<PAGE>

================================================================================

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                               WASHINGTON DC 20549

                                   ----------

                                    FORM 10-Q

                                   ----------

                                   (Mark One)

[X]  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934
                  For the quarterly period ended March 27, 2004

                                   ----------

[_]  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                (IRS Employer Identification No.)
        incorporation)

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

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

                                   ----------

Check whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.

                                YES [X]   NO [_]

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

                                YES [_]   NO [X]

As of April 30, 2004 there were 9,357,222 shares of common stock of the
registrant issued and outstanding.

================================================================================

<PAGE>

                  VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

                               INDEX TO FORM 10-Q

                                 March 27, 2004

                                                                            Page
                                                                            ----

Part I.    Financial Information..........................................     1

   ITEM 1. Consolidated Financial Statements (Unaudited)

              Balance Sheets as of March 27, 2004 and June 28, 2003.......     1

              Statements of Operations for the Three and Nine Months
               Ended March 27, 2004 and March 29, 2003....................     2

              Statement of Shareholders' Equity for the Nine Months
               Ended March 27, 2004.......................................     3

              Statements of Cash Flows for the Nine Months Ended
               March 27, 2004 and March 29, 2003..........................     4

              Notes to Consolidated Financial Statements..................     5

   ITEM 2. Management's Discussion and Analysis of Financial
            Condition and Results of Operations...........................    11

   ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.....    15

   ITEM 4. Controls and Procedures........................................    15

Part II.   Other Information..............................................    16

   ITEM 1. Legal Proceedings..............................................    16

   ITEM 2. Changes in Securities, Use of Proceeds and Issuer
            Purchases of Equity Securities................................    16

   ITEM 3. Defaults Upon Senior Securities................................    17

   ITEM 4. Submission of Matters to a Vote of Security Holders............    17

   ITEM 5. Other Information..............................................    17

   ITEM 6. Exhibits and Reports on Form 8-K...............................    17

Signatures................................................................    18

                                        i

<PAGE>

                                    PART I.
                 VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                    (Amounts in thousands, except par value)

<TABLE>
<CAPTION>
                                                                    March 27,     June 28,
                                                                      2004          2003
                                                                  -----------   -----------
                                                                  (unaudited)
                            ASSETS
<S>                                                               <C>           <C>
Current assets:
   Cash                                                           $     1,392   $     1,589
   Accounts receivable, net                                            34,000        38,102
   Accounts receivable - other                                          1,196         2,681
   Prepaid workers' compensation and auto liability insurance           6,479         7,425
   Other current assets                                                 1,207         1,518
                                                                  -----------   -----------
      Total current assets                                             44,274        51,315
Property and equipment, net                                             9,039         9,810
Goodwill                                                               42,830        42,830
Deferred financing costs, net                                           1,653         1,425
Other assets                                                            1,197         1,109
                                                                  -----------   -----------
Total assets                                                      $    98,993   $   106,489
                                                                  ===========   ===========
             LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Trade accounts payable                                         $    20,044   $    19,389
   Accrued insurance and claims                                         4,584         4,236
   Accrued wages and benefits                                           2,563         4,896
   Accrued legal and claims                                             2,061         3,730
   Other accrued liabilities                                              414           340
   Revolving credit facility and current portion of long-term
    debt                                                               29,957        39,143
                                                                  -----------   -----------
      Total current liabilities                                        59,623        71,734
Long-term debt less current portion                                     5,978         4,602
Accrued insurance and claims                                            5,088         7,703
Shareholders' equity:
   Preferred stock, $0.004 par value, 50,000 shares
    authorized 29,933 and 13,615 shares issued and outstanding
    at March 27, 2004 and June 28, 2003, respectively                  86,888        64,422
   Preferred warrants, 1,042 outstanding at March 27, 2004
    and June 28, 2003                                                   7,600         7,600
   Common stock, $0.004 par value, 150,000 shares authorized
    8,696 and 5,388 shares issued and outstanding at
    March 27, 2004 and June 28, 2003, respectively                         35            22
   Stock subscription receivable                                          (38)          (38)
   Additional paid-in-capital                                          95,736        65,882
   Accumulated deficit                                               (161,811)     (115,375)
   Foreign currency translation                                          (106)          (63)
                                                                  -----------   -----------
      Total shareholders' equity                                       28,304        22,450
                                                                  -----------   -----------
      Total liabilities and shareholders' equity                  $    98,993   $   106,489
                                                                  ===========   ===========
</TABLE>

                 See notes to consolidated financial statements.

                                        1

<PAGE>


                  VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
                  (Amounts in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                Three Months Ended          Nine Months Ended
                                                            -------------------------   -------------------------
                                                              March 27,     March 29,     March 27,     March 29,
                                                                2004          2003          2004          2003
                                                            -----------   -----------   -----------   -----------
<S>                                                         <C>           <C>           <C>           <C>
Revenue                                                     $    67,986   $    76,335   $   215,895   $   229,294
Cost of services                                                 56,523        60,030       175,384       178,226
                                                            -----------   -----------   -----------   -----------
   Gross profit                                                  11,463        16,305        40,511        51,068
Operating expenses:
   Occupancy                                                      3,605         3,475        10,129         9,860
   Selling, general and administrative                           17,087        14,031        48,804        41,409
                                                            -----------   -----------   -----------   -----------
Total operating expenses                                         20,692        17,506        58,933        51,269
                                                            -----------   -----------   -----------   -----------
Loss from operations                                             (9,229)       (1,201)      (18,422)         (201)
Other income (expense):
   Interest expense                                                (557)         (679)       (2,799)       (2,250)
   Other                                                             --            15            --           (29)
                                                            -----------   -----------   -----------   -----------
Net loss                                                         (9,786)       (1,865)      (21,221)       (2,480)
Beneficial conversion feature on preferred stock issuance            --          (599)      (25,215)         (875)
                                                            -----------   -----------   -----------   -----------
Net loss applicable to common shareholders                  $    (9,786)  $    (2,464)  $   (46,436)  $    (3,355)
                                                            ===========   ===========   ===========   ===========
Basic and diluted net loss per share                        $     (1.31)  $     (0.53)  $     (7.58)  $     (0.77)
                                                            ===========   ===========   ===========   ===========
Basic and diluted weighted average number
 of common shares outstanding                                     7,497         4,687         6,128         4,355
                                                            ===========   ===========   ===========   ===========
</TABLE>

                 See notes to consolidated financial statements.

