continue to be available in sufficient numbers and on terms acceptable to us. The
inability to attract and retain qualified delivery personnel, could materially and adversely affect our business, financial condition, results of operations and cash flows.

Our failure to maintain required certificates, permits or licenses, or to comply with applicable laws, ordinances or regulations could result in substantial fines or possible revocation of our authority to conduct
certain of our operations.

Although certain aspects of the transportation industry have been significantly deregulated, our delivery
operations are still subject to various federal, state and local laws, ordinances and regulations that in many instances require certificates, permits and licenses. Our failure to maintain required certificates, permits or licenses, or to comply
with applicable laws, ordinances or regulations could result in substantial fines or possible revocation of our authority to conduct certain of our operations.



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Our reputation will be harmed, and we could lose customers, if the information and telecommunication technologies on
which we rely fail to adequately perform.

Our business depends upon a number of different information and telecommunication
technologies as well as our ability to develop and implement new technologies enabling us to manage and process a high volume of transactions accurately and timely. Any impairment of our ability to process transactions in this way could result in
the loss of customers and negatively affect our reputation. In addition, if new information and telecommunication technologies develop, we may need to invest in them to remain competitive, which could reduce our profitability and cash flow.

If our goodwill or other intangible assets were to become impaired, our results of operations could be materially and adversely affected.

The value of our goodwill and other intangible assets is significant relative to our total assets and stockholders equity. We review
goodwill and other intangible assets for impairment on at least an annual basis. Changes in business conditions or interest rates could materially impact our estimates of future operations and result in an impairment. As such, we cannot assure you
that there will not be a material impairment of our goodwill and other intangible assets. If our goodwill or other intangible assets were to become impaired, our results of operations could be materially and adversely affected.

We face trademark infringement and related risks.

There can be no assurance that any of our trademarks and service marks, collectively, the marks, if registered, will afford us protection against competitors with similar marks that may have a use date prior to that of our
marks. In addition, no assurance can be given that others will not infringe upon our marks, or that our marks will not infringe upon marks and proprietary rights of others. Furthermore, there can be no assurance that challenges will not be
instituted against the validity or enforceability of any mark claimed by us, and if instituted, that such challenges will not be successful.

We may
face higher litigation and settlement costs than anticipated.

We have made estimates of our exposure in connection with the lawsuits
and claims that have been made. As a result of litigation or settlement of cases, the actual amount of exposure in a given case could differ materially from that projected. In addition, in some instances, our liability for claims may increase or
decrease depending upon the ultimate development of those claims. In estimating our exposure to claims, we are relying upon our assessment of insurance coverages and the availability of insurance. In some instances insurers could contest their
obligation to indemnify us for certain claims, based upon insurance policy exclusions or limitations. In addition, from time to time, in connection with routine litigation incidental to our business, plaintiffs may bring claims against us that may
include undetermined amounts of punitive damages. Such punitive damages are not normally covered by insurance.

Risks Related to Our Capital Structure

We have a substantial amount of debt outstanding and may incur additional indebtedness in the future that could negatively affect our ability to
achieve or sustain profitability and compete successfully in our markets.

We have a significant amount of debt outstanding. At
September 29, 2007, we had $78.2 million in aggregate principal amount of debt outstanding, $9.0 million of revolving credit borrowings, with $0.1 million in available borrowings and $51.9 million of stockholders equity. The degree to which we
are leveraged could have important consequences for you, including:



| |  |  | requiring us to dedicate a substantial portion of our cash flow from operations to make interest payments on our debt, approximately $10.2 million per year, thereby
reducing funds available for operations, future business opportunities and other purposes;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



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| |  |  | making it more difficult for us to satisfy our debt and other obligations;
| | - |  | --------------------------------------------------------------------------



| |  |  | limiting our ability to borrow additional funds, or to sell assets to raise funds, if needed, for working capital, capital expenditures, acquisitions or other
purposes;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increasing our vulnerability to general adverse economic and industry conditions, including changes in interest rates; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | placing us at a competitive disadvantage compared to our competitors that have less debt.
| | - |  | -----------------------------------------------------------------------------------------

In addition, we may incur additional indebtedness in the future, subject to certain restrictions, exceptions and financial tests set forth in the
indenture governing our senior notes. As of September 29, 2007, under certain circumstances, we would have been restricted from incurring additional debt under the terms of our indenture other than our credit facility, subject to the terms of
the indenture and our credit agreement.

