##### Table of Contents

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U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON DC 20549



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FORM 10-Q/A



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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 December 28, 2002



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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)



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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 January 29, 2003, there were 4,670,550 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



December 28, 2002



|           |  |                                                                                                             |  | Page
|---------- |  | ----------------------------------------------------------------------------------------------------------- |  | ----
|PART I.    |  | FINANCIAL INFORMATION                                                                                       |  | 3   
|           |  |                                                                                                            
|ITEM 1.    |  | Consolidated Financial Statements (Unaudited)                                                               |  |     
|           |  | Balance Sheets as of December 28, 2002 and June 29, 2002                                                    |  | 3   
|           |  | Statements of Operations for the Three and Six Months Ended        
December 28, 2002 and December 29, 2001 |  | 4   
|           |  | Statement of Shareholders Equity for the Six Months Ended December 28, 2002                                |  | 5   
|           |  | Statements of Cash Flows for the Six Months Ended December 28, 2002 and December 29, 2001                   |  | 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                                                  |  | 17  
|           |  |                                                                                                            
|ITEM 4.    |  | Controls and Procedures                                                                                     |  | 17  
|           |  |                                                                                                            
|PART II.   |  | OTHER INFORMATION                                                                                           |  | 18  
|           |  |                                                                                                            
|ITEM 1.    |  | Legal Proceedings                                                                                           |  | 18  
|           |  |                                                                                                            
|ITEM 2.    |  | Changes in Securities and Use of Proceeds                                                                   |  | 18  
|           |  |                                                                                                            
|ITEM 3.    |  | Defaults Upon Senior Securities                                                                             |  | 19  
|           |  |                                                                                                            
|ITEM 4.    |  | Submission of Matters to a Vote of Security Holders                                                         |  | 19  
|           |  |                                                                                                            
|ITEM 5.    |  | Other Information                                                                                           |  | 19  
|           |  |                                                                                                            
|ITEM 6.    |  | Exhibits and Reports on Form 8-K                                                                            |  | 19  
|           | 
|SIGNATURES |  | 20                                                                                                         



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##### Table of Contents

PART 1

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



(Amounts in thousands, except par value)



|                                                                                                                                                                 |  | December 28,2002 |          |   | June 29, 2002 |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ------------- | -
|                                                                                                                                                                 |  | (unaudited)      |          |   |               |  
|ASSETS                                                                                                                                                           |  |                  |          |   |               |  
|Current assets:                                                                                                                                                  |  |                  |          |   |               |  
|Cash                                                                                                                                                             |  | $                | 1,531    |   |               | $
|Accounts receivable, net                                                                                                                                         |  |                  | 41,151   |   |               |  
|Accounts receivableother                                                                                                                                        |  |                  | 1,781    |   |               |  
|Prepaid workers compensation and auto liability insurance                                                                                                       |  |                  | 8,636    |   |               |  
|Other prepaid expenses                                                                                                                                           |  |                  | 2,058    |   |               |  
|Other current assets                                                                                                                                             |  |                  | 378      |   |               |  
|                                                                                                                                                                 |  |                  |          |   |               |  
|Total current assets                                                                                                                                             |  |                  | 55,535   |   |               |  
|Property and equipment, net                                                                                                                                      |  |                  | 10,378   |   |               |  
|Goodwill                                                                                                                                                         |  |                  | 42,830   |   |               |  
|Deferred financing costs, net                                                                                                                                    |  |                  | 1,877    |   |               |  
|Other assets                                                                                                                                                     |  |                  | 991      |   |               |  
|                                                                                                                                                                 |  |                  |          |   |               |  
|Total assets                                                                                                                                                     |  | $                | 111,611  |   |               | $
|                                                                                                                                                                 |  |                  |          |   |               |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                             |  |                  |          |   |               |  
|Current liabilities:                                                                                                                                             |  |                  |          |   |               |  
|Trade accounts payable                                                                                                                                           |  | $                | 19,592   |   |               | $
|Accrued insurance and claims                                                                                                                                     |  |                  | 5,280    |   |               |  
|Accrued wages and benefits                                                                                                                                       |  |                  | 2,983    |   |               |  
|Accrued legal and claims                                                                                                                                         |  |                  | 2,918    |   |               |  
|Other accrued liabilities                                                                                                                                        |  |                  | 1,931    |   |               |  
|Current portion of long-term debt                                                                                                                                |  |                  | 13       |   |               |  
|                                                                                                                                                                 |  |                  |          |   |               |  
|Total current liabilities                                                                                                                                        |  |                  | 32,717   |   |               |  
|Long-term debt less current portion                                                                                                                              |  |                  | 39,997   |   |               |  
|Accrued insurance and claims                                                                                                                                     |  |                  | 6,987    |   |               |  
|Shareholders equity:                                                                                                                                            |  |                  |          |   |               |  
|Preferred stock, $0.004 par value, 50,000 shares authorized 13,650 and 13,568 shares issued and outstanding at December 28, 2002
and June 29, 2002, respectively |  |                  | 64,741   |   |               |  
|Preferred warrants, 1,042 outstanding at December 28, 2002 and June 29, 2002                                                                                     |  |                  | 7,600    |   |               |  
|Common stock, $0.004 par value, 150,000 shares authorized 4,671 and 3,663 shares issued and outstanding at December 28, 2002 and
June 29, 2002, respectively     |  |                  | 19       |   |               |  
|Stock subscription receivable                                                                                                                                    |  |                  | (8       | ) |               |  
|Additional paid-in-capital                                                                                                                                       |  |                  | 60,367   |   |               |  
|Accumulated deficit                                                                                                                                              |  |                  | (100,657 | ) |               |  
|Foreign currency translation                                                                                                                                     |  |                  | (152     | ) |               |  
|                                                                                                                                                                 |  |                  |          |   |               |  
|Total shareholders' equity                                                                                                                                       |  |                  | 31,910   |   |               |  
|                                                                                                                                                                 |  |                  |          |   |               |  
|Total liabilities and shareholders equity                                                                                                                       |  | $                | 111,611  |   |               | $
|                                                                                                                                                                 |  |                  |          |   |               |  