                                        2

<PAGE>

                  VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                                   (Unaudited)
                             (Amounts in thousands)

<TABLE>
<CAPTION>
                                                  Series B         Series C          Series D          Series F         Series G
                                              Preferred Stock  Preferred Stock   Preferred Stock   Preferred Stock  Preferred Stock
                                             ----------------  ----------------  ---------------  ----------------  ---------------
                                             Shares   Amount   Shares   Amount   Shares  Amount   Shares   Amount   Shares  Amount
                                             ------  --------  ------  --------  ------  -------  ------  --------  ------  -------
<S>                                          <C>     <C>       <C>     <C>       <C>     <C>      <C>     <C>       <C>     <C>
Balance at June 28, 2003                      2,807  $ 24,304   2,000  $ 13,600   1,517  $ 8,308     926  $  9,849   5,865  $ 4,377
   Stock option expense                          --        --      --        --      --       --      --        --      --       --
   Issuance of restricted stock                  --        --      --        --      --       --      --        --      --       --
   Common Stock warrants
    issued for services rendered                 --        --      --        --      --       --      --        --      --       --
   Warrant exercises                             --        --      --        --      --       --      --        --      --       --
   Offering costs                                --        --      --        --      --       --      --        --      --       --
   Conversion of preferred to common stock       --        --      --        --      --       --    (145)   (1,600)   (347)    (260)
   Issuance of Series I Preferred Stock          --        --      --        --      --       --      --        --      --       --
   Conversion of debt and
    interest to Series I Preferred Stock         --        --      --        --      --       --      --        --      --       --
   Series I Preferred Stock issued for
    services rendered                            --        --      --        --      --       --      --        --      --       --
   Series I Preferred Stock issued for fees
    related to senior subordinated note          --        --      --        --      --       --      --        --      --       --
   Beneficial conversion of
    Series I Preferred Stock                     --        --      --        --      --       --      --        --      --       --
   Net loss                                      --        --      --        --      --       --      --        --      --       --
   Foreign currency translation                  --        --      --        --      --       --      --        --      --       --
   Comprehensive loss                            --        --      --        --      --       --      --        --      --       --
                                             ------  --------  ------  --------  ------  -------  ------  --------  ------  -------
Balance at March 27, 2004                     2,807  $ 24,304   2,000  $ 13,600   1,517  $ 8,308     781  $  8,249   5,518  $ 4,117
                                             ======  ========  ======  ========  ======  =======  ======  ========  ======  =======

<CAPTION>
                                                 Series H          Series I        Preferred Stock
                                             Preferred Stock    Preferred Stock      Warrants         Common Stock       Stock
                                             ----------------  -----------------  ----------------  ----------------  Subscription
                                             Shares   Amount   Shares    Amount   Shares   Amount   Shares   Amount    Receivable
                                             ------  --------  -------  --------  ------  --------  ------  --------  ------------
<S>                                          <C>     <C>       <C>      <C>       <C>     <C>       <C>     <C>       <C>
Balance at June 28, 2003                        500  $  3,984       --  $     --   1,042  $  7,600   5,388  $     22  $        (38)
   Stock option expense                          --        --       --        --      --        --      --        --            --
   Issuance of restricted stock                  --        --       --        --      --        --      43        --            --
   Common Stock warrants
    issued for services rendered                 --        --       --        --      --        --      --        --            --
   Warrant exercises                             --        --       --        --      --        --     125        --            --
   Offering costs                                --       (66)      --      (823)     --        --      --        --            --
   Conversion of preferred to common stock       --        --       --        --      --        --   3,140        13            --
   Issuance of Series I Preferred Stock          --        --   15,153    22,730      --        --      --        --            --
   Conversion of debt and
    interest to Series I Preferred Stock         --        --      901     1,351      --        --      --        --            --
   Series I Preferred Stock issued for
    services rendered                            --        --      279       419      --        --      --        --            --
   Series I Preferred Stock issued for fees
    related to senior subordinated note          --        --      477       715      --        --      --        --            --
   Beneficial conversion of
    Series I Preferred Stock                     --        --       --        --      --        --      --        --            --
   Net loss                                      --        --       --        --      --        --      --        --            --
   Foreign currency translation                  --        --       --        --      --        --      --        --            --
   Comprehensive loss                            --        --       --        --      --        --      --        --            --
                                             ------  --------  -------  --------  ------  --------  ------  --------  ------------
Balance at March 27, 2004                       500  $  3,918   16,810  $ 24,392   1,042  $  7,600   8,696  $     35  $        (38)
                                             ======  ========  =======  ========  ======  ========  ======  ========  ============

<CAPTION>
                                             Additional                Foreign
                                              Paid-in    Accumulated   Currency
                                              Capital      Deficit    Translation    Total
Balance at June 28, 2003                     ----------  -----------  -----------  ---------
<S>                                          <C>         <C>          <C>          <C>
                                             $   65,882  $  (115,375) $       (63) $  22,450
   Stock option expense                             180           --           --        180
   Issuance of restricted stock                      45           --           --         45
   Common Stock warrants
    issued for services rendered                  2,566           --           --      2,566
   Warrant exercises                                  1           --           --          1
   Offering costs                                    --           --           --       (889)
   Conversion of preferred to common stock        1,847           --           --         --
   Issuance of Series I Preferred Stock              --           --           --     22,730
   Conversion of debt and
    interest to Series I Preferred Stock             --           --           --      1,351
   Series I Preferred Stock issued for
    services rendered                                --           --           --        419
   Series I Preferred Stock issued for fees
    related to senior subordinated note              --           --           --        715
   Beneficial conversion of
    Series I Preferred Stock                     25,215      (25,215)          --         --
   Net loss                                          --      (21,221)          --    (21,221)
   Foreign currency translation                      --           --          (43)       (43)
                                                                                   ---------
   Comprehensive loss                                --           --           --    (21,264)
                                             ----------  -----------  -----------  ---------
Balance at March 27, 2004                    $   95,736  $  (161,811) $      (106) $  28,304
                                             ==========  ===========  ===========  =========
</TABLE>

