##### Table of Contents



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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 March 29, 2003



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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





VELOCITY EXPRESS CORPORATION

(Exact name of registrant as specified in its charter)



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





|7803 Glenroy Road, Suite 200, Minneapolis, Minnesota |  | 55439     
|---------------------------------------------------- |  | ----------
|(Address of Principal Executive Offices)             |  | (Zip Code)





|(612) 492-2400                                      
|----------------------------------------------------
|(Registrants telephone number, including area code)



---



Check 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
(    )



Check whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act).



YES  (    )     NO (X)



As of May 2, 2003, there were 5,385,525 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



March 29, 2003



|               |  |                                                                                               |  | Page
|-------------- |  | --------------------------------------------------------------------------------------------- |  | ----
|PART I.        |  | FINANCIAL INFORMATION                                                                         |  | 3   
|              
|ITEM 1.        |  | Consolidated Financial Statements (Unaudited)                                                 |  |     
|              
|               |  | Balance Sheets as of March 29, 2003 and June 29, 2002                                         |  | 3   
|              
|               |  | Statements of Operations for the Three and Nine Months EndedMarch 29, 2003 and March 30, 2002 |  | 4   
|              
|               |  | Statement of Shareholders Equity for the Nine Months EndedMarch 29, 2003                     |  | 5   
|              
|               |  | Statements of Cash Flows for the Nine Months EndedMarch 29, 2003 and March 30, 2002           |  | 6   
|              
|               |  | Notes to Consolidated Financial Statements                                                    |  | 7   
|              
|ITEM 2.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations         |  | 11  
|              
|ITEM 3.        |  | Quantitative and Qualitative Disclosures About Market Risk                                    |  | 15  
|              
|ITEM 4.        |  | Controls and Procedures                                                                       |  | 15  
|              
|PART II.       |  | OTHER INFORMATION                                                                             |  | 16  
|              
|ITEM 1.        |  | Legal Proceedings                                                                             |  | 16  
|              
|ITEM 2.        |  | Changes in Securities and Use of Proceeds                                                     |  | 16  
|              
|ITEM 3.        |  | Defaults Upon Senior Securities                                                               |  | 17  
|              
|ITEM 4.        |  | Submission of Matters to a Vote of Security Holders                                           |  | 17  
|              
|ITEM 5.        |  | Other Information                                                                             |  | 17  
|              
|ITEM 6.        |  | Exhibits and Reports on Form 8-K                                                              |  | 17  
|              
|SIGNATURES     |  | 19                                                                                           
|              
|CERTIFICATIONS |  | 20                                                                                           



2



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##### Table of Contents



P
ART I.

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except par value)

|                                                                                                                                                              |  | March 29,   |          |   | June 29, |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | -------- | - | -------- | -
|                                                                                                                                                              |  | 2003        |          |   | 2002     |  
|                                                                                                                                                              |  | (unaudited) |          |   |          |  
|ASSETS                                                                                                                                                        |  |             |          |   |          |  
|Current assets:                                                                                                                                               |  |             |          |   |          |  
|Cash                                                                                                                                                          |  | $           | 1,421    |   |          | $
|Accounts receivable, net                                                                                                                                      |  |             | 42,609   |   |          |  
|Accounts receivableother                                                                                                                                     |  |             | 1,626    |   |          |  
|Prepaid workers' compensation and auto liability insurance                                                                                                    |  |             | 8,634    |   |          |  
|Other prepaid expenses                                                                                                                                        |  |             | 1,863    |   |          |  
|Other current assets                                                                                                                                          |  |             | 367      |   |          |  
|                                                                                                                                                              |  |             |          |   |          |  
|Total current assets                                                                                                                                          |  |             | 56,520   |   |          |  
|                                                                                                                                                             
|Property and equipment, net                                                                                                                                   |  |             | 10,063   |   |          |  
|                                                                                                                                                             
|Goodwill                                                                                                                                                      |  |             | 42,830   |   |          |  
|Deferred financing costs, net                                                                                                                                 |  |             | 1,954    |   |          |  
|Other assets                                                                                                                                                  |  |             | 999      |   |          |  
|                                                                                                                                                              |  |             |          |   |          |  
|Total assets                                                                                                                                                  |  | $           | 112,366  |   |          | $
|                                                                                                                                                              |  |             |          |   |          |  
|                                                                                                                                                             
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                                                          |  |             |          |   |          |  
|Current liabilities:                                                                                                                                          |  |             |          |   |          |  
|Trade accounts payable                                                                                                                                        |  | $           | 20,566   |   |          | $
|Accrued insurance and claims                                                                                                                                  |  |             | 5,245    |   |          |  
|Accrued wages and benefits                                                                                                                                    |  |             | 4,697    |   |          |  
|Accrued legal and claims                                                                                                                                      |  |             | 3,560    |   |          |  
|Other accrued liabilities                                                                                                                                     |  |             | 1,199    |   |          |  
|Current portion of long-term debt                                                                                                                             |  |             | 33,793   |   |          |  
|                                                                                                                                                              |  |             |          |   |          |  
|Total current liabilities                                                                                                                                     |  |             | 69,060   |   |          |  
|                                                                                                                                                             
|Long-term debt less current portion                                                                                                                           |  |             | 4,524    |   |          |  
|Accrued insurance and claims                                                                                                                                  |  |             | 6,501    |   |          |  
|                                                                                                                                                             
|Shareholders' equity:                                                                                                                                         |  |             |          |   |          |  
|Preferred stock, $0.004 par value, 50,000 shares authorized 13,865 and 13,568 shares
issued and outstanding at March 29, 2003 and June 29, 2002, respectively |  |             | 66,777   |   |          |  
|Preferred warrants, 1,042 outstanding at March 29, 2003 and June 29,
2002                                                                                     |  |             | 7,600    |   |          |  
|Common stock, $0.004 par value, 150,000 shares authorized 4,719 and 3,663 shares issued
and outstanding at March 29, 2003 and June 29, 2002, respectively     |  |             | 19       |   |          |  
|Stock subscription receivable                                                                                                                                 |  |             | (38      | ) |          |  
|Additional paid-in-capital                                                                                                                                    |  |             | 61,172   |   |          |  
|Accumulated deficit                                                                                                                                           |  |             | (103,121 | ) |          |  
|Foreign currency translation                                                                                                                                  |  |             | (128     | ) |          |  
|                                                                                                                                                              |  |             |          |   |          |  
|Total shareholders' equity                                                                                                                                    |  |             | 32,281   |   |          |  
|                                                                                                                                                              |  |             |          |   |          |  
|Total liabilities and shareholders' equity                                                                                                                    |  | $           | 112,366  |   |          | $
|                                                                                                                                                              |  |             |          |   |          |  



See notes
to consolidated financial statements.