See notes to
consolidated financial statements.



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##### Table of Contents

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



(Amounts in thousands, except per share data)



|                                                                       |  | Three Months Ended |        |   | Six Months Ended |  
|---------------------------------------------------------------------- |  | ------------------ | ------ | - | ---------------- | -
|                                                                       |  | December 28,2002   |        |   | December 29,2001 |  
|Revenue                                                                |  | $                  | 75,041 |   |                  | $
|Cost of services                                                       |  |                    | 58,188 |   |                  |  
|                                                                       |  |                    |        |   |                  |  
|Gross profit                                                           |  |                    | 16,853 |   |                  |  
|Operating expenses:                                                    |  |                    |        |   |                  |  
|Occupancy                                                              |  |                    | 3,199  |   |                  |  
|Selling, general and administrative                                    |  |                    | 13,638 |   |                  |  
|                                                                       |  |                    |        |   |                  |  
|Total operating expenses                                               |  |                    | 16,837 |   |                  |  
|                                                                       |  |                    |        |   |                  |  
|Income (loss) from operations                                          |  |                    | 16     |   |                  |  
|Other income (expense):                                                |  |                    |        |   |                  |  
|Interest expense                                                       |  |                    | (761   | ) |                  |  
|Common stock warrant charge                                            |  |                    |       |   |                  |  
|Other                                                                  |  |                    | (28    | ) |                  |  
|                                                                       |  |                    |        |   |                  |  
|Net loss                                                               |  | $                  | (773   | ) |                  | $
|                                                                       |  |                    |        |   |                  |  
|Net loss applicable to common shareholders                             |  | $                  | (1,049 | ) |                  | $
|                                                                       |  |                    |        |   |                  |  
|Basic and diluted net loss per share                                   |  | $                  | (0.24  | ) |                  | $
|                                                                       |  |                    |        |   |                  |  
|Basic and diluted weighted average number of common shares outstanding |  |                    | 4,442  |   |                  |  
|                                                                       |  |                    |        |   |                  |  







See notes to consolidated financial statements.