                 See notes to consolidated financial statements

                                        3

<PAGE>

                 VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                             (Amounts in thousands)

                                                        Nine Months Ended
                                                   ---------------------------
                                                     March 27,      March 29,
                                                       2004           2003
                                                   ------------   ------------
OPERATING ACTIVITIES
   Net loss                                        $    (21,221)  $     (2,480)
   Adjustments to reconcile net loss to net
    cash flows used in operating activities:
      Depreciation                                        2,862          2,693
      Amortization                                          842            690
      Equity instruments issued for compensation          2,571             --
      Stock option expense                                  180             84
      Non-cash interest expense                             702            256
      Provision for bad debts                             4,150            480
      Other                                                  (6)            32
      Gain on retirement of equipment                        --            (11)
   Change in operating assets and liabilities:
      Accounts receivable                                 1,337         (4,273)
      Other current assets                                  719          3,301
      Other assets                                          (88)           (36)
      Accounts payable                                      835          1,435
      Accrued liabilities                                (4,050)        (5,506)
                                                   ------------   ------------
         Cash used in operating activities              (11,167)        (3,335)
INVESTING ACTIVITIES
   Proceeds from sale of assets                              --             11
   Capital expenditures                                  (2,015)        (1,818)
   Other                                                   (124)           104
                                                   ------------   ------------
         Cash used in investing activities               (2,139)        (1,703)
FINANCING ACTIVITIES
   Repayments under revolving credit agreement,
    net                                                 (10,102)          (817)
   Proceeds from bridge loan                              1,000             --
   Proceeds from senior subordinated debt                 6,000             --
   Repayment of senior subordinated debt                 (5,000)            --
   Proceeds from subscription notes                          --            (12)
   Proceeds from issuance of preferred stock, net        22,730          4,721
   Proceeds from issuance of common stock, net                1            400
   Issuance costs related to preferred stock               (722)            --
   Debt financing costs                                    (798)          (537)
                                                   ------------   ------------
         Cash provided by financing activities           13,109          3,755
                                                   ------------   ------------
Net decrease in cash and cash equivalents                  (197)        (1,283)
Cash and cash equivalents, beginning of period            1,589          2,704
                                                   ------------   ------------
Cash and cash equivalents, end of period           $      1,392   $      1,421
                                                   ============   ============

                 See notes to consolidated financial statements

                                        4

<PAGE>

                  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 time-critical logistics solutions to
meet the needs of customers in multiple industry segments. 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.

     The Company has one of the largest time-critical networks and provides a
national footprint for customers desiring same-day service throughout the United
States. The Company's driver work force is primarily comprised of independent
contractors who must pass an intensive screening process to include: proof of
identity and authorization to work in the U.S.; criminal background check for
felony, theft and violence convictions; pre-engagement alcohol and substance
usage testing with post-accident and random testing throughout the year;
validation of driving records to include DUI/DWI convictions and moving
violations within the prior three years; automobile liability insurance of $0.3
million to $1.0 million with the Company named as an additional insured; and
vehicle requirements that meet regulatory and safety standards.

     The Company has continued to invest heavily in technology solutions
developing a proprietary package tracking system which provides customers the
capability of tracking electronically the status of any package via a flexible
web reporting system. The Company believes its same-day ground service
compliments the delivery capabilities of companies such as UPS(R) and FedEx(R)
by providing customers later release times, attractive pricing for multiple
cartons deliveries including heavier package shipments, and the ability to track
any of these packages electronically.

     In certain instances, the Company provides dedicated same-day routing
solutions for customers who have outsourced their entire time-critical
transportation requirements and where the customers' volume is sufficient to
support such activities. However, the Company believes its time-critical
conjunctive or commingled routing solutions throughout the major areas of the
U.S. provide even large customers same-day service at lower costs than either
the major package delivery companies or the customers can provide themselves.
The Company believes the major area of growth is in these same-day conjunctive
routing opportunities, and the Company has invested heavily to provide dynamic
routing solutions based on sophisticated algorithms which are adjusted daily.

2.   SIGNIFICANT ACCOUNTING POLICIES

     Basis of Presentation - The unaudited 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," pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of the Company, all adjustments consisting only of
normal recurring adjustments, necessary to present fairly the financial position
of the Company as of March 27, 2004, and the results of its operations for the
nine months ended March 27, 2004 and March 29, 2003, and its cash flows for the
nine months ended March 27, 2004 and March 29, 2003 have been included. The
results of operations for the nine months ended March 27, 2004 are not
necessarily indicative of the results that may be expected for the fiscal year
ending July 3, 2004. 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 28, 2003, and the footnotes thereto, included in the Company's
Report on Form 10-K, filed with the Securities and Exchange Commission.

                                        5

<PAGE>

                  VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                   (Unaudited)
--------------------------------------------------------------------------------

     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 loss - Comprehensive loss was $21.3 million and $2.5 million
for the nine months ended March 27, 2004 and March 29, 2003, respectively. The
difference between net loss and total comprehensive loss in the respective
periods related to foreign currency translation adjustments.

     New accounting pronouncements - In January 2003, the FASB issued
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN No. 46),
which requires the consolidation of variable interest entities including special
purpose entities that are not controlled through voting interests or in which
the equity investors do not bear the underlying economic risks and rewards. The
provisions of FIN No. 46 are effective for the Company and require disclosures
if the Company expects to consolidate any variable interest entities. The
Company does not expect its consolidated financial results to be impacted by
this standard.

     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.