3



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VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Amounts in thousands, except per share data)



|                                                                       |  | Three Months Ended |        |   | Nine Months Ended |  
|---------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | -
|                                                                       |  | March 29, 2003     |        |   | March 30, 2002    |  
|Revenue                                                                |  | $                  | 76,335 |   |                   | $
|Cost of services                                                       |  |                    | 60,030 |   |                   |  
|                                                                       |  |                    |        |   |                   |  
|Gross profit                                                           |  |                    | 16,305 |   |                   |  
|                                                                      
|Operating expenses:                                                    |  |                    |        |   |                   |  
|Occupancy                                                              |  |                    | 3,475  |   |                   |  
|Selling, general and administrative                                    |  |                    | 14,031 |   |                   |  
|                                                                       |  |                    |        |   |                   |  
|Total operating expenses                                               |  |                    | 17,506 |   |                   |  
|                                                                       |  |                    |        |   |                   |  
|Income (loss) from operations                                          |  |                    | (1,201 | ) |                   |  
|                                                                      
|Other income (expense):                                                |  |                    |        |   |                   |  
|Interest expense                                                       |  |                    | (679   | ) |                   |  
|Common stock warrant charge                                            |  |                    |       |   |                   |  
|Other                                                                  |  |                    | 15     |   |                   |  
|                                                                       |  |                    |        |   |                   |  
|Net loss                                                               |  | $                  | (1,865 | ) |                   | $
|                                                                       |  |                    |        |   |                   |  
|                                                                      
|Net loss applicable to common shareholders                             |  | $                  | (2,464 | ) |                   | $
|                                                                       |  |                    |        |   |                   |  
|                                                                      
|Basic and diluted net loss per share                                   |  | $                  | (0.53  | ) |                   | $
|                                                                       |  |                    |        |   |                   |  
|                                                                      
|Basic and diluted weighted average number of common shares outstanding |  |                    | 4,687  |   |                   |  
|                                                                       |  |                    |        |   |                   |  



See notes
to consolidated financial statements.



|
|





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VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS
EQUITY

(Unaudited)

(Amounts in thousands)



|                                                                              |  | Series B Preferred Stock |  | Series C Preferred Stock |        | Series D Preferred Stock |       |        | Series F Preferred Stock |        |  | Series G Preferred Stock |        |  | Series H Preferred Stock |       
|----------------------------------------------------------------------------- |  | ------------------------ |  | ------------------------ | ------ | ------------------------ | ----- | ------ | ------------------------ | ------ |  | ------------------------ | ------ |  | ------------------------ | ------
|                                                                              |  | Shares                   |  | Amount                   |        | Shares                   |       | Amount |                          | Shares |  |                          | Amount |  |                          | Shares
|Balance at June 29, 2002                                                      |  | 2,807                    |  | $                        | 24,304 |                          | 2,000 |        | $                        | 13,600 |  | 1,830                    |        |  | $                        | 10,808
|Payments against stock subscription receivable                                |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |      
|Amortization of stock option expense                                          |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |      
|Warrant exercises                                                             |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |      
|Offering costs                                                                |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |      
|Issuance of Series H Preferred Stock                                          |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |      
|Value of Common Warrants issued in connection with sale of Series H
Preferred |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |      
|Beneficial conversion feature for Series H Preferred Stock                    |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |      
|Conversion of Series D to Common Stock                                        |  |                         |  |                          |       |                          |      |        |                          |       |  | (63                      | )      |  |                          | (500  
|Conversion of Series F to Common Stock                                        |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |      
|Net loss                                                                      |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |      
|Foreign currency translation                                                  |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |      
|                                                                              |  |                          |  |                          |        |                          |       |        |                          |        |  |                          |        |  |                          |       
|Comprehensive loss                                                            |  |                          |  |                          |        |                          |       |        |                          |        |  |                          |        |  |                          |       
|                                                                              |  |                          |  |                          |        |                          |       |        |                          |        |  |                          |        |  |                          |       
|Balance at March 29, 2003                                                     |  | 2,807                    |  | $                        | 24,304 |                          | 2,000 |        | $                        | 13,600 |  | 1,767                    |        |  | $                        | 10,308
|                                                                              |  |                          |  |                          |        |                          |       |        |                          |        |  |                          |        |  |                          |       



[WIDE TABLE
CONTINUED]