If we cannot generate sufficient cash from our operations to meet our debt service and repayment
obligations, we may need to reduce or delay capital expenditures, the development of our business generally and any acquisitions. If for any reason we are unable to meet our debt service and repayment obligations, we would be in default under the
terms of the agreements governing our debt, which would allow the debt holders to declare all borrowings outstanding to be due and payable.

Our senior
notes and preferred stock contain restrictive covenants that limit our operating and financial flexibility.

The indenture pursuant to
which we issued our senior notes and the terms of our revolving credit facility impose significant operating and financial restrictions on us. These restrictions limit or restrict among other things, our ability and the ability of our subsidiaries
that are restricted by these agreements to:



| |  |  | incur additional debt and issue preferred stock;
| | - |  | ------------------------------------------------



| |  |  | make restricted payments, including paying dividends on, redeeming, repurchasing or retiring our capital stock and making investments and prepaying or redeeming
debt and making other specified investments;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | create liens;
| | - |  | -------------



| |  |  | sell or otherwise dispose of assets, including capital stock of subsidiaries;
| | - |  | -----------------------------------------------------------------------------



| |  |  | enter into agreements restricting our subsidiaries ability to pay dividends, make loans or transfer assets to us;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | engage in transactions with affiliates;
| | - |  | ---------------------------------------



| |  |  | engage in sale and leaseback transactions;
| | - |  | ------------------------------------------



| |  |  | make capital expenditures;
| | - |  | --------------------------



| |  |  | engage in business other than our current businesses;
| | - |  | -----------------------------------------------------



| |  |  | consolidate, merge, recapitalize or enter into other transactions that would affect a fundamental change on us; and
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | under certain circumstances, enter into a senior credit facility (or refinance any such facility) without first giving the holders of the senior notes a right of
first refusal to provide such financing.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The indenture and revolving credit facility agreement also contain certain
financial covenants under which we must maintain cash and cash equivalents at specified levels and cash, cash equivalents and



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qualified accounts receivable at specified levels as well as specified financial ratios, including ratios regarding interest coverage, total leverage, senior
secured leverage and fixed charge coverage and minimum EBITDA. Our ability to comply with these ratios may be affected by events beyond our control.

A breach of any of these covenants could result in an event of default, or possibly a cross-default or cross-acceleration of other debt that may be outstanding in the future. In that event, the holders of our then
outstanding debt could allow the holders of that debt to declare all borrowings outstanding to be due and payable. In the event of a default under the indenture or the revolving credit facility, the holders of the secured debt then outstanding could
foreclose on the collateral pledged to secure our obligations under that debt, assets and capital stock pledged to them. The senior notes and the new lenders are secured by a first-priority lien, subject to permitted liens, on collateral consisting
of substantially all of our tangible and intangible assets. The Company and its subsidiaries failed to achieve its minimum EBITDA required pursuant to the terms of the Revolving Credit Agreement for the months ending July 28, 2007 and
August 25, 2007. The lender under the credit agreement granted the Company waivers. The Company negotiated (1) revised monthly minimum EBITDA requirements and (2) agreed to an increase in the interest rate of 75 basis points in LIBOR
margin (from 2.5% to 3.25%) until trailing twelve month EBITDA equals $15.0 million, dropping 25 basis points when trailing twelve month EBITDA is greater than $15.0 million and reverts back to the original interest rate when trailing twelve month
EBITDA is greater than $20.0 million with the lender with an amended agreement dated October 15, 2007. Although we believe we will be able to satisfy the revised minimum EBITDA covenant, we cannot assure you we will be able to do so, or that we
will be able to obtain or maintain additional waivers in the future if we are unable to maintain compliance with our debt covenants. We cannot assure you that our assets would be sufficient to repay in full the money owed to these secured debt
holders.