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

<TABLE>
<CAPTION>
                                                             Three Months Ended           Nine Months Ended
                                                          ------------------------    ------------------------
                                                           March 27,     March 29,     March 27,     March 29,
                                                             2004          2003          2004          2003
                                                          ----------    ----------    ----------    ----------
                                                             (Amounts in thousands, except per share data)
<S>                                                       <C>           <C>           <C>           <C>
Numerator
   Net loss                                               $   (9,786)   $   (1,865)   $  (21,221)   $   (2,480)
   Accretion of beneficial conversion feature
    for Series H Preferred Stock                                  --          (599)           --          (875)
   Beneficial conversion feature for Series I Preferred           --            --       (25,215)           --
                                                          ----------    ----------    ----------    ----------
   Net loss applicable to common shareholders             $   (9,786)   $   (2,464)   $  (46,436)   $   (3,355)
                                                          ==========    ==========    ==========    ==========
Denominator for basic and diluted loss per share
   Weighted average shares                                     7,497         4,687         6,128         4,355
                                                          ==========    ==========    ==========    ==========
Basic and diluted loss per share                          $    (1.31)   $    (0.53)   $    (7.58)   $    (0.77)
                                                          ==========    ==========    ==========    ==========
</TABLE>

                                        6

<PAGE>

                  VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                   (Unaudited)
--------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
                                       Three Months Ended         Nine Months Ended
                                     -----------------------   -----------------------
                                      March 27,    March 29,    March 27,    March 29,
                                        2004         2003         2004         2003
                                     ----------   ----------   ----------   ----------
                                                  (Amounts in thousands)
<S>                                   <C>          <C>          <C>          <C>
Stock options                                --           24           --           12
Common warrants                           7,885        1,859        6,757          939
Preferred warrants:
   Series C Convertible Preferred         3,338          804        3,337          809
   Series D Convertible Preferred         2,136          500        2,136          501
Convertible preferred stock:
   Series B Convertible Preferred        16,404        4,103       16,404        4,103
   Series C Convertible Preferred         8,112        1,976        8,112        1,976
   Series D Convertible Preferred        15,159        4,365       15,159        4,392
   Series F Convertible Preferred        16,373        5,775       17,229        5,848
   Series G Convertible Preferred         4,754        1,286        4,870        1,286
   Series H Convertible Preferred        17,259        3,664       17,259        1,860
   Series I Convertible Preferred       169,809           --       83,819           --
                                     ----------   ----------   ----------   ----------
                                        261,229       24,356      175,082       21,726
                                     ==========   ==========   ==========   ==========
</TABLE>

     Stock Plans and Awards - The Company follows Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for its
employee stock options.

     In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value-based method of accounting
for stock-based employee compensation and to require expanded and more prominent
disclosure about the method of accounting for stock-based employee compensation
and the effect of the method on reported results. The Company has not adopted a
method of transition to the fair value-based method of accounting for
stock-based employee compensation provided under SFAS No. 123 but rather,
follows APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for its stock option plans. The following
table illustrates the effect on net loss and loss per share as if the Company
had applied the fair value recognition provisions of SFAS No. 123:

<TABLE>
<CAPTION>
                                                                Three Months Ended          Nine Months Ended
                                                             ------------------------    ------------------------
                                                              March 27,     March 29,     March 27,     March 29,
                                                                2004          2003          2004          2003
                                                             ----------    ----------    ----------    ----------
                                                                   (In thousands, except per share amounts)
<C>                                                          <S>           <S>           <S>           <S>
Net loss applicable to common shareholders, as reported      $   (9,786)   $   (2,464)   $  (46,436)   $   (3,355)
   Add: Stock-based employee compensation expense included
    in reported net loss applicable to common shareholders           32            --            96            --
   Deduct: Stock-based compensation expense determined
    under fair value method for all awards                           (5)         (326)         (371)       (1,134)
                                                             ----------    ----------    ----------    ----------
   Pro forma                                                 $   (9,759)   $   (2,790)   $  (46,711)   $   (4,489)
                                                             ==========    ==========    ==========    ==========
Basic and diluted loss per common share:
   As reported                                               $    (1.31)   $    (0.53)   $    (7.58)   $    (0.77)
                                                             ==========    ==========    ==========    ==========
   Pro forma                                                 $    (1.30)   $    (0.60)   $    (7.62)   $    (1.03)
                                                             ==========    ==========    ==========    ==========
</TABLE>

                                        7

<PAGE>

                  VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                   (Unaudited)
--------------------------------------------------------------------------------

     In fiscal 2004, the Company issued 3,456,663 common stock warrants to
certain members of the Company's management. The warrants have an exercise price
of $0.01 per share and a term of five years. The warrants contain a provision to
allow additional shares of common stock upon exercise of the warrants in the
event that the Company issues other equity instruments that would result in
dilution to the holders of the warrants. The fair value of the warrants was
approximately $2.6 million, $0.8 million of which was included in compensation
expense in the statement of operations during the second quarter, and $1.8
million of which is included in compensation expense in the statement of
operations in the third quarter. Further expansion of the management team may
result in additional warrant issuances and related compensation charges.

3.   INSURANCE

     The Company maintains a self-insurance reserve for its workers'
compensation and automobile liability risk that is funded with cash being held
by the Company's insurance company. The cash held by the insurance company at
March 27, 2004 and June 28, 2003 amounts to $6.5 million and $7.4 million,
respectively and is reported on the balance sheet as part of Prepaid Workers'
Compensation and Auto Liability insurance. The insurance reserve at March 27,
2004 and June 28, 2003 was $7.9 million and $10.5 million, respectively. These
amounts are reported on the balance sheet with accrued insurance and claims. The
reserves are based upon analysis and an actuarial determination made by the
insurer. The reserves represent the estimate of potential current and future
costs.