|                                                                              |  | Preferred Stock Warrants |  | Common Stock |       | Stock Subscription Receivable |       |        | Additional Paid-in Capital |    | Accumulated Deficit |   |     | Foreign Currency Translation |  |   | Total  | 
|----------------------------------------------------------------------------- |  | ------------------------ |  | ------------ | ----- | ----------------------------- | ----- | ------ | -------------------------- | -- | ------------------- | - | --- | ---------------------------- |  | - | ------ | 
|                                                                              |  | Shares                   |  | Amount       |       | Shares                        |       | Amount |                            |    |                     |   |    
|Balance at June 29, 2002                                                      |  | 1,042                    |  | $            | 7,600 |                               | 3,663 |        | $                          | 15 |                     | $ | (26 | )                            |  | $ | 57,152 | 
|Payments against stock subscription receivable                                |  |                         |  |              |      |                               |      |        |                            |   |                     |   | 18  |                              |  |   |       | 
|Amortization of stock option expense                                          |  |                         |  |              |      |                               |      |        |                            |   |                     |   |    |                              |  |   | 84     | 
|Warrant exercises                                                             |  |                         |  |              |      |                               | 200   |        |                            | 1  |                     |   |    |                              |  |   | 399    | 
|Offering costs                                                                |  |                         |  |              |      |                               |      |        |                            |   |                     |   |    |                              |  |   |       | 
|Issuance of Series H Preferred Stock                                          |  |                         |  |              |      |                               |      |        |                            |   |                     |   | (30 | )                            |  |   |       | 
|Value of Common Warrants issued in connection with sale of Series H
Preferred |  |                         |  |              |      |                               |      |        |                            |   |                     |   |    |                              |  |   | 1,505  | 
|Beneficial conversion feature for Series H Preferred Stock                    |  |                         |  |              |      |                               |      |        |                            |   |                     |   |    |                              |  |   |       | 
|Conversion of Series D to Common Stock                                        |  |                         |  |              |      |                               | 152   |        |                            | 1  |                     |   |    |                              |  |   | 499    | 
|Conversion of Series F to Common Stock                                        |  |                         |  |              |      |                               | 704   |        |                            | 2  |                     |   |    |                              |  |   | 1,533  | 
|Net loss                                                                      |  |                         |  |              |      |                               |      |        |                            |   |                     |   |    |                              |  |   |       | 
|Foreign currency translation                                                  |  |                         |  |              |      |                               |      |        |                            |   |                     |   |    |                              |  |   |       | 
|                                                                              |  |                          |  |              |       |                               |       |        |                            |    |                     |   |     |                              |  |   |        | 
|Comprehensive loss                                                            |  |                          |  |              |       |                               |       |        |                            |    |                     |   |     |                              |  |   |        | 
|                                                                              |  |                          |  |              |       |                               |       |        |                            |    |                     |   |     |                              |  |   |        | 
|Balance at March 29, 2003                                                     |  | 1,042                    |  | $            | 7,600 |                               | 4,719 |        | $                          | 19 |                     | $ | (38 | )                            |  | $ | 61,172 | 
|                                                                              |  |                          |  |              |       |                               |       |        |                            |    |                     |   |     |                              |  |   |        | 



See notes
to consolidated financial statements.





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##### Table of Contents

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands)



|                                                                                  |  | Nine Months Ended |       
|--------------------------------------------------------------------------------- |  | ----------------- | ------
|                                                                                  |  | March 29, 2003    |       
|OPERATING ACTIVITIES                                                              |  |                   |       
|Net loss                                                                          |  | $                 | (2,480
|Adjustments to reconcile net loss to net cash flows used in operating
activities: |  |                   |       
|Depreciation                                                                      |  |                   | 2,693 
|Amortization                                                                      |  |                   | 690   
|Equity instruments issued in lieu of payment for services received                |  |                   |      
|Amortization of stock option expense                                              |  |                   | 84    
|Non cash interest expense                                                         |  |                   | 256   
|Other                                                                             |  |                   | 32    
|Gain on sale of assets                                                            |  |                   |      
|Gain on retirement of equipment                                                   |  |                   | (11   
|Change in operating assets and liabilities:                                       |  |                   |       
|Accounts receivable                                                               |  |                   | (3,793
|Other current assets                                                              |  |                   | 3,301 
|Other assets                                                                      |  |                   | (36   
|Accounts payable                                                                  |  |                   | 1,435 
|Accrued liabilities                                                               |  |                   | (5,506
|                                                                                  |  |                   |       
|Cash used in operating activities                                                 |  |                   | (3,335
|                                                                                 
|INVESTING ACTIVITIES                                                              |  |                   |       
|Proceeds from sale of assets                                                      |  |                   | 11    
|Purchases of equipment                                                            |  |                   | (1,818
|Other                                                                             |  |                   | 104   
|                                                                                  |  |                   |       
|Cash used in investing activities                                                 |  |                   | (1,703
|                                                                                 
|FINANCING ACTIVITIES                                                              |  |                   |       
|(Repayments) borrowings under revolving credit agreement, net                     |  |                   | (817  
|Payments on acquisition notes                                                     |  |                   |      
|Proceeds from subscription notes                                                  |  |                   | (12   
|Proceeds from issuance of preferred stock, net                                    |  |                   | 4,721 
|Proceeds from issuance of common stock, net                                       |  |                   | 400   
|Debt financing costs                                                              |  |                   | (537  
|                                                                                  |  |                   |       
|Cash provided by financing activities                                             |  |                   | 3,755 
|                                                                                  |  |                   |       
|Net (decrease) increase in cash and cash equivalents                              |  |                   | (1,283
|                                                                                 
|Cash and cash equivalents, beginning of period                                    |  |                   | 2,704 
|                                                                                  |  |                   |       
|Cash and cash equivalents, end of period                                          |  | $                 | 1,421 
|                                                                                  |  |                   |       





See notes to consolidated financial statements.





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VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)

---



|1. |  | DESCRIPTION OF BUSINESS
|-- |  | -----------------------



Velocity Express Corporation and its subsidiaries (collectively, the Company) are engaged in the business of providing
same-day transportation and distribution/logistics services 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
and thus additional disclosures under Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures About Segments of an Enterprise and Related Information, are not required.



|2. |  | SIGNIFICANT ACCOUNTING POLICIES
|-- |  | -------------------------------



Basis of Presentation The consolidated financial statements included herein have been prepared by Velocity Express
Corporation which, together with its wholly-owned subsidiaries, shall be referred to herein as the Company, without audit, 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 March 29, 2003, and the results of its operations for the three and nine months ended March 29, 2003, and its
cash flows for the nine months ended March 29, 2003 have been included. 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 consolidated financial statements should be read in conjunction with the
financial statements for the year ended June 29, 2002, and the footnotes thereto, included in the Companys Report on Form 10-K, filed with the Securities and Exchange Commission.



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



Comprehensive income (loss) Comprehensive loss was $2.5 million and $11.5 million for the nine months ended March 29,
2003 and March 30, 2002, respectively. The difference between net loss and total comprehensive loss in the respective periods related to foreign currency translation adjustments.