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##### Table of Contents

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 |        |   | Preferred Stock Warrants |        | Common Stock |  | StockSubscriptionReceivable |        |        | AdditionalPaid-inCapital |       | AccumulatedDeficit |   |        | ForeignCurrencyTranslation |  |        | Total |       
|----------------------------------------------------------------------------- |  | ------------------------ |  | ------------------------ | ------ | ------------------------ | ----- | ------ | ------------------------ | ------ |  | ------------------------ | ------ |  | ------------------------ | ------ | - | ------------------------ | ------ | ------------ |  | --------------------------- | ------ | ------ | ------------------------ | ----- | ------------------ | - | ------ | -------------------------- |  | ------ | ----- | ------
|                                                                              |  | Shares                   |  | Amount                   |        | Shares                   |       | Amount |                          | Shares |  |                          | Amount |  |                          | Shares |   |                          | Amount |              |  | Shares                      |        | Amount |                          |       | Shares             |   | Amount |                            |  | Shares |       | Amount
|Balance at June 29, 2002                                                      |  | 2,807                    |  | $                        | 24,304 |                          | 2,000 |        | $                        | 13,600 |  | 1,830                    |        |  | $                        | 10,808 |   |                          | 1,066  |              |  | $                           | 11,389 |        |                          | 5,865 |                    | $ | 4,379  |                            |  |       |       | $     
|Payments against stock subscription receivable                                |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |       |   |                          |       |              |  |                             |       |        |                          |      |                    |   |       |                            |  |       |       |       
|Amortization of stock option expense                                          |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |       |   |                          |       |              |  |                             |       |        |                          |      |                    |   |       |                            |  |       |       |       
|Warrant exercises                                                             |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |       |   |                          |       |              |  |                             |       |        |                          |      |                    |   |       |                            |  |       |       |       
|Offering costs                                                                |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |       |   |                          |       |              |  |                             |       |        |                          |      |                    |   | (2     | )                          |  |       |       |       
|Issuance of Series H Preferred Stock                                          |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |       |   |                          |       |              |  |                             |       |        |                          |      |                    |   |       |                            |  | 275    |       |       
|Value of Common Warrants issued in connection with sale of Series H Preferred |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |       |   |                          |       |              |  |                             |       |        |                          |      |                    |   |       |                            |  |       |       |       
|Accretion of beneficial conversion feature for Series H Preferred Stock       |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |       |   |                          |       |              |  |                             |       |        |                          |      |                    |   |       |                            |  |       |       |       
|Conversion of Series D to Common Stock                                        |  |                         |  |                          |       |                          |      |        |                          |       |  | (63                      | )      |  |                          | (500   | ) |                          |       |              |  |                             |       |        |                          |      |                    |   |       |                            |  |       |       |       
|Conversion of Series F to Common Stock                                        |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |       |   |                          | (130   | )            |  |                             | (1,435 | )      |                          |      |                    |   |       |                            |  |       |       |       
|Net loss                                                                      |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |       |   |                          |       |              |  |                             |       |        |                          |      |                    |   |       |                            |  |       |       |       
|Foreign currency translation                                                  |  |                         |  |                          |       |                          |      |        |                          |       |  |                         |        |  |                          |       |   |                          |       |              |  |                             |       |        |                          |      |                    |   |       |                            |  |       |       |       
|                                                                              |  |                          |  |                          |        |                          |       |        |                          |        |  |                          |        |  |                          |        |   |                          |        |              |  |                             |        |        |                          |       |                    |   |        |                            |  |        |       |       
|Comprehensive loss                                                            |  |                          |  |                          |        |                          |       |        |                          |        |  |                          |        |  |                          |        |   |                          |        |              |  |                             |        |        |                          |       |                    |   |        |                            |  |        |       |       
|                                                                              |  |                          |  |                          |        |                          |       |        |                          |        |  |                          |        |  |                          |        |   |                          |        |              |  |                             |        |        |                          |       |                    |   |        |                            |  |        |       |       
|Balance at December 28, 2002                                                  |  | 2,807                    |  | $                        | 24,304 |                          | 2,000 |        | $                        | 13,600 |  | 1,767                    |        |  | $                        | 10,308 |   |                          | 936    |              |  | $                           | 9,954  |        |                          | 5,865 |                    | $ | 4,377  |                            |  | 275    |       | $     
|                                                                              |  |                          |  |                          |        |                          |       |        |                          |        |  |                          |        |  |                          |        |   |                          |        |              |  |                             |        |        |                          |       |                    |   |        |                            |  |        |       |       



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)



|                                                                                  |  | Six Months Ended |       
|--------------------------------------------------------------------------------- |  | ---------------- | ------
|                                                                                  |  | December 28,2002 |       
|OPERATING ACTIVITIES                                                              |  |                  |       
|Net loss                                                                          |  | $                | (615  
|Adjustments to reconcile net loss to net cash flows used in operating activities: |  |                  |       
|Depreciation                                                                      |  |                  | 1,778 
|Amortization                                                                      |  |                  | 405   
|Equity instruments issued in lieu of payment for services received                |  |                  |      
|Amortization of stock option expense                                              |  |                  | 56    
|Non cash interest expense                                                         |  |                  | 171   
|Other                                                                             |  |                  | (32   
|Gain on sale of assets                                                            |  |                  |      
|Gain on retirement of equipment                                                   |  |                  | (11   
|Change in operating assets and liabilities:                                       |  |                  |       
|Accounts receivable                                                               |  |                  | (2,335
|Other current assets                                                              |  |                  | 2,963 
|Other assets                                                                      |  |                  | (28   
|Accounts payable                                                                  |  |                  | 461   
|Accrued liabilities                                                               |  |                  | (6,850
|                                                                                  |  |                  |       
|Cash used in operating activities                                                 |  |                  | (4,037
|INVESTING ACTIVITIES                                                              |  |                  |       
|Proceeds from sale of assets                                                      |  |                  | 11    
|Purchases of equipment                                                            |  |                  | (1,154
|Other                                                                             |  |                  | (30   
|                                                                                  |  |                  |       
|Cash used in investing activities                                                 |  |                  | (1,173
|FINANCING ACTIVITIES                                                              |  |                  |       
|Borrowings (repayments) under revolving credit agreement, net                     |  |                  | 1,071 
|Payments on acquisition notes                                                     |  |                  |      
|Proceeds from subscription notes                                                  |  |                  | 18    
|Proceeds from issuance of preferred stock, net                                    |  |                  | 2,748 
|Proceeds from issuance of common stock, net                                       |  |                  | 400   
|Debt financing costs                                                              |  |                  | (200  
|                                                                                  |  |                  |       
|Cash provided by financing activities                                             |  |                  | 4,037 
|                                                                                  |  |                  |       
|Net (decrease) increase in cash and cash equivalents                              |  |                  | (1,173
|Cash and cash equivalents, beginning of period                                    |  |                  | 2,704 
|                                                                                  |  |                  |       
|Cash and cash equivalents, end of period                                          |  | $                | 1,531 
|                                                                                  |  |                  |       