4.   FINANCING ARRANGEMENTS

                            March 27,    June 28,
                              2004         2003
                           ----------   ---------
                           (Amounts in thousands)
Revolving note             $   28,859   $  38,961
Senior subordinated note        5,429       4,602
Other                           1,647         182
                           ----------   ---------
                               35,935      43,745
Less current maturities       (29,957)    (39,143)
                           ----------   ---------
Total                      $    5,978   $   4,602
                           ==========   =========

     On November 26, 2003, the Company entered into an amended and restated
revolving credit facility with Fleet Capital Corporation ("Fleet") and Merrill
Lynch Capital. Borrowings under the revolving credit facility are limited to the
lesser of $42.5 million or an amount based on a defined portion of receivables.
Interest is payable monthly at a rate of prime plus 1.25% (5.25% at March 27,
2004), or, at the Company's election, at LIBOR plus 3%. Further, these margins
may be adjusted upward or downward 25 basis points on an annual basis depending
on the Company's achieving certain conditions as defined in the agreement. As of
March 27, 2004, the Company has 87% of the facility under LIBOR contracts at an
average interest rate of 4.24%. In addition, the Company is required to pay a
commitment fee of 0.375% on unused amounts of the total commitment, as defined
in the agreement. The facility matures December 31, 2006. Due to the
characteristics of the revolving credit facility, in accordance with current
accounting pronouncements, the Company has classified the amount outstanding
under the revolving credit facility as a current liability. Despite the balance
sheet classification, the Company intends to manage the revolving credit
facility as long-term debt with a final maturity date in fiscal 2007.

     On November 26, 2003, the Company entered into a new senior subordinated
note agreement with BET Associates, LP which replaced the senior subordinated
debt facility with the former lender, Bayview Capital. The initial carrying
value of the senior subordinated note was $6.0 million and was reduced by $0.6
million for the fair value of Series I Preferred Stock issued to the senior
subordinated lender. The unamortized discount was $0.6 million at March 27,
2004, and is being amortized over the remaining term of the note. The

                                        8

<PAGE>

                  VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                   (Unaudited)
--------------------------------------------------------------------------------

Company also incurred fees of $0.2 million, $0.1 million of which were satisfied
through the issuance of Series I Preferred Stock. These fees were recorded as
deferred financing costs and will be amortized over the life of the loan. The
senior subordinated note requires quarterly principal repayments of $0.5 million
beginning January 31, 2005, and has interest payable monthly at 12% per annum.
Further, the Company is required to pay a service fee of $5,000 per month. The
senior subordinated note is due October 31, 2007. The note is subordinate to the
revolving note.

     Substantially all of the Company's assets have been pledged to secure
borrowings under the revolving credit facility and senior subordinated note. The
Company is subject to certain restrictive covenants under the agreements, 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 its interest
coverage ratio, capital expenditures and maintaining of minimum availability and
EBITDA levels. As of March 27, 2004, there were no violations of covenants for
which the Company did not obtain waivers.

     On March 31, 2004, the Company entered into the third amendment to the
amended and restated revolving credit facility with Fleet. The purpose of this
amendment was to reset certain of the financial covenants provided for in the
agreement discussed above.

     In connection with refinancing the revolving credit facility and the senior
subordinated note, the Company raised $25.2 million in equity (see note 5) to
pay down its existing debt and refinance and extend the Fleet and senior
subordinated facilities. As part of this equity raise, the Company borrowed $1.0
million during the first quarter from an individual investor with an agreement
to repay the principal and interest within 90 days. During the second quarter,
the indebtedness to the individual investor plus the interest thereon as well as
$0.1 million of other borrowings were converted to Series I Convertible
Preferred Stock.

5.   SHAREHOLDERS' EQUITY

     Series I Convertible Preferred Stock - In connection with the extensions of
the revolving credit and senior subordinated debt facilities, the Company's
Board of Directors authorized the sale of up to $25.2 million in Series I
Convertible Preferred Stock ("Series I Preferred") through a private placement.
The issuance of the Series I Preferred is subject to shareholder approval and
has voting rights on an as-converted basis unless the resulting conversion
results in the holder having, cumulatively, more than 40% of the voting stock of
the Company. The initial conversion price of the Series I Preferred is $0.15 per
common share, and is convertible, upon shareholder approval, into the Company's
common stock. Both the conversion price and the number of common shares into
which the Series I Preferred is convertible are subject to adjustment in order
to prevent dilution. The Series I Preferred was deemed to have contained a
beneficial conversion amounting to $25.2 million which was recognized as a
deemed dividend to preferred shareholders.

6.   CASH REQUIREMENTS

     The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company incurred an operating loss of approximately $18.4
million for the nine months ended March 27, 2004. The Company's ability to
continue to fund these operating losses and its ability to grow the business
depends on its ability to obtain additional sources of funds for working capital
for fiscal 2004.

     The Company's revolving credit facility with Fleet Capital Corporation
("Fleet") and its senior subordinated debt facility have been extended through
fiscal 2007 and 2008, respectively. In connection with raising $12.0 million
through a Series J private placement (see Note 7), the Company has amended and
restated its revolving credit and senior subordinated debt facilities in order
to reset certain of the financial

                                        9

<PAGE>

                  VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                   (Unaudited)
--------------------------------------------------------------------------------

covenants provided for in the credit facilities. As of March 27, 2004, there
were no violations of covenants for which the Company did not obtain waivers.
There can be no assurance that such waivers can be obtained in the event that
violations of debt covenants occur in the future.

     The Company's operating plans include controlling its direct cost of
delivery expenses through the implementation of its route management technology,
while continuing to leverage the consolidated back office selling, general and
administrative platform. The Company believes that the new equity relating to
the Series J Preferred, in conjunction with the new credit facility and the
capital from Series I Preferred positions the Company to fund short-term cash
losses and provide adequate liquidity to fund the future growth of the business.
Management believes the new capital will allow the Company to implement the
various initiatives currently under way directed at improving customer service
levels, decreasing fixed expenses and fueling new business development. The
Company expects to continue to secure additional financing from its lenders or
through the issuance of additional Company equity securities; however, there can
be no assurance that such funding can be obtained.

7.   SUBSEQUENT EVENT

     Series J Convertible Preferred Stock - In February 2004, the Company's
Board of Directors authorized the sale of up to $12.0 million of Series J
Convertible Preferred Stock ("Series J Preferred") through a private placement.
The issuance of the Series J Preferred is subject to shareholder approval and is
non-voting unless it is converted into common stock. The initial conversion
price of the Series J Preferred is $0.15 per common share, and is convertible,
upon shareholder approval, into the Company's common stock. Both the conversion
price and the number of common shares into which the Series J Preferred is
convertible are subject to adjustment in order to prevent dilution. The Company
began selling its Series J Preferred on March 30, 2004 and expects to complete
sales of Series J Preferred in the fourth quarter. The Company will be required
to take a charge against net income available to common shareholders of $12.0
million in its fourth quarter to reflect the beneficial conversion in the Series
J Preferred.