The certificates of designation of several series of our outstanding preferred stock impose similar restrictions on us, including
on the following:



| |  |  | authorizing or issuing additional series of preferred stock that ranks senior to, or on a par with, the outstanding preferred stock;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | entering into mergers or similar transactions if our existing stockholders immediately before the transaction do not own 50% or more of the voting power of our
capital stock after the transaction;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | selling all or substantially all of our assets;
| | - |  | -----------------------------------------------



| |  |  | materially changing our lines of business;
| | - |  | ------------------------------------------



| |  |  | selling, leasing or licensing our intellectual property or technology other than pursuant to non-exclusive licenses granted to customers in connection with ordinary
course sales of our products;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | raising capital by specified equity lines of credit or similar arrangements or issue any floating or variable priced equity instrument or specified other equity
financings; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | until the earlier of December 21, 2007 and the date on which the original investors in our Series M Convertible Preferred Stock beneficially own less than 10%
of our outstanding common stock, we are prohibited from issuing any preferred stock or convertible debt unless such preferred stock or convertible debt has a fixed conversion ratio. Similarly, we may not issue any of our common stock other than for
a fixed price. Our inability to finance our operations in such ways may have an adverse effect on our business, financial condition, operating results and cash flows.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Because we expect to need to refinance our existing debt, we face the risks of either not being able to do so or doing so at higher interest expense.

Our senior notes mature in 2010. We may not be able to refinance our senior notes or renew or refinance any new credit facility we may enter into, or any
renewal or refinancing may occur on less favorable terms. If we are unable to refinance or renew our senior notes or any new credit facility, our failure to repay all amounts due on the maturity date would cause a default under the indenture or the
applicable credit agreement. In addition, our interest expense may increase significantly if we refinance our senior notes, which bear interest at 13% per year, or any new credit facility, on terms that are less favorable to us than the
existing terms of our senior notes or any new credit facility.



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If we fail to achieve certain financial performance targets, we may be required to redeem up to half of our senior
notes.

Holders of our senior notes have the right to cause us to redeem, at a redemption price of 100% of the principal amount of the
notes, subject to certain exceptions (including there being any outstanding obligations under the revolving credit facility. The Company intends to continue to borrow under the terms of the revolving credit facility):



| |  |  | up to 25% of the original principal amount of senior notes if our consolidated cash flow, for the period of four consecutive fiscal quarters preceding the second
anniversary of the issue date of the senior notes, is less than $20 million; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | up to an additional 25% of the original principal amount of senior notes issued if our consolidated cash flow, for the period of four consecutive fiscal quarters
preceding the third anniversary of the issue date, is less than $25 million.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, upon a change of control of
our company, holders of the senior notes also have the right to require us to repurchase all or any part of their notes at an offer price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of
purchase. In the event we are required to redeem or repurchase senior notes, we may not have sufficient cash or access to liquidity to do so. If we were then required to raise additional capital to do so, we cannot assure you that we would be able
to do so on commercially reasonable terms or at all. In addition, any new credit facility we enter into may have similar provisions or may cause us to be in default if a change of control occurs.

Because we are a holding company with no operations, we will not be able to pay interest on our debt or pay dividends unless our subsidiaries transfer funds to us.

As a holding company, we have no direct operations and our principal assets are the equity interests we hold in our subsidiaries. Our
subsidiaries are legally distinct from us and have no obligation to transfer funds to us. As a result, we are dependent on the results of operations of our subsidiaries and, based on their existing and future debt agreements, the state corporation
law of the subsidiaries and any state regulatory requirements, their ability to transfer funds to us to meet our obligations, to pay interest and principal on our debt and to pay any dividends in the future.

Our stock price is subject to fluctuation and volatility.

The price of our common stock in the secondary market may be influenced by many factors, including the depth and liquidity of the market for our common stock, investor perception of us, variations in our operating results, general trends in
the transportation/logistics industry, government regulation and general economic and market conditions, among other things. The stock market has, on occasion, experienced extreme price and volume fluctuations that have often particularly affected
market prices for smaller companies and that have often been unrelated or disproportionate to the operating performance of the affected companies. The price of our common stock could be affected by such fluctuations.

Future issuances, or the perception of future issuances, of a substantial amount of our common stock may depress the price of the shares of our common stock.

Future issuances, or the perception or the availability for sale in the public market, of substantial amounts of our common stock could
adversely affect the prevailing market price of our common stock and could impair our ability to raise capital through future sales of equity securities. Certain of our stockholders have registration rights with respect to their common stock and
preferred stock, and the holders of our warrants and preferred stock may be forced to exercise and convert these securities into our common stock if specified conditions are met.