See notes to
consolidated financial statements.



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##### Table of Contents

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 December 28, 2002, and the
results of its operations for the three and six months ended December 28, 2002, and its cash flows for the six months ended December 28, 2002 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.



Reclassifications Certain
reclassifications have been made to the prior period consolidated financial statements to conform to the current period presentation.



Comprehensive income (loss) Comprehensive loss was $627,000 and $11.3 million for the six months ended December 28, 2002 and December
29, 2001, respectively. The difference between net income and total comprehensive income 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                            |        |   | Six Months Ended  |  
|-------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ------ | - | ----------------- | -
|                                                                                                   |  | December 28, 2002                             |        |   | December 29, 2001 |  
|                                                                                                   |  | (Amounts in thousands, except per share data) |       
|Numerator                                                                                          |  |                                               |        |   |                   |  
|Net loss                                                                                           |  | $                                             | (773   | ) |                   | $
|Beneficial conversion feature                                                                      |  |                                               |       |   |                   |  
|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                                                              |  |                                               |       |   |                   |  
|Accretion of beneficial conversion feature for Series H Preferred Stock                            |  |                                               | (276   | ) |                   |  
|Adjustment of Preferred Series C Warrants to market value                                          |  |                                               |       |   |                   |  
|Adjustment of Preferred Series D Warrants to market value                                          |  |                                               |       |   |                   |  
|                                                                                                   |  |                                               |        |   |                   |  
|Net loss applicable to common shareholders                                                         |  | $                                             | (1,049 | ) |                   | $
|                                                                                                   |  |                                               |        |   |                   |  
|Denominator for basic and diluted loss per share                                                   |  |                                               |        |   |                   |  
|Weighted average shares                                                                            |  |                                               | 4,442  |   |                   |  
|                                                                                                   |  |                                               |        |   |                   |  
|Basic and diluted loss per share                                                                   |  | $                                             | (0.24  | ) |                   | $
|                                                                                                   |  |                                               |        |   |                   |  



The following table
presents securities that could potentially dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share because to do so would have been antidilutive for the periods presented:



|                               |  | Three Months Ended     |  | Six Months Ended
|------------------------------ |  | ---------------------- |  | ----------------
|                               |  | December 28,2002       |  | December 29,2001
|                               |  | (Amounts in thousands)
|Stock options                  |  | 7                      |  | 279             
|Common warrants                |  | 906                    |  | 723             
|Preferred warrants:            |  |                        |  |                 
|Series C Convertible Preferred |  | 774                    |  | 714             
|Series D Convertible Preferred |  | 480                    |  | 438             
|Convertible preferred stock:   |  |                        |  |                 
|Series B Convertible Preferred |  | 3,942                  |  | 3,616           
|Series C Convertible Preferred |  | 1,895                  |  | 1,733           
|Series D Convertible Preferred |  | 4,191                  |  | 4,140           
|Series F Convertible Preferred |  | 5,629                  |  | 4,514           
|Series G Convertible Preferred |  | 1,239                  |  |                
|Series H Convertible Preferred |  | 1,915                  |  |                
|                               |  |                        |  |                 
|                               |  | 20,978                 |  | 16,157          
|                               |  |                        |  |                 



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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:



|                         |  | December 28, 2002      |        |   | June 29, 2002 |  
|------------------------ |  | ---------------------- | ------ | - | ------------- | -
|                         |  | (Amounts in thousands) |       
|Revolving note           |  | $                      | 35,559 |   |               | $
|Senior subordinated note |  |                        | 4,431  |   |               |  
|Other                    |  |                        | 20     |   |               |  
|                         |  |                        |        |   |               |  
|                         |  |                        | 40,010 |   |               |  
|Less current maturities  |  |                        | (13    | ) |               |  
|                         |  |                        |        |   |               |  
|Total                    |  | $                      | 39,997 |   |               | $
|                         |  |                        |        |   |               |  