                                       10

<PAGE>

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

     The Company is engaged in the business of time-critical logistics solutions
to meet the needs of customers in multiple industry segments, primarily in the
United States with limited operations in Canada.

     The Company has one of the largest time-critical networks and provides a
national footprint for customers desiring same-day service throughout the United
States. The Company's driver work force is primarily comprised of independent
contractors who must pass an intensive screening process to include: proof of
identity and authorization to work in the U.S.; criminal background check for
felony, theft and violence convictions; pre-engagement alcohol and substance
usage testing with post-accident and random testing throughout the year;
validation of driving records to include DUI/DWI convictions and moving
violations within the prior three years; automobile liability insurance of $0.3
million to $1.0 million with the Company named as an additional insured; and
vehicle requirements that meet regulatory and safety standards.

     The Company has continued to invest heavily in technology solutions
developing a proprietary package tracking system which provides customers the
capability of tracking electronically the status of any package via a flexible
web reporting system. The Company believes its same-day ground service
compliments the delivery capabilities of companies such as UPS(R) and FedEx(R)
by providing customers later release times, attractive pricing for multiple
cartons deliveries including heavier package shipments, and the ability to track
any of these packages electronically.

     In certain instances, the Company provides dedicated same-day routing
solutions for customers who have outsourced their entire time-critical
transportation requirements and where the customers' volume is sufficient to
support such activities. However, the Company believes its time-critical
conjunctive or commingled routing solutions throughout the major areas of the
U.S. provide even large customers same-day service at lower costs than either
the major package delivery companies or the customers can provide themselves.
The Company believes the major area of growth is in these same-day conjunctive
routing opportunities, and the Company has invested heavily to provide dynamic
routing solutions based on sophisticated algorithms which are adjusted daily.

                                       11

<PAGE>

     The Company's customers represent a variety of industries and utilize the
Company's services across multiple service offerings. Revenue categories and
percentages of total revenue as of March 27, 2004 and March 29, 2003 are as
follows:

                                             2004           2003
                                             ----           ----
Commercial & office products                 38.5%          34.6%
Financial services                           28.7%          27.9%
Healthcare                                   19.3%          24.0%
Transportation & logistics                    4.9%           4.3%
Energy                                        5.2%           5.5%
Technology                                    3.4%           3.7%

Historical Results of Operations

     During the second quarter of this fiscal year, the company's service
relationship with two corporate customers was terminated. Revenue for the
quarter ended March 27, 2004 decreased $8.3 million or 10.9% to $68.0 million
from $76.3 million for the quarter ended March 29, 2003. Approximately
sixty-five percent of the net decline in revenue is the result of the
termination of these two relationships. When adjusted for the effect of the
aforementioned terminations of service, revenue in the quarter ended March 27,
2004 was approximately one per cent lower than the revenue reported for the
quarter ended December 27, 2003. During the quarter, revenue from new customer
and expanded customer contracts was approximately $3.8 million.

     During the second quarter of this fiscal year, the company's service
relationship with two corporate customers was terminated. Revenue for the nine
months ended March 27, 2004 decreased $13.4 million or 5.8% to $215.9 million
from $229.3 million for the nine months ended March 29, 2003. Approximately
seventy-nine per cent of the net decline in revenue is the result of the
termination of these two relationships. The remaining decrease in revenue for
the nine months ended March 27, 2004 compared to the same period last year is
related to lower volume experienced as a result of customer attrition, revenue
loss associated with pricing pressure, and customer freight volume fluctuations.
During the nine month period ended March 27, 2004, revenue growth from new
customer and expanded customer contracts was approximately $9.9 million.

     The Company is continually engaged in bidding additional contract work for
a variety of customers. The Company's current pipeline of bidding activity
remains robust, with potential customers whose expected billings would amount to
approximately $92 million on an annual basis. The activity is consistent across
all geographic regions in which the Company operates. Implementation of newly
awarded contracts generally requires from thirty to sixty days for full
implementation.

     Cost of services for the quarter ended March 27, 2004 was $56.5 million, a
reduction of $3.5 million or 5.8% from $60.0 million for the quarter ended March
29, 2003. The decrease consists of $6.6 million in cost reductions related to
the reduced revenue described above and increases of $3.1 million related to
increased costs. The increases included $2.0 million of compensatory costs for
employee drivers, independent contractor drivers and other purchased
transportation, $0.4 million of insurance costs and $0.7 million of other
increased delivery costs. As a result, gross margin declined from 21.4% in the
prior-year quarter to 16.9% for the quarter ended March 27, 2004.

     Cost of services for the nine months ended March 27, 2004 was $175.4
million, a reduction of $2.8 million or 1.6% from $178.2 million for the nine
months ended March 29, 2003. The decrease consists of $10.4 million in direct
cost savings resulting from the reduced revenue described above. The reduction
was offset by increases totaling $7.6 million, comprised of $5.0 million of
increased compensatory costs for employee drivers, independent contractor
drivers and other purchased transportation, $1.9 million of increased insurance
costs and $0.7 million of increases in other delivery costs. As a result, gross
margin declined from 22.3% in the prior year to 18.8% for the nine months ended
March 27, 2004.

     Selling, general and administrative ("SG&A") expenses for the quarter ended
March 27, 2004 were $17.1 million or 25.1% of revenue, an increase of $3.1
million or 22.1% as compared with $14.0 million or 18.4% of revenue for the
quarter ended March 29, 2003. The increase in SG&A for the quarter resulted from
a charge of

                                       12

<PAGE>

approximately $1.8 million in connection with warrants issued to certain members
of management. Additionally, approximately $0.6 million of the increase relates
to increased contract labor costs, $0.5 million relates to increased travel and
employee acquisition costs and $0.2 million of the increase relates to other
miscellaneous items.