We may issue shares of our common stock, or other securities, from time to time as consideration for future acquisitions and investments. In the event
any such acquisition or investment is significant, the number of shares of our common stock, or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be significant. We may also grant
registration rights covering those shares or other securities in connection with any such acquisitions and investments.



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The issuance of additional equity securities in a future financing could trigger the anti-dilution provisions of our
outstanding preferred stock and warrants.

If we issue additional equity securities at a per share price lower than the current market
price (in the case of our outstanding warrants) or the conversion price (in the case of our outstanding warrants and preferred stock), then the exercise price of such warrants and the conversion price of such preferred stock would automatically
adjust downward. Such adjustments would have a dilutive effect on our existing common stockholders and a negative effect on our stock price.

We do not
intend to pay cash dividends on our common stock in the foreseeable future.

We do not anticipate paying cash dividends on our common
stock in the foreseeable future. Any payment of cash dividends will depend on our financial condition, capital requirements, earnings and other factors deemed relevant by our board of directors. Further, the terms of our credit facilities limit our
ability to pay dividends.

We are currently not in compliance with NASDAQ rules regarding minimum bid price and you may have difficulty trading our
securities.

We will need to maintain certain financial and corporate governance qualifications to keep our securities listed on the
NASDAQ Capital Market (NASDAQ). At various times in the past, we have received notices from NASDAQ that we would be de-listed due to a variety of matters, including failure to maintain a minimum bid price of $1.00, failure to timely hold
an annual stockholders meeting and failure to meet the minimum levels of stockholders equity. In each instance, we have taken the actions required by NASDAQ to maintain continued listing, but we cannot assure you that we will at all times meet
the criteria for continued listing.

We received a notice on June 29, 2007 from the NASDAQ that we are not in compliance with the
Marketplace Rule 4310(c)(4) regarding the minimum bid requirement for the continued listing of our common stock on the NASDAQ. We have a period of 180 days, until December 26, 2007, to attain compliance by maintaining a bid price of $1 for ten
consecutive trading days. If we are unable to demonstrate bid price compliance by December 26, 2007, but are found to meet all other initial listing requirements for the NASDAQ, we may receive an additional 180-day compliance period. If we do
not meet compliance requirements within the second 180-day period, NASDAQ will notify us that our common stock will be de-listed. Upon receiving this notice, we will file a current report on Form 8-K with the SEC disclosing that and related details.
Although we may regain compliance with the NASDAQ listing requirements, the negative publicity surrounding the receipt of this notice will likely have a material adverse effect on the price of our Common Stock, our ability to raise capital, whether
debt or equity, in the future unless and until this situation is resolved and will likely cause a negative perception of, and confidence in, us by our investors, customers, vendors, creditors and employees. Further failing to maintain our NASDAQ
listing will result in our breaching covenants made to holders of our preferred stock and certain warrants. We cannot assure you that we will be successful in regaining compliance with NASDAQ listing requirements.

In the event of delisting, trading, if any, would be conducted in the over-the-counter market in the so-called pink sheets or on the OTC
Bulletin Board. In addition, our securities could become subject to the SECs penny stock rules. These rules would impose additional requirements on broker-dealers who effect trades in our securities, other than trades with their
established customers and accredited investors. Consequently, the delisting of our securities and the applicability of the penny stock rules may adversely affect the ability of broker- dealers to sell our securities, which may adversely affect your
ability to resell our securities. If any of these events take place, you may not be able to sell as many securities as you desire, you may experience delays in the execution of your transactions and our securities may trade at a lower market price
than they otherwise would.



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Our organizational documents and applicable law could limit or delay another partys ability to acquire us and,
therefore, could deprive our investors of the opportunity to obtain a takeover premium for their shares.