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 December 28, 2002), or, at the Companys election, at LIBOR plus
3%. Further, the Company has the ability to lower these margins by 0.50% over the remainder of the agreement provided it meets certain conditions as defined in the agreement. 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 facility is two years, ending 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 $0.6 million at December 28, 2002, and is
being amortized over the remaining term of the note. The warrant has an exercise price of $8.46 per share and entitles the holder to acquire, in whole or in part 534,939 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 is in
the process of raising subordinated debt in order to refinance its current subordinated debt facility and to provide working capital support. In connection with this effort, the Company has authorized the issuance of up to $5.0 million of its Series
H Convertible Preferred Stock (Series H Preferred). The Series H Preferred contains a call provision to allow the Company to buy back, at its discretion, the Series H Preferred.



The initial conversion price of the Series H Preferred is $1.00 per common
share, and is convertible, upon the later of shareholder approval or April 30, 2003, into the Companys common stock. 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 Series H Preferred call provision provides 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.



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VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(Unaudited)



During the second quarter, the Company received $5.0 million in purchase commitments from investors
to purchase shares of Series H Preferred. In the quarter, the Company sold 275,000 shares of Series H Preferred to investors for net proceeds of $2.75 million. In connection with the sales of Series H Preferred in the second quarter, the Company
issued five-year warrants to purchase 1.4 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 as determined by an outside independent
appraiser between the warrants and the Series H Preferred resulting in an allocation of $0.8 million from Series H Preferred to additional paid in capital. The Series H Preferred was deemed to have contained a beneficial conversion amounting to $0.8
million, $0.3 million of which was recognized in the quarter ended December 28, 2002 as a deemed dividend to preferred shareholders. The beneficial conversion amount will be charged to accumulated deficit over the period between the issue date and
the earliest conversion date of the Series H Preferred.



The
remaining 225,000 shares of Series H Preferred will be issued in the third quarter. In connection with these shares, the Company will issue 1.1 million five-year common stock warrants at an exercise price of $0.01 per share. Once the fair value of
the warrants to be issued in the third quarter is determined, the proceeds from the Series H Preferred will be allocated based upon their fair values between the warrants and the Series H Preferred.



In the event the Company does not call the Series H Preferred on or before
April 30, 2003, it will be required to issue an additional 3.6 million five-year common stock warrants at an exercise price of $0.01 per share to the holders of the Series H Preferred. In the event the warrants are issued, 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.



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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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Historical Results of Operations



Revenue for the quarter ended December 28, 2002 decreased $9.4 million or 11.1% to $75.0 million from $84.4 million for the
quarter ended December 29, 2001. The decrease in revenue for the quarter ended December 28, 2002 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 $6.5 million. The remaining decline in revenue was the result of lower volume in the second quarter as a result of the soft economy, which impacted the Company through customer attrition, pricing pressure and existing customers shipping
lower volumes. The total impact was approximately $2.9 million.



Revenue for the six months ended December 28, 2002 decreased $27.2 million or 15.1% to $153.0 million from $180.2 million for the six months ended December 29, 2001. The decrease in revenue for the six months ended December 28, 2002
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 $21.3 million, and lower volume experienced in the first half as a result of the
soft economy which impacted the Company through customer attrition, pricing pressure and existing customers shipping lower volumes. The total impact was approximately $5.9 million.



Revenue by service offering was as follows:





|Scheduled logistics    |  | 53.2%
|---------------------- |  | -----
|Distribution logistics |  | 23.4%
|Expedited logistics    |  | 23.4%



Cost of services for
the quarter ended December 28, 2002 was $58.2 million, a reduction of $6.9 million or 10.6% from $65.1 million for the quarter ended December 29, 2001. Approximately $7.2 million of the savings in cost of services correlates to the reduced revenue
described above. This savings was offset by inefficiencies of approximately $0.3 million primarily related to costs associated with not achieving route density resulting in higher payments to drivers as a percentage of sales compared to the same
quarter last year. The Company continues to move to a variable cost strategy, which may mitigate these inefficiencies going forward as the Company continues to see improved insurance expense and improvement in overall driver and vehicle-related
costs.



Cost of services for the six months ended December 28,
2002 was $118.2 million, a reduction of $22.9 million or 16.2% from $141.1 million for the six months ended December 29, 2001. Cost of services improved 1.0 percentage point as our costs as a percentage of revenue decreased from 78.3% to 77.3% for
the six months ended December 28, 2002. Approximately $21.7 million of the savings in cost of services correlates to the reduced revenue described above, including $3.7 million as a result of the divestiture of a non-core air courier business
operation. Approximately $1.2 million relates to efficiencies gained as the Company moved to a variable cost model using independent contractors and employee-owner operators in greater proportion to employee drivers. This variable cost strategy has
resulted in improved insurance expense and improvement in overall driver and vehicle-related costs.