     SG&A expenses for the nine months ended March 27, 2004 were $48.8 million
or 22.6% of revenue, an increase of $7.4 million or 17.9% as compared with $41.4
million or 18.1% of revenue for the nine months ended March 29, 2003. The
increase in SG&A for the first nine months of fiscal 2004 resulted from charges
associated with the valuation of certain accounts receivable of $3.7 million. In
connection with the review of accounts receivable at the mid-year point, the
revenue loss in the first half and the Company's strengthening of its credit
standards, the Company recorded this charge to mitigate credit risk. The Company
also recorded charges of approximately $2.6 million in connection with warrants
issued to certain members of management. Approximately $0.2 million of the
increase relates to the write off of bank fees in connection with the new senior
subordinated note, approximately $1.5 million of the increase relates to
increased contract labor costs, $0.4 million relates to increased travel and
costs related to hiring of new executives and $1.5 million of the increase
relates to other miscellaneous items. The Company realized savings of
approximately $2.7 million related to reduced headcounts as a result of
centralization of back office functions.

     Occupancy charges for the quarter ended March 27, 2004 were $3.6 million,
an increase of $0.1 million or 2.9% from $3.5 million for the quarter ended
March 29, 2003. The net increase is due to higher utility and common area
maintenance charges and higher net rental expense.

     Occupancy charges for the nine months ended March 27, 2004 were $10.1
million, an increase of $0.2 million or 2.0% from $9.9 million for the nine
months ended March 29, 2003. The net increase for the first nine months is due
to higher utility and common area maintenance charges of as well as higher net
rental expense.

     Interest expense for the quarter ended March 27, 2004 decreased $0.1
million to $0.6 million from $0.7 million for the quarter ended March 29, 2003.
Interest expense related to the Company's borrowings decreased over the same
period in the prior year as a result of lower interest rates and lower average
borrowings under the revolving credit and senior subordinated debt facilities.

     Interest expense for the nine months ended March 27, 2004 increased $0.5
million to $2.8 million from $2.3 million for the nine months ended March 29,
2003. Interest expense related to the Company's borrowings increased over the
same period in the prior year as a result of higher average interest rates under
the revolving credit and senior subordinated debt facilities.

     As a result of the foregoing factors, the net loss for the quarter ended
March 27, 2004 was $9.8 million, compared with $1.9 million for the same period
in fiscal 2003, an increase of $7.9 million. Net loss for the nine months ended
March 27, 2004 was $21.2 million, compared with $2.5 million for the same period
in fiscal 2003, an increase of $18.7 million.

     Net loss applicable to common shareholders was $9.8 million for quarter
ended March 27, 2004 as compared with $2.5 million for the same period in fiscal
2003. Net loss applicable to common shareholders was $46.4 million for nine
months ended March 27, 2004 as compared with $3.4 million for the same period in
fiscal 2003. For the nine-month period, the difference between net loss
applicable to common shareholders and net loss in the current year relates to
the beneficial conversion associated with the sale of the Series I Preferred. In
the prior-year quarter and nine months, the difference between net loss
applicable to common shareholders and net loss related to the accretion of the
charge associated with the common stock warrants issued with the Series H
Preferred.

Liquidity and Capital Resources

     Cash flow used in operations was $11.2 million for the first nine months of
fiscal 2004. This cash flow was comprised of cash used in operations of $9.9
million and cash used as a result of working capital changes of $1.3 million.
Cash provided as a result of the decrease in accounts receivable of
approximately $1.3 million

                                       13

<PAGE>

was due to ongoing collection activity during the third quarter. Accounts
payable provided approximately $0.8 million as a result of changes in payment
terms with various vendors. The remaining use of working capital of $3.4 million
was due to funding of claims (including insurance, cargo and legal) and other
miscellaneous accruals.

     Cash flow used as a result of investing activities was $2.1 million and
consisted primarily of capital expenditures for the Company's continued
implementation of operational and customer-driven technology solutions
initiatives. The Company's technology solutions are comprised of three elements:
(i) implementation of route management technology, (ii) smart package tracking
technology which will provide a single source of aggregated delivery information
to national customers, and (iii) 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. The
on-going financial benefits of this initiative will be in the form of reduced
cost of services as the Company will have the ability to more effectively manage
driver capacity, vehicle utilization and customer disputes. As an added benefit,
the Company believes this initiative will provide an opportunity to recruit and
retain the most qualified drivers available.

     Cash flow from financing activities amounted to $13.1 million during fiscal
2004. The primary source of cash was from the proceeds of the sale of the Series
I Preferred stock which provided $22.7 million. The bridge loan provided $1.0
million. The Company paid down its revolving credit facility by $10.1 million,
while debt financing costs and costs associated with the issuance of preferred
stock used $1.5 million. In connection with the refinancing of the senior
subordinated note, the Company paid $5.0 million to its former lender and
received proceeds from the new senior subordinated note of $6.0 million.

     As of March 27, 2004, the Company had no outstanding purchase commitments
for capital improvements.

     The Company reported a loss from operations of approximately $18.4 million
for the first nine months of fiscal 2004 and has negative working capital of
approximately $15.3 million at March 27, 2004, primarily due to the
classification of the revolving credit facility as a current liability even
though managed as a long-term liability with a final maturity in fiscal 2007.

     In connection with the extensions of the revolving credit and senior
subordinated debt facilities, the Company's Board of Directors authorized the
sale of up to $25.2 million in Series I Convertible Preferred Stock ("Series I
Preferred") through a private placement. The issuance of the Series I Preferred
is subject to shareholder approval and has voting rights on an as-converted
basis unless the resulting conversion results in the holder having,
cumulatively, more than 40% of the voting stock of the Company. The initial
conversion price of the Series I Preferred is $0.15 per common share, and is
convertible, upon shareholder approval, into the Company's common stock. Both
the conversion price and the number of common shares into which the Series I
Preferred is convertible are subject to adjustment in order to prevent dilution.
The Series I Preferred was deemed to have contained a beneficial conversion
amounting to $25.2 million which was recognized as a deemed dividend to
preferred shareholders.