New accounting pronouncements In August 2001, the FASB issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, effective for fiscal years beginning after December 15, 2001. This statement develops one accounting model (based on the model in SFAS No. 121) for long-lived assets to be
disposed of, expands the scope of discontinued operations and modifies the accounting for discontinued operations. The adoption of this statement beginning fiscal 2003 has not had a material impact on the Companys consolidated financial
position or results of operations.



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. For all periods presented, diluted net loss per share is equal to basic net loss per share because the effect of including such securities or obligations would
have been antidilutive.



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VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



(Unaudited)

---



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



|                                                                                                   |  | Three Months Ended                       |        |   | Nine Months Ended |  
|-------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------ | - | ----------------- | -
|                                                                                                   |  | March 29, 2003                           |        |   | March 30, 2002    |  
|                                                                                                   |  | (In thousands, except per share amounts) |       
|Numerator                                                                                          |  |                                          |        |   |                   |  
|Net loss                                                                                           |  | $                                        | (1,865 | ) |                   | $
|Beneficial conversion feature for Series B Preferred                                               |  |                                          |       |   |                   |  
|Adjustment of Common Warrants issued in connection with sale of Series F Preferred to
market value |  |                                          |       |   |                   |  
|Accretion of Series B Preferred Stock                                                              |  |                                          |       |   |                   |  
|Accretion of Series D Preferred Stock                                                              |  |                                          |       |   |                   |  
|Beneficial conversion feature for Series H Preferred                                               |  |                                          | (599   | ) |                   |  
|Adjustment of Preferred Series C Warrants to market value                                          |  |                                          |       |   |                   |  
|Adjustment of Preferred Series D Warrants to market value                                          |  |                                          |       |   |                   |  
|                                                                                                   |  |                                          |        |   |                   |  
|                                                                                                  
|Net loss applicable to common shareholders                                                         |  | $                                        | (2,464 | ) |                   | $
|                                                                                                   |  |                                          |        |   |                   |  
|                                                                                                  
|Denominator for basic and diluted loss per share                                                   |  |                                          |        |   |                   |  
|Weighted average shares                                                                            |  |                                          | 4,687  |   |                   |  
|                                                                                                   |  |                                          |        |   |                   |  
|                                                                                                  
|Basic and diluted loss per share                                                                   |  | $                                        | (0.53  | ) |                   | $
|                                                                                                   |  |                                          |        |   |                   |  



Stock-Based Compensation In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the Company accounts for its stock option plans under APB Opinion No. 25 and related interpretations. If
the Company had applied the fair value recognition provisions of SFAS No. 123, net loss and loss per share would have been adjusted to the pro forma amounts indicated below:



|                                            |  | Three Months Ended                       |        |   | Nine Months Ended |  
|------------------------------------------- |  | ---------------------------------------- | ------ | - | ----------------- | -
|                                            |  | March 29, 2003                           |        |   | March 30, 2002    |  
|                                            |  | (In thousands, except per share amounts) |       
|Net loss applicable to common shareholders: |  |                                          |        |   |                   |  
|As reported                                 |  | $                                        | (2,464 | ) |                   | $
|                                            |  |                                          |        |   |                   |  
|Pro forma                                   |  | $                                        | (2,851 | ) |                   | $
|                                            |  |                                          |        |   |                   |  
|Basic and diluted loss per common share:    |  |                                          |        |   |                   |  
|As reported                                 |  | $                                        | (0.53  | ) |                   | $
|                                            |  |                                          |        |   |                   |  
|Pro forma                                   |  | $                                        | (0.61  | ) |                   | $
|                                            |  |                                          |        |   |                   |  





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VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



(Unaudited)

---



|3. |  | LONG-TERM DEBT
|-- |  | --------------



Long-term debt consisted of the following:



|                         |  | March 29, 2003         |         |   | June 29, 2002 |  
|------------------------ |  | ---------------------- | ------- | - | ------------- | -
|                         |  | (Amounts in thousands) |        
|Revolving note           |  | $                      | 33,671  |   |               | $
|Senior subordinated note |  |                        | 4,516   |   |               |  
|Other                    |  |                        | 130     |   |               |  
|                         |  |                        |         |   |               |  
|                         |  |                        | 38,317  |   |               |  
|Less current maturities  |  |                        | (33,793 | ) |               |  
|                         |  |                        |         |   |               |  
|Total                    |  | $                      | 4,524   |   |               | $
|                         |  |                        |         |   |               |  



Borrowings under the revolving note are limited to the lesser of $40 million or an amount based on a defined portion of receivables. Interest is payable monthly at a rate of prime plus 1.25% (5.5% at March 29, 2003), or, at the
Companys election, at LIBOR plus 3%. As of March 29, 2003, the Company has 88% of the facility under LIBOR contracts at interest rates ranging from 4.375% to 4.5%.In addition, the Company is required to pay a commitment fee of 0.375%
on unused amounts of the total commitment, as defined in the agreement. The facility matures January 2004.



The senior subordinated note has interest payable quarterly at 12% per annum and is due September 30, 2004. The note is subordinate to the
revolving note. The initial carrying value of the senior subordinated note was reduced by $1.7 million for the fair value of the common stock warrant issued to the senior subordinated lender. The unamortized discount was $0.5 million at March 29,
2003, and is being amortized over the remaining term of the note. The warrant has an exercise price of $7.44 per share and entitles the holder to acquire, in whole or in part 608,099 shares of the Companys common stock, as adjusted to reflect
certain anti-dilution rights as defined in the warrant purchase agreement.



The Companys accounts receivable have been pledged to secure borrowings under the revolving note. The Company is subject to certain restrictive covenants, the more significant of which include
limitations on dividends, acquisitions, new indebtedness and changes in capital structure. The Company is also required to maintain financial covenants related to capital expenditures and maintaining of minimum availability levels.



|4. |  | SHAREHOLDERS EQUITY
|-- |  | --------------------



Series H Convertible Preferred Stock The Company while in the process of raising subordinated debt, authorized the
issuance of up to $5.0 million of its Series H Convertible Preferred Stock (Series H Preferred). The initial conversion price of the Series H Preferred is $1.00 per common share, and is convertible into the Companys common stock
upon the later of shareholder approval or April 30, 2003. Both the conversion price and the number of common shares into which the Series H Preferred is convertible are subject to adjustment in order to prevent dilution.