A number of provisions in our
certificate of incorporation and bylaws make it difficult for another company to acquire us. These provisions include, among others, the following:



| |  |  | requiring the affirmative vote of holders of not less than 62.5% of our Series M Convertible Preferred Stock and Series N Convertible Preferred Stock, each voting
separately as a class, to approve certain mergers, consolidations or sales of all or substantially all of our assets;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | requiring stockholders to provide us with advance notice if they wish to nominate any persons for election to our board of directors or if they intend to propose
any matters for consideration at an annual stockholders meeting; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | authorizing the issuance of so-called blank check preferred stock without common stockholder approval upon such terms as the board of directors may
determine.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, TH Lee Putnam Ventures, L.P. beneficially owned, as of October 15, 2007, approximately
27.7% (excludes other TH Lee funds) of our outstanding common stock on a fully diluted basis, which means it can influence matters requiring stockholder approval, including important corporate matters such as a change in control of our company.

We are also subject to laws that may have a similar effect. For example, section 203 of the Delaware General Corporation Law prohibits us
from engaging in a business combination with an interested stockholder for a period of three years from the date the person became an interested stockholder unless certain conditions are met. As a result of the foregoing, it will be difficult for
another company to acquire us and, therefore, could limit the price that possible investors might be willing to pay in the future for shares of our common stock. These provisions may also have the effect of making it more difficult for third parties
to cause the replacement of our current management team without the concurrence of our board of directors.

We may be exposed to risks relating to our
internal controls and may need to incur significant costs to comply with applicable requirements.

Under Section 404 of the
Sarbanes-Oxley Act, the SEC adopted rules requiring public companies to include a report of management on internal control over financial reporting in their annual reports. In accordance with recently issued guidelines from the SEC, we are
evaluating our internal controls over financial reporting in order for our management to ascertain that such internal controls are adequate and effective.

We expect to expend significant resources during fiscal 2008 in developing the necessary documentation and testing procedures required by Section 404 of the Sarbanes-Oxley Act. There is a risk that we will not
comply with all of the requirements imposed thereby. Accordingly, we cannot assure you that we will not receive an adverse report on our assessment of our internal controls over financial reporting and/or the operating effectiveness of our internal
controls over financial reporting from our independent registered public accounting firm in 2009. If we identify significant deficiencies or material weaknesses in our internal controls over financial reporting that we cannot remediate in a timely
manner or we receive an adverse report from our independent registered public accounting firm with respect to our internal controls over financial reporting, investors and others may lose confidence in the reliability of our financial statements and
our ability to obtain equity or debt financing could be adversely affected.

In addition, if our independent registered public accounting
firm is unable to rely on our internal controls over financial reporting in connection with their audit of our financial statements, and in the further event that they are unable to devise alternative procedures in order to satisfy themselves as to
the



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material accuracy of our financial statements and related disclosures, it is possible that we could receive a qualified or adverse audit opinion on those
financial statements. In that event, the market for our common stock could be adversely affected. Investors and others may lose confidence in the reliability of our financial statements and our ability to obtain equity or debt financing could be
adversely affected.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
|------- | ------------------------------------------------------------

In June 2007, management of the Company and certain key advisors entered into binding agreements to purchase approximately 1 million shares of Common Stock at a purchase price of $1.10 per share. As of
June 30, 2007, the Company received $573,000 from management as advances related to the stock purchase. An additional $68,000 was received in July 2007 and the Company recorded a stock subscription receivable of $417,000. The remainder of the
balance due from management of approximately $249,000 as of September 29, 2007 is classified as a subscription receivable on the consolidated balance sheet and will be paid by payroll deductions or scheduled monthly payments.

In connection with a consent solicitation from the holders of the Senior Notes, in July 2007, the Company raised approximately $3.0 million from the
exercise of approximately 6.0 million warrants in exchange for 6,481,203 shares of common stock. The warrants were exercised by the holders of the Senior Notes at an exercise price of $0.50 per warrant.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES.
|------- | --------------------------------

Not Applicable.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|------- | ----------------------------------------------------

Not
Applicable



|ITEM 5. | OTHER INFORMATION.
|------- | ------------------

Not Applicable.



|ITEM 6. | EXHIBITS.
|------- | ---------

See the Exhibit Index following the
signature page of this Report.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the Town of Westport, State of Connecticut on November 13, 2007.



VELOCITY EXPRESS CORPORATION.By

/s/ Vincent A. WasikVINCENT A. WASIKChief Executive OfficerBy

/s/ Edward W. StoneEDWARD W. STONEChief Financial Officer




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