     During fiscal 2004, the Company intends to continue the execution of
activities it previously initiated to further improve the operating performance
of the Company. These activities include, but are not limited to controlling its
direct cost delivery expenses through the implementation of route management
technology, while continuing to leverage the consolidated back office SG&A
platform. The Company raised $25.2 million in equity, which is being used to
support the refinancing and extension of its revolving credit and senior
subordinated debt facilities and for general working capital purposes.

     In February 2004, the Company's Board of Directors authorized the sale of
up to $12.0 million of Series J Convertible Preferred Stock through a private
placement. Further, the issuance of the Series J Preferred is subject to
shareholder approval and is non-voting unless it is converted into common stock.
The initial conversion price of the Series J Preferred is $0.15 per common
share, and is convertible, upon shareholder approval, into the Company's common
stock. Both the conversion price and the number of common shares into which the
Series J Preferred is convertible are subject to adjustment in order to prevent
dilution. The Company began selling its Series J Preferred on March 30, 2004 and
expects to complete sales of Series J Preferred in the fourth quarter. The
Company will be required to take a charge against net income available to

                                       14

<PAGE>

common shareholders of $12.0 million in its fourth quarter to reflect the
beneficial conversion in the Series J Preferred.

     The Company has entered into the third amendment to the amended and
restated revolving credit facility with Fleet. The purpose of this amendment was
to reset certain of the financial covenants provided for in the amendment
discussed in note 4 to the financial statements. As of March 27, 2004, there
were no violations of covenants for which the Company did not obtain waivers.
There can be no assurance that such waivers can be obtained in the event that
violations of debt covenants occur in the future.

     The Company believes that the new equity relating to Series J Preferred, in
conjunction with the new credit facility and the capital from Series I Preferred
positions the Company to fund short-term cash losses and provide adequate
liquidity to fund the future growth of the business. Management believes the new
capital will allow the Company to implement the various initiatives, currently
underway, directed at improving customer service levels, decreasing fixed
expenses and fueling new business development.

     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 Company maintains a revolving credit facility with Fleet
Capital Corporation that allows for borrowings up to the lesser of $42.5 million
or an amount based on a defined portion of receivables. Interest is payable
monthly at a rate of prime plus 1.25% (5.25% at March 27, 2004), or, at the
Company's election, at LIBOR plus 3%. Further, these margins may be adjusted
upward or downward 25 basis points on an annual basis depending on the Company's
achieving certain conditions as defined in the agreement. As of March 27, 2004,
the Company has 87% of the facility under LIBOR contracts at an average interest
rate of 4.24%. In addition, the Company is required to pay a commitment fee of
0.375% on unused amounts of the total commitment, as defined in the agreement.
The facility matures December 31, 2006. The Company also maintains a $6.0
million senior subordinated note with interest payable monthly at 12% per annum,
as well as quarterly principal repayments of $0.5 million beginning January 31,
2005. The senior subordinated note matures October 31, 2007. Substantially all
of the Company's assets have been pledged to secure borrowings under the
revolving credit facility and senior subordinated note. The Company is subject
to certain restrictive covenants under the agreements, 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 its interest coverage ratio, capital
expenditures and maintaining of minimum availability and EBITDA levels.

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.
However, the Company has revolving debt of $28.9 million at March 27, 2004. If
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 $0.3 million.

ITEM 4.   CONTROLS AND PROCEDURES.

     (a)  Evaluation of disclosure controls and procedures

          Under the supervision and with the participation of the Company's
          management, including its Chief Executive Officer and Chief Financial
          Officer, the Company evaluated the effectiveness of the design and
          operation of its disclosure controls and procedures (as defined in
          Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934
          (the "Exchange Act")). Based upon that evaluation, the Chief Executive
          Officer and Chief Financial Officer concluded that, as of the end of
          the period covered by this report, the Company's disclosure controls
          and procedures were adequately designed to ensure that information
          required to be disclosed by the Company in the reports it files or
          submits under the Exchange Act is recorded, processed, summarized and
          reported within the time periods specified in applicable rules and
          forms.

                                       15

<PAGE>

     (b)  Changes in internal controls

          The Company maintains a system of internal accounting controls that is
          designed to provide reasonable assurance that the Company's books and
          records accurately reflect its transactions and that the established
          policies and procedures are followed. For the quarter ended March 27,
          2004, 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.

     The Company 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. The Company carries workers' compensation insurance and auto liability
coverage for its employees. The Company and its subsidiaries are also named as
defendants in various employment-related lawsuits arising in the ordinary course
of the business of the Company. The Company vigorously defends against all of
the foregoing claims.

     The Company has established additional 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 active 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, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
          SECURITIES.

     The Company has not paid any cash dividends on its Common Stock and expects
that for the foreseeable future it will follow a policy of retaining earnings in
order to finance the continued operations of its business.

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<PAGE>

Payment of dividends is within the discretion of the Company's Board of
Directors and will depend upon the earnings, capital requirements and operating
and financial condition of the Company, among other factors. Further, the
Company's ability to pay dividends is restricted under the terms of the
revolving credit facility and subordinated debt facility.

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.

     The Company does not currently have a formal procedure by which security
holders may recommend nominees to the Registrant's Board of Directors.

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

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

          10.1 Form of Stock Purchase Agreement to purchase Series J Convertible
               Preferred Stock

          10.2 Form of Common Stock Warrant between Velocity Express Corporation
               and management, dated February 12, 2004

          31.1 Section 302 Certification of CEO

          31.2 Section 302 Certification of CFO

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

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

     b.   Reports on Form 8-K

          None


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<PAGE>

                                   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 May 11, 2004.

                                        VELOCITY EXPRESS CORPORATION.


                                        By  /s/ Vincent A. Wasik
                                           -------------------------------------
                                           Vincent A. Wasik
                                           Chairman of the Board, President
                                           & Chief Executive Officer


                                        By  /s/ Robert B. Lewis
                                           -------------------------------------
                                           Robert B. Lewis
                                           Chief Financial Officer
                                           (Principal Financial and Accounting
                                           Officer)


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