The Company sold 500,000 shares of Series H Preferred to
investors for net proceeds of $5.0 million. In connection with the sales of Series H Preferred, the Company issued five-year warrants to purchase 2.5 million shares of common stock at an exercise price of $0.01 per share. The proceeds from the
Series H Preferred were allocated based upon their relative fair values between the warrants and the Series H Preferred resulting in an allocation of $1.5 million from Series H Preferred to additional paid in capital. The Series H Preferred was
deemed to have contained a beneficial conversion amounting to $0.9 million, $0.3 million of which was



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VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



(Unaudited)

---



recognized in the quarter ended
December 28, 2002 and the remainder in the quarter ended March 29, 2003 as a deemed dividend to preferred shareholders.



The Series H Preferred contained a call provision that provided the Company with the right to repurchase any or all of the shares of
Series H Preferred at a purchase price of $1.00 per share of common stock until the expiration of the call provision on April 30, 2003. If the Company did not call the Series H Preferred prior to the call date, the Company would be required to issue
a warrant to purchase additional shares of common stock. Subsequent to the third quarter, the Company did not exercise its call right with respect to the Series H Preferred prior to its expiration on April 30, 2003, and on May 1, 2003 issued 3.8
million warrants with a five-year term and an exercise price of $0.01 per share to the holders of the Series H Preferred. The fair value of these warrants will be accounted for on the date of their issuance as a deemed dividend to the preferred
shareholders which will increase the accumulated deficit and additional paid in capital. The Company has not yet determined the amount of this charge.



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

OPERATIONS





VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



In accordance with the Safe
Harbor Provisions of the Private Securities Litigation Reform Act of 1995, the Company notes that certain statements in this Form 10-Q and elsewhere which are forward-looking and which provide other than historical information, involve risks
and uncertainties that may impact the Companys results of operations. These forward-looking statements include, among others, statements concerning the Companys general business strategies, financing decisions, and expectations for
funding capital expenditures and operations in the future. When used herein, the words believe, plan, continue, hope, estimate, project, intend, expect,
and similar expressions are intended to identify such forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, no statements contained in this
Form 10-Q should be relied upon as predictions of future events. Such statements are necessarily dependent on assumptions, data or methods that may be incorrect or imprecise and may be incapable of being realized. The risks and uncertainties
inherent in these forward-looking statements could cause results to differ materially from those expressed in or implied by these statements.



Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date
hereof. The information contained in this Form 10-Q is believed by the Company to be accurate as of the date hereof. Changes may occur after that date, and the Company will not update that information except as required by law in the normal course
of its public disclosure practices.



Overview



Velocity Express Corporation and its
subsidiaries are engaged in the business of providing same-day transportation and distribution/logistics services to individual consumers and businesses. The Company operates primarily in the United States with limited operations in Canada.



The Company has one of the largest nationwide
networks of customized, time-critical delivery solutions in the United States and is a leading provider of scheduled, distribution and expedited logistics services. The Companys 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, for example, financial
institutions that need a wide variety of services including the pickup and delivery of non-negotiable instruments, primarily canceled checks and ATM receipts, the delivery of office supplies, and the transfer of inter-office mail and correspondence.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Distribution logistics consisting of the receipt of customer bulk shipments that are divided and sorted at major metropolitan locations and delivered into multiple
routes with defined endpoints and more broadly defined time schedules. Customers utilizing distribution logistics normally include pharmaceutical wholesalers, retailers, manufacturers or other companies who must distribute merchandise every day from
a single point of origin to many locations within a clearly defined geographic region.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expedited logistics consisting of unique and expedited point-to-point service for customers with extremely time sensitive delivery requirements. Most expedited
logistics services occur within a major metropolitan area or radius of 40 miles, and the Company usually offers one-hour, two- to four-hour and over four-hour delivery services depending on the customers time requirements. These services are
typically available 24 hours a day, seven days a week. Expedited logistics services also include critical parts management and delivery for companies.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





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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 are as follows:



|Financial services    |  | 30.3 | %
|--------------------- |  | ---- | -
|Healthcare            |  | 24.3 | %
|Commercial            |  | 20.8 | %
|Office products       |  | 13.8 | %
|Energy                |  | 5.5  | %
|Technology            |  | 5.2  | %
|Third-party logistics |  | 4.1  | %



Historical Results of
Operations



Revenue for the quarter ended
March 29, 2003 decreased $5.2 million or 6.4% to $76.3 million from $81.5 million for the quarter ended March 30, 2002. Approximately $6.9 million of the decline relates to customer attrition, revenue loss associated with pricing pressure, and
volume declines during the first two months of the quarter resulting from severe weather and a soft economy. This decline was offset by revenue growth from new customer contracts in the third quarter of fiscal 2003 of approximately $1.7 million.



Revenue for the nine months ended March 29, 2003
decreased $32.4 million or 12.4% to $229.3 million from $261.7 million for the nine months ended March 30, 2002. The decrease in revenue for the nine months ended March 29, 2003 compared to the same period last year is the result of the
consolidation of unprofitable locations and the divesture of a non-core air courier business operation of $4.1 million and lower volume experienced in the first nine months as a result of customer attrition, revenue loss associated with pricing
pressure, and volume declines from the soft economy and severe weather of approximately $35.6 million. New customer contracts resulted in revenue growth from in the first nine months of approximately $7.3 million.



Cost of services for the quarter ended March 29, 2003 was
$60.0 million, a reduction of $2.3 million or 3.7% from $62.3 million for the quarter ended March 30, 2002. The reduction of $2.3 million consists of $4.0 million in reduced costs as a result of the reduced revenue described above and an increase of
$1.7 million related to savings achieved in the prior-year quarter, as the Company aggressively transitioned a large portion of its business to the variable cost model resulting in higher than normal insurance and vehicle savings in the prior-year
quarter. While the Company continues to implement its variable cost strategy and to position itself for improvement in its cost structure, it will continue to realize savings related to insurance expense and overall driver and vehicle-related costs,
but at a lower rate going forward.