Selling, general and administrative (SG&A) expenses for the quarter ended December 28, 2002 were $13.6 million or 18.2% of revenue, a
reduction of $2.1 million or 13.4% as compared with $15.7 million or 18.6% of revenue for the quarter ended December 29, 2001. The decrease in SG&A for the quarter resulted from integrating, through technology, all back office processes into one
common platform.



SG&A expenses for the six months
ended December 28, 2002 were $27.4 million or 17.9% of revenue, a reduction of $5.2 million or 16.0% as compared with $32.6 million or 18.1% of revenue for the six months ended December 29, 2001. The decrease in SG&A for the first half of fiscal
2003 resulted from integrating, through technology, all back office processes into one common platform resulting in savings of approximately $4.7 million and the sale of a non-core air courier business operation which eliminated $0.5 million of
related costs.



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Occupancy charges for the quarter ended December 28, 2002 were $3.2 million, a reduction of $0.1 million
or 3.0% from $3.3 million for the quarter ended December 29, 2001. The improvement for the quarter is due to lower rent rates being implemented in various locations.



Occupancy charges for the six months ended December 28, 2002 were $6.4 million, a reduction of $0.4 million or 5.9% from
$6.8 million for the six months ended December 29, 2001. The improvement for the first half is due to divestitures of a non-core air courier business operation and lower rental rates being implemented in various locations.



Interest expense for the quarter ended December 28, 2002 decreased $4.4
million to $0.8 million from $5.2 million for the quarter ended December 29, 2001. Included in interest expense for the prior-year period is 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. Exclusive of this charge, interest expense related to the Companys borrowings decreased $0.4 million over the same period in the prior year as a
result of lower interest rates.



Interest expense for the six
months ended December 28, 2002 decreased $9.3 million to $1.6 million from $10.9 million for the six months ended December 29, 2001. 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 the non-cash charge of $4.0 million discussed above. 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.



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 December 28, 2002 was $0.8 million, compared with $3.8 million for the same period in fiscal 2002, an improvement of $3.0 million. Net loss for the six months ended December 28, 2002 was $0.6
million, compared with $11.2 million for the same period in fiscal 2002, an improvement of $10.6 million.



Net loss applicable to common shareholders was $1.0 million for quarter ended December 28, 2002 as compared with $9.7 million for the same period in
fiscal 2002. Net loss applicable to common shareholders was $0.9 million for six months ended December 28, 2002 as compared with $21.1 million for the same period in fiscal 2002. The difference in the six-month period between net loss applicable to
common shareholders and net loss in the current year relates to the accretion of the charge associated with the common stock warrants issued with the Series H Preferred. In the prior year of the comparable period, 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.



Performance Metrics



The Company evaluates operating performance based on various measures
including income from operations, net income and EBITDA. EBITDA represents net income (loss) plus interest, income taxes, depreciation and amortization. The Company considers EBITDA an important indicator of the operational strength and performance
of its business because EBITDA is used as an acceptable measurement in the Companys industry and the Company believes this indicator gives investors and shareholders a benchmark to compare the Companys results to both other industry
competition as well as the Companys historical results, and a measure of the Companys ability to provide cash flows to service debt and fund capital expenditures; however, EBITDA is a supplemental measure of performance and is not
intended to represent a measure of performance in accordance with disclosures required by generally accepted accounting principles (GAAP). Furthermore, EBITDA presented herein may not be comparable to similarly titled measures reported
by other companies. Management believes that there is no limitation on its discretionary use of funds depicted by EBITDA.



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In the second quarter of fiscal 2003, the Company reported income from operations of $16,000 as compared
to $0.3 million in the second quarter of fiscal 2002, a decline of $0.3 million. Furthermore, the Company reported EBITDA of $1.1 million as compared to $2.6 million in the second quarter of fiscal 2002. In the second quarter of fiscal 2002, the
Company recorded a one-time gain associated with the sale of its Air Courier Division. Excluding this gain, the EBITDA produced from operations was $1.5 million.



For the six months ended December 28, 2002, the Company reported income from operations of $1.0 million as compared to
a loss from operations of $0.4 million for the same period in fiscal 2002. The Company also reported EBITDA of $3.2 million as compared to $2.1 million for the same period in fiscal 2002. The prior-year period included a one-time gain of $1.1
million related to the sale of the Air Courier Division. Exclusive of this gain, EBITDA for the first half of fiscal 2003 improved $2.2 million compared to the same period last year. These improvements will be discussed in the following sections.