Cost of
services for the nine months ended March 29, 2003 was $178.2 million, a reduction of $25.2 million or 12.4% from $203.4 million for the nine months ended March 30, 2002. Year-over-year, gross margin remained constant at 22.3% resulting in the entire
reduction in cost of services of $25.2 million correlating to the reduced revenue described above, including $3.7 million related to the divestiture of a non-core air courier business operation. The continued transition to the variable cost model
using independent contractors and employee-owner operators in greater proportion to employee drivers has allowed the Company to maintain consistent margins year over year through the third quarter. The Company expects to continue to realize savings
related to insurance expense and overall driver and vehicle-related costs, but at a lower rate going forward.



Selling, general and administrative (SG&A) expenses for the quarter ended March 29, 2003 were $14.0 million or 18.4% of
revenue, a reduction of $1.4 million or 9.1% as compared with $15.4 million or 18.9% of revenue for the quarter ended March 30, 2002. The decrease in SG&A for the quarter resulted from the Companys continued focus on integrating its back
office functions and scaling back expenses as a result of the soft economy.



SG&A expenses for the nine months ended March 29, 2003 were $41.4 million or 18.1% of revenue, a reduction of $6.7 million or 13.9% as compared with $48.1 million or 18.4% of revenue for the nine
months ended March 30, 2002. The decrease in SG&A for the first nine months of fiscal 2003 resulted from



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integrating, through
technology, all back office processes into one common platform as well as the Companys continued focus on this integration and scaling back expenses as a result of the soft economy. The sale of a non-core air courier business operation
eliminated $0.6 million of related costs.



Occupancy charges for the quarter ended March 29, 2003 were $3.5 million, an increase of $0.3 million or 9.4% from $3.2 million for the quarter ended March 30, 2002. The increase for the quarter is related to new office startups
and higher utility costs related to the cold weather and higher fuel costs.



Occupancy charges for the nine months ended March 29, 2003 were $9.9 million, a reduction of $0.1 million or 1.0% from $10.0 million for the nine months ended March 30, 2002. The improvement for
the first nine months is due to divestitures of a non-core air courier business operation and lower rental rates being implemented in various locations during the first half, offset by slightly higher costs in the third quarter related to new office
startups and higher utility costs related to the cold weather and higher fuel costs.



Interest expense for the quarter ended March 29, 2003 decreased $0.1 million to $0.7 million from $0.8 million for the quarter ended March 30, 2002 primarily as a result of lower interest rates related
to the Companys borrowings due to the Companys use of LIBOR contracts for the majority of its borrowings under the revolving credit facility.



Interest expense for the nine months ended March 29, 2003 decreased $9.5 million to $2.3 million from $11.8 million for the nine months
ended March 30, 2002. Included in interest expense for the prior-year period are certain non-cash charges related to the preferred stock amounting to approximately $4.7 million and a non-cash charge of $4.0 million related to a long-term guarantee
the Company received from its largest shareholder on two letters of credit supporting the Companys revolving credit facility. Interest expense related to the Companys borrowings decreased $0.6 million over the same period in the prior
year as a result of lower interest rates due to the Companys use of LIBOR contracts for the majority of its borrowings under the revolving credit facility.



As compensation for structuring and finalizing the agreement between the Company and CEX which occurred in
July 2001, the Company issued common stock warrants in the first quarter of fiscal 2002. The fair value of the warrants was approximately $1.0 million and was included in other expense in the statement of operations in fiscal 2002.



As a result of the foregoing factors, the net
loss for the quarter ended March 29, 2003 was $1.9 million, compared with $0.2 million for the same period in fiscal 2002, a decline of $1.7 million. Net loss for the nine months ended March 29, 2003 was $2.5 million, compared with $11.4
million for the same period in fiscal 2002, an improvement of $8.9 million.



Net loss applicable to common shareholders was $2.5 million for quarter ended March 29, 2003 as compared with $0.2 million for the same period in fiscal 2002. Net loss applicable to common shareholders
was $3.4 million for nine months ended March 29, 2003 as compared with $21.3 million for the same period in fiscal 2002. The difference in the current year between net loss applicable to common shareholders and net loss relates to the beneficial
conversion associated with Series H Preferred. In the prior year, the difference between net loss applicable to common shareholders and net loss was comprised of non-cash charges associated with the Companys redeemable preferred stock and the
elimination of the redemption features in December 2001.



Liquidity and Capital Resources



Cash flow used in operations was $3.3 million for the first nine months of fiscal 2003. This use of funds was comprised of cash generated from operations of $1.3 million offset by cash flows used as a result of working capital
changes of $4.6 million. Cash used related to accounts receivable was approximately $3.8 million. In 2003, the Company experienced an increase in its days sales outstanding (DSO) as a result of the impact the economy has had on its
customers payment practices. The Company has implemented new credit policies and has increased its scrutiny of its accounts receivable base, but as yet, has not returned the Companys accounts receivable to fiscal 2002 DSO operating
levels. Prepaid workers compensation resulted



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in $2.7 million in working
capital due to a loss fund adjustment returned by the insurance carrier because of claims not developing as the insurance carrier expected. This adjustment is a continued benefit from our transition to the variable cost model. The remaining use of
working capital during the first nine months included approximately $5.1 million due to funding of claims (including insurance, cargo and legal) and the funding of other miscellaneous accruals.



Cash flow used as a result of investing activities was $1.7
million and consisted primarily of capital expenditures for the Companys continued implementation of the customer-driven technology solutions initiative. The Companys customer-driven technology solutions initiative is comprised of two
elements: (i) smart package tracking technology which will provide a single source of aggregated delivery information to national customers, and (ii) a customer-oriented web portal for online information access to provide package tracking,
chain-of-custody updates, electronic signature capture, and real-time proof of delivery retrieval.



Cash flow from financing activities amounted to $3.8 million during the first nine months of fiscal 2003. The primary source of cash was
from the issuance of the Series H Preferred, which provided net proceeds of $4.7 million. Repayments on the revolving credit facility used $0.8 million, and debt financing costs used $0.5 million. The exercise of common warrants resulted in proceeds
of $0.4 million.



The Company reported a
loss from operations of approximately $0.2 million for the first nine months of fiscal 2003 and has negative working capital of approximately $12.5 million at March 29, 2003, primarily due to the reclassification of the credit facility as current
due to its expiration in January 2004. The Company has begun the process of working with its current lender to extend the facility, and expects to have the facility extended by the end of the first quarter in fiscal 2004.



The Company while in the process of raising subordinated debt,
authorized the issuance of up to $5.0 million of its Series H Convertible Preferred Stock (Series H Preferred). The initial conversion price of the Series H Preferred is $1.00 per common share, and is convertible into the
Companys common stock upon the later of shareholder approval or April 30, 2003. Both the conversion price and the number of common shares into which the Series H Preferred is convertible are subject to adjustment in order to prevent dilution.



The Company sold 500,000 shares of Series H
Preferred to investors for net proceeds of $5.0 million. In connection with the sales of Series H Preferred, the Company issued five-year warrants to purchase 2.5 million shares of common stock at an exercise price of $0.01 per share. The proceeds
from the Series H Preferred were allocated based upon their relative fair values between the warrants and the Series H Preferred resulting in an allocation of $1.5 million from Series H Preferred to additional paid in capital. The Series H Preferred
was deemed to have contained a beneficial conversion amounting to $0.9 million, $0.3 million of which was recognized in the quarter ended December 28, 2002 and the remainder in the quarter ended March 29, 2003 as a deemed dividend to preferred
shareholders.



The Series H Preferred contained a
call provision that provided the Company with the right to repurchase any or all of the shares of Series H Preferred at a purchase price of $1.00 per share of common stock until the expiration of the call provision on April 30, 2003. If the Company
did not call the Series H Preferred prior to the call date, the Company would be required to issue a warrant to purchase additional shares of common stock. Subsequent to the third quarter, the Company did not exercise its call right with respect to
the Series H Preferred prior to its expiration on April 30, 2003, and on May 1, 2003 issued 3.8 million warrants with a five-year term and an exercise price of $0.01 per share to the holders of the Series H Preferred. The fair value of these
warrants will be accounted for on the date of their issuance as a deemed dividend to the preferred shareholders which will increase the accumulated deficit and additional paid in capital. The Company has not yet determined the amount of this charge.



As of March 29, 2003, the Company had no
outstanding purchase commitments for capital improvements.



In the short term, the Company intends to continue the execution of activities it previously initiated over the past 18 months to further improve the operating performance of the Company and to meet its fiscal 2003 financial plan.
These activities include, but are not limited to, expanding the variable cost model using independent contractors and employee owner-operators in greater proportion to employee drivers, the



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implementation of
customer-driven technology solutions and continued leveraging of the consolidated back office SG&A platform. Currently, the Company has sufficient cash to fund the fiscal 2003 operating plan as discussed above. If however, the Company elects to
accelerate its transition to a variable cost model using independent contractors and employee owner-operators as a result of continued increases in insurance and fuel costs or expands the implementation of its customer-driven technology solutions
due to customer demands or competitive pressures as a result of continued softness in the economy, the Company may need to secure additional funding. If additional funding is required, the Company will continue to secure additional financing from
its lenders or through the issuance of additional equity; however, there can be no assurance that such funding can be obtained.



In the long term, the Company intends to continue to fund its operations through the extension of its existing revolving credit and senior
subordinated debt facilities. The revolving credit facility with Fleet Capital Corporation allows for borrowings under the revolving note limited to the lesser of $40 million or an amount based on a defined portion of receivables. Interest is
payable monthly at a rate of prime plus 1.25% (5.5% at March 29, 2003), or, at the Companys election, at LIBOR plus 3%. As of March 29, 2003, the Company has 88% of the revolving credit facility under LIBOR contracts at interest rates ranging
from 4.375% to 4.5%.In addition, the Company is required to pay a commitment fee of 0.375% on unused amounts of the total commitment, as defined in the agreement. The term of the revolving credit facility is two years, ending January 2004.
The Company has begun the process of working with its current lender to extend the revolving credit facility, and expects to have the credit facility extended by the end of the first quarter in fiscal 2004. Until such time the Company does not
expect any changes in its capacity to borrow funds under its revolving credit facility. The senior subordinated note has interest payable quarterly at 12% per annum and is due September 30, 2004. The note is subordinate to the revolving credit
facility. The initial carrying value of the senior subordinated note was reduced by $1.7 million for the fair value of the common stock warrant issued to the senior subordinated lender. The unamortized discount was $0.5 million at March
29, 2003, and is being amortized over the remaining term of the note. The warrant has an exercise price of $7.44 per share and entitles the holder to acquire, in whole or in part 608,099 shares of the Companys common stock, as adjusted to
reflect certain anti-dilution rights as defined in the warrant purchase agreement. If additional funding is required as a result of working capital requirements due to business expansion or changes in working capital requirements, the Company will
attempt to secure additional financing from its existing lenders through the expansion of these facilities or through the issuance of additional equity; however, there can be no assurance that such funding can be obtained.



ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.



The Companys operations are not currently subject to material market risks for interest rates, foreign currency rates, or other
market price risks.



The Company has revolving
debt of $33.7 million at March 29, 2003. Approximately 88% of the Companys borrowings under the revolving credit facility are currently under LIBOR contracts with fixed interest rates and various maturity dates, reducing the exposure to market
risk until such time as the expiration of the individual LIBOR contracts. If, however, the entire revolving credit facility were subject to a one percentage point change in the borrowing rate, the corresponding annualized effect on interest expense
would be $337,000.