Cash flow used in operations was $2.9 million for the second
quarter of fiscal 2003 as compared to $2.0 million in the prior year comparable period. In the second quarter of fiscal 2003, the use of funds was comprised of cash flow provided by operations of $0.5 million and cash flow absorbed as a result of
working capital changes of $3.4 million, while in fiscal 2002, the use of funds was comprised of cash flow provided by operations of $0.3 million and cash flow used as a result of working capital changes of $2.3 million. During the second quarter of
fiscal 2003, the Company generated $1.2 million in working capital through the reduction of accounts receivable, while accounts payable provided $0.6 million. Prepaid workers compensation resulted in $0.7 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
included approximately $2.5 million for the funding of the Companys self-insurance risk associated with workers compensation and auto liability insurance and settlement of pre-acquisition legal lawsuits, and $3.4 million for other
accruals, including wages and benefits. During the second quarter of fiscal 2002, the use of cash was driven principally by cash provided from accounts receivable and other current assets of $3.1 million, offset by accounts payable of $1.5 million
and accrued liabilities of $3.9 million, including approximately $1.3 million for the funding of the Companys self-insurance risk associated with workers compensation and auto liability insurance and settlement of pre-acquisition legal
lawsuits, and $2.6 million for other accruals, including wages and benefits.



Cash flow used as a result of investing activities during the second quarter of fiscal 2003 was $0.3 million and consisted of capital expenditures used for the Companys customer-driven technology solutions
initiative and capitalized costs related to the integration of the back office. During the second quarter of 2002, cash flow used as a result of investing activities was $0.6 million, consisting of capital expenditures used for the Companys
customer-driven technology solutions initiative and capitalized costs related to the integration of the back office of $1.2 million, offset by proceeds from the sale of a non-core air courier business operation of $1.8 million.



Cash flow generated from financing activities in the second quarter of fiscal
2003 amounted to $1.6 million, compared to $5.6 million in the second quarter of fiscal 2002. In fiscal 2003, the source of funds was primarily from the private placement of Series H Convertible Preferred Stock through which the Company raised net
cash proceeds of approximately $2.7 million. Long-term debt and notes payable used $1.1 million, including $0.1 million paid for debt financing costs, and $1.0 million repaid against the revolving credit facility. During the second quarter of
2002, cash flow from financing activities was mainly from the private placement of Series F Convertible Preferred Stock through which the Company raised net cash proceeds of approximately $4.5 million and borrowings on the revolving credit facility
of $1.2 million. Net proceeds from issuance of common stock as a result of stock option exercises were $0.1 million. The Company paid $0.2 million for debt financing costs.



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|                                                    |  | Three Months Ended                            |        |   | Six Months Ended  |  
|--------------------------------------------------- |  | --------------------------------------------- | ------ | - | ----------------- | -
|                                                    |  | December 28, 2002                             |        |   | December 29, 2001 |  
|                                                    |  | (Amounts in thousands, except per share data) |       
|Revenue                                             |  | $                                             | 75,041 |   |                   | $
|Income (loss) from operations                       |  |                                               | 16     |   |                   |  
|Net income (loss)                                   |  |                                               | (773   | ) |                   |  
|Net income (loss) applicable to common shareholders |  |                                               | (1,049 | ) |                   |  
|Net income (loss) per common share:                 |  |                                               |        |   |                   |  
|Basic net income (loss) per share                   |  | $                                             | (0.24  | ) |                   | $
|Diluted net income (loss) per share                 |  |                                               | (0.24  | ) |                   |  
|Other financial data:                               |  |                                               |        |   |                   |  
|Cash used in operating activities                   |  |                                               | (2,936 | ) |                   |  
|Cash (used in) provided by investing activities     |  |                                               | (336   | ) |                   |  
|Cash provided by financing activities               |  |                                               | 1,604  |   |                   |  
|EBITDA                                              |  |                                               | 1,091  |   |                   |  



A reconciliation of
EBITDA to net income (loss) is as follows:



|                  |  | Three Months Ended     |       |   | Six Months Ended  |  
|----------------- |  | ---------------------- | ----- | - | ----------------- | -
|                  |  | December 28, 2002      |       |   | December 29, 2001 |  
|                  |  | (Amounts in thousands) |      
|EBITDA            |  | $                      | 1,091 |   |                   | $
|Interest expense  |  |                        | (761  | ) |                   |  
|Income taxes      |  |                        |      |   |                   |  
|Depreciation      |  |                        | (846  | ) |                   |  
|Amortization      |  |                        | (257  | ) |                   |  
|                  |  |                        |       |   |                   |  
|Net income (loss) |  | $                      | (773  | ) |                   | $
|                  |  |                        |       |   |                   |  



Liquidity and Capital Resources



Cash flow used in operations was $4.0 million for the
first half of fiscal 2003. This use of funds was comprised of cash generated from operations of $1.8 million offset by cash flows used as a result of working capital changes of $5.8 million. In the first six months of fiscal 2003, cash receipts on
accounts receivable were off approximately $2.3 million compared to revenues during the same period, resulting in a use of cash of approximately $2.3 million. As a result, the Company has implemented new credit policies and has increased its focus
on accounts receivable collections. Prepaid workers compensation resulted in $2.5 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 half included approximately $5.2 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 $1.2 million and consisted primarily of capital expenditures for the Companys continued implementation of the customer-driven technology solutions



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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 $4.0 million during the first half of fiscal 2003. The primary source of cash was from the issuance of Series H Preferred, which provided net proceeds of $2.7 million. The revolving credit facility provided $1.1
million due to the increase in the collateral base. The exercise of common warrants resulted in proceeds of $0.4 million.