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ITEM 4.     CONTROLS AND PROCEDURES.



| | (a) |  | Evaluation of disclosure controls and procedures
| | --- |  | ------------------------------------------------



Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we
evaluated the effectiveness of the design and operation of disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act) as of a date (the Evaluation Date) within 90 days prior to the filing date
of this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Companys disclosure controls and procedures were effective in timely alerting them to the
material information relating to the Company (or its consolidated subsidiaries) required to be included in its periodic SEC filings.



| | (b) |  | Changes in internal controls
| | --- |  | ----------------------------



The Company maintains a system of internal accounting controls that is designed to provide reasonable assurance that the Companys
books and records accurately reflect its transactions and that the established policies and procedures are followed. For the quarter ended March 29, 2003, there were no significant changes to internal controls or in other factors that could
significantly affect the Companys internal controls.





PART II



ITEM 1.     LEGAL PROCEEDINGS.



Velocity is a party to litigation and has claims asserted against it incidental to its business. Most of such 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. Velocity carries workers compensation insurance and auto liability coverage for its employees for the current policy year.Velocity and its subsidiaries are also named as defendants in various employment-related lawsuits arising in the ordinary course of the business of Velocity. The Company vigorously defends against all of the foregoing claims.



The Company has established reserves for litigation, which it
believes, are adequate. The Company reviews its litigation matters on a regular basis to evaluate the demands and likelihood of settlements and litigation related expenses. Based on this review, the Company does not believe that the pending
lawsuits, if resolved or settled unfavorably to the Company, would have a material adverse effect upon the Companys balance sheet or results of operations. The Company has managed to fund settlements and litigation expenses through cash flow
and believes that it will be able to do so going forward. Settlements and litigation expenses have not had a material impact on cash flow and the Company believes they will not have a material impact going forward.



Cautionary Statements Regarding Pending Litigation and
Claims



The Companys statements above
concerning pending litigation constitute forward-looking statements. Investors should consider that there are many important factors that could adversely affect the Companys assumptions and the outcome of claims, and cause actual results to
differ materially from those projected in the forward-looking statements. These factors include:



| |  |  | The Company has made estimates of its 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, the Companys liability for claims may increase or decrease depending upon the ultimate development of those claims.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | In estimating the Companys exposure to claims, the Company is relying upon its assessment of insurance coverages and the availability of insurance. In some
instances insurers could contest their obligation to indemnify the Company for certain claims, based upon insurance policy exclusions or limitations. In addition, from time to time, in connection with routine litigation incidental to the
Companys business, plaintiffs may bring claims against the Company that may include undetermined amounts of punitive damages. The Company is currently not aware of any such punitive damages claim or claims in the aggregate which would exceed
10% of its current assets. Such punitive damages are not normally covered by insurance.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ITEM 2.     CHANGES IN SECURITIES AND USE OF PROCEEDS.



The following describes sales of the Companys securities in the last fiscal quarter without registration under the Securities Act of
1933 (the Securities Act):



The
Company authorized the issuance of up to $5.0 million of its Series H Convertible Preferred Stock (Series H Preferred). The initial conversion price of the Series H Preferred is $1.00 per common share, and is convertible into the
Companys common stock upon the later of shareholder approval or April 30, 2003. Both the conversion price and the number of common shares into which the Series H Preferred is convertible are subject to adjustment in order to prevent dilution.



During the third quarter, the Company sold
225,000 shares of Series H Preferred to investors for net proceeds of $2.25 million and issued 1.1 million five-year common stock warrants at an exercise price of $0.01 per share, bringing the total number of shares of Series H Preferred sold to
500,000, the total five-year common stock warrants issued to 2.5 million, and the total proceeds to $5.0 million.



The Company did not use an underwriter or placement agent in connection with selling the Series H Preferred, and no underwriting
commissions were paid. No means of general solicitation was used in offering the securities. The securities were sold to a limited group of accredited investors within the meaning of Rule 501(a) of Regulation D under the Securities Act of 1933 (the
Securities Act) in a private placement transactions, exempt from registration under Section 4(2) of the Securities Act and Rule 506 of Regulation D thereunder.



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.



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ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K.



| | a. |  | Exhibits required by Item 601 of Regulation S-K:
| | -- |  | ------------------------------------------------



| | 10.1 |  | Form of Stock Purchase Agreement to Purchase Series H Convertible Preferred Stock
| | ---- |  | ---------------------------------------------------------------------------------



| | 99.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------



| | 99.2 |  | Certification of Chief Financial Officer pursuant to 18 U.S.C as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------



| | b. |  | Reports on Form 8-K
| | -- |  | -------------------



The Company filed one report on Form 8-K during the fiscal quarter ended March 29, 2003, as follows:



| | (1) |  | Current Report on Form 8-K filed on January 24, 2003, relating that the Company received a notice from The Nasdaq Stock Market stating that because the trading price
for the Companys common stock had closed below $1.00 per share for the previous 30 consecutive trading days, the Company was not in compliance with the minimum bid requirements for continued listing on the Nasdaq SmallCap Market. The Company
was granted 180 days to demonstrate compliance. The Company can demonstrate compliance if its common stock trades for $1.00 per share or more for ten consecutive trading days. The Company believes that it will be able to achieve compliance with the
Nasdaq rules for continued listing.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES



Pursuant
to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned; thereunto duly authorized, in the City of Minneapolis, State of Minnesota on May 13, 2003.





VELOCITY EXPRESS CORPORATION.By

/s/     JEFFRY J. PARELLJeffry J. ParellChief Executive OfficerBy

/s/     MARK E. TIESMark E. TiesChief Financial Officer(Principal Financial and Accounting Officer)




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CERTIFICATIONS



I, Jeffry J. Parell,
certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Velocity Express Corporation;
|-- |  | -----------------------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which the quarterly report is being prepared;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





|Dated: |  | May 13, 2003
|------ |  | ------------



/s/     JEFFRY J. PARELLJeffry J. ParellChief Executive Officer




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##### Table of Contents



I, Mark E. Ties, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Velocity Express Corporation;
|-- |  | -----------------------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which the quarterly report is being prepared;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





|Dated: |  | May 13, 2003
|------ |  | ------------



/s/     MARK E. TIESMark E. TiesChief Financial Officer




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