The Company reported operating income of approximately $1.0 million for the first six months of fiscal 2003 and has positive working capital of
approximately $22.8 million at December 28, 2002.



As of
December 28, 2002, the Company had no outstanding purchase commitments for capital improvements.



The Company is in the process of raising subordinated debt in order to refinance its current subordinated debt facility and to provide working capital
support. In connection with this effort, the Company has authorized the issuance of up to $5.0 million of its Series H Convertible Preferred Stock (Series H Preferred). The Series H Preferred contains a call provision to allow the
Company to buy back, at its discretion, the Series H Preferred.



The initial conversion price of the Series H Preferred is $1.00 per common share, and is convertible, upon the later of shareholder approval or April 30, 2003, into the Companys common stock. 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 Series H Preferred call provision provides 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.



During the second quarter, the Company received $5.0 million in purchase commitments from investors to purchase shares of Series H Preferred. In the
quarter, the Company sold 275,000 shares of Series H Preferred to investors for net proceeds of $2.75 million. In connection with the sales of Series H Preferred in the second quarter, the Company issued warrants to purchase 1.4 million shares of
common stock at an exercise price of $0.01 per share.



The
remaining 225,000 shares of Series H Preferred will be issued in the third quarter. In connection with these shares, the Company will issue 1.1 million common stock warrants at an exercise price of $0.01 per share.



In the event the Company does not call the Series H Preferred on or before
April 30, 2003, it will be required to issue an additional 3.6 million common stock warrants at an exercise price of $0.01 per share to the holders of the Series H Preferred. As a result of allocating fair value of the warrants from the carrying
amount of the Series H Preferred to the warrants, a beneficial conversion on the Series H Preferred results. The amount of the beneficial conversion will range from $1.5 million to $2.9 million, depending upon whether or not the Company elects to
call the Series H Preferred prior to the April 30, 2003 call date, and depending on the stock price at the time that any additional warrants are issued. The beneficial conversion amount will be charged to accumulated deficit over period between the
issue date and the earliest conversion date of the Series H Preferred. In the second quarter, the Company accounted for $0.3 million of this charge.



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 implementation of customer-driven technology solutions and continued leveraging of the consolidated back



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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 for the first year is
payable monthly at a rate of prime plus 1.25% (5.5% at December 28, 2002). The Company may elect the rate of LIBOR plus 3% at its discretion in which case interest is payable at the end of a LIBOR advance period. 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 facility is two years, ending January 2004. 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 in excess of $0.5 million and changes in capital structure. The Company is
also required to maintain financial covenants related to capital expenditures and maintaining of minimum availability levels. 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 $0.6
million at December 28, 2002, and is being amortized over the remaining term of the note. The warrant has an exercise price of $8.46 per share and entitles the holder to acquire, in whole or in part 534,939 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 $35.6 million at December 28, 2002. Approximately 86% 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 $356,000.



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



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| | 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 December 28, 2002, 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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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):



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The Company has 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, upon the later of shareholder approval or April 30, 2003, into the Companys common stock. 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 Series H Preferred call provision provides 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.



During the second quarter, the Company received approximately $5.0 million in purchase commitments from investors to purchase shares of Series H
Preferred. In the quarter, the Company sold 275,000 shares of Series H Preferred to investors for net proceeds of $2.75 million. The remaining 225,000 shares of Series H Preferred will be issued in the third quarter.



The Company did not use an underwriter or placement agent in connection with
this securities transaction, 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.



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



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



| |  |     
| |  | ----
| |  | 3.1 
| |  |     
| |  | 10.1
| |  |     
| |  | 10.2
| |  |     
| |  | 10.3
| |  |     
| |  | 31.1
| |  |     
| |  | 31.2
| |  |     
| |  | 32.1
| |  |     
| |  | 32.2

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* Filed with initial filing of this Quarterly Report
on Form 10-Q for the quarter ended December 28, 2002.



b.
Reports on Form 8-K



None



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SIGNATURES



In accordance with 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 July 28, 2003.



VELOCITY EXPRESS CORPORATION.By

/S/    Jeffry J. ParellJeffry J. Parell Chief Executive
OfficerBy

/S/    Mark E. TiesMark E. Ties Chief Financial
Officer (Principal Financial and Accounting Officer)








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