<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 December 27, 2003

                                   ----------

[ ]  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
         incorporation)                                   Identification No.)

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

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

                                   ----------

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

                                 YES [X] NO [ ]

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

                                 YES [ ] NO [X]

As of February 6, 2004 there were 7,606,330 shares of common stock of the
registrant issued and outstanding.

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

<PAGE>

                  VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

                               INDEX TO FORM 10-Q

                                December 27, 2003

<TABLE>
<CAPTION>
                                                                                   Page
                                                                                   ----
<S>                                                                                 <C>
Part I.      Financial Information..............................................     1
   ITEM 1.   Consolidated Financial Statements (Unaudited)
                Balance Sheets as of December 27, 2003 and June 28, 2003........     1
                Statements of Operations for the Three and Six Months Ended
                   December 27, 2003 and December 28, 2002......................     2
                Statement of Shareholders' Equity for the Six Months Ended
                   December 27, 2003............................................     3
                Statements of Cash Flows for the Six Months Ended
                   December 27, 2003 and December 28, 2002......................     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............................................    17
   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
</TABLE>

                                       i

<PAGE>

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

<TABLE>
<CAPTION>
                                                       December 27,    June 28,
                                                           2003         2003
                                                       ------------   ---------
                                                        (unaudited)
<S>                                                     <C>           <C>
                          ASSETS

Current assets:
   Cash                                                 $     804     $   1,589
   Accounts receivable, net                                35,674        38,102
   Accounts receivable - other                                999         2,681
   Prepaid workers' compensation and auto liability
      insurance                                             6,845         7,425
   Other current assets                                     1,741         1,518
                                                        ---------     ---------
      Total current assets                                 46,063        51,315
Property and equipment, net                                 9,154         9,810
Goodwill                                                   42,830        42,830
Deferred financing costs, net                               1,771         1,425
Other assets                                                1,168         1,109
                                                        ---------     ---------
Total assets                                            $ 100,986     $ 106,489
                                                        =========     =========
          LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Trade accounts payable                               $  20,300     $  19,389
   Accrued insurance and claims                             3,896         4,236
   Accrued wages and benefits                               2,464         4,896
   Accrued legal and claims                                 2,119         3,730
   Other accrued liabilities                                  264           340
   Revolving credit facility and current portion of
      long-term debt                                       23,512        39,143
                                                        ---------     ---------
      Total current liabilities                            52,555        71,734

Long-term debt less current portion                         6,334         4,602
Accrued insurance and claims                                5,618         7,703

Shareholders' equity:
   Preferred stock, $0.004 par value, 50,000 shares
      authorized 30,412 and 13,615 shares issued and
      outstanding at December 27, 2003 and June 28,
      2003, respectively                                   88,826        64,422
   Preferred warrants, 1,042 outstanding at December
      27, 2003 and June 28, 2003                            7,600         7,600

   Common stock, $0.004 par value, 150,000 shares
      authorized 5,644 and 5,388 shares issued and
      outstanding at December 27, 2003 and June 28,
      2003, respectively                                       23            22
   Stock subscription receivable                              (38)          (38)
   Additional paid-in-capital                              92,207        65,882
   Accumulated deficit                                   (152,025)     (115,375)
   Foreign currency translation                              (114)          (63)
                                                        ---------     ---------
      Total shareholders' equity                           36,479        22,450
                                                        ---------     ---------
      Total liabilities and shareholders' equity        $ 100,986     $ 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            Six Months Ended
                                                   ---------------------------   ---------------------------
                                                   December 27,   December 28,   December 27,   December 28,
                                                       2003           2002           2003           2002
                                                   ------------   ------------   ------------   ------------
<S>                                                  <C>            <C>            <C>            <C>
Revenue                                              $ 71,270       $75,041        $147,909       $152,959
Cost of services                                       57,809        58,188         118,861        118,196
                                                     --------       -------        --------       --------
   Gross profit                                        13,461        16,853          29,048         34,763

Operating expenses:
   Occupancy                                            3,317         3,199           6,524          6,385
   Selling, general and administrative                 18,605        13,638          31,717         27,378
                                                     --------       -------        --------       --------
Total operating expenses                               21,922        16,837          38,241         33,763
                                                     --------       -------        --------       --------
Income (loss) from operations                          (8,461)           16          (9,193)         1,000

Other income (expense):
   Interest expense                                    (1,201)         (761)         (2,242)        (1,571)
   Other                                                   --           (28)             --            (44)
                                                     --------       -------        --------       --------
Net loss                                               (9,662)         (773)        (11,435)          (615)

Beneficial conversion feature on preferred stock
   issuance                                           (25,215)         (276)        (25,215)          (276)
                                                     --------       -------        --------       --------

Net loss applicable to common shareholders           $(34,877)      $(1,049)       $(36,650)      $   (891)
                                                     ========       =======        ========       ========

Basic and diluted net loss per share                 $  (6.38)      $ (0.24)       $  (6.73)      $  (0.21)
                                                     ========       =======        ========       ========
Basic and diluted weighted average number
   of common shares outstanding                         5,467         4,442           5,447          4,190
                                                     ========       =======        ========       ========
</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                  --       --      --       --      --       --     --        --      --       --
   Offering costs                                   --       --      --       --      --       --     --        --      --       --
   Conversion of Series F to common stock           --       --      --       --      --       --    (13)     (150)     --       --
   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 December 27, 2003                     2,807  $24,304   2,000  $13,600   1,517   $8,308    913    $9,699   5,865   $4,377
                                                 =====  =======   =====  =======   =====   ======    ===    ======   =====   ======

<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                  --       --      --       --      --       --      --     --         --
   Offering costs                                   --      (66)     --     (595)     --       --      --     --         --
   Conversion of Series F to common stock           --       --      --       --      --       --     213      1         --
   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 December 27, 2003                       500   $3,918  16,810  $24,620   1,042   $7,600   5,644    $23       $(38)
                                                   ===   ======  ======  =======   =====   ======   =====    ===       ====

<CAPTION>

                                                Additional                 Foreign
                                                  Paid-in   Accumulated   Currency
                                                  Capital      Deficit   Translation    Total
                                                ----------  -----------  -----------  ---------
<S>                                               <C>        <C>            <C>       <C>
Balance at June 28, 2003                          $65,882    $(115,375)     $ (63)    $ 22,450
   Stock option expense                               120           --         --          120
   Issuance of restricted stock                        45           --         --           45
   Common Stock warrants
      issued for services rendered                    796           --         --          796
   Offering costs                                      --           --         --         (661)
   Conversion of Series F to common stock             149           --         --           --
   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                                            --      (11,435)        --      (11,435)
   Foreign currency translation                        --           --        (51)         (51)
                                                                                      --------
   Comprehensive loss                                  --           --         --      (11,486)
                                                  -------    ---------      -----     --------
Balance at December 27, 2003                      $92,207    $(152,025)     $(114)    $ 36,479
                                                  =======    =========      =====     ========
</TABLE>

                 See notes to consolidated financial statements.

                                        3

<PAGE>

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

                                                         Six Months Ended
                                                    ---------------------------
                                                    December 27,   December 28,
                                                        2003           2002
                                                    ------------   ------------
OPERATING ACTIVITIES
   Net loss                                           $(11,435)      $  (615)
   Adjustments to reconcile net loss to net
      cash flows used in operating activities:
         Depreciation                                    1,921         1,778
         Amortization                                      698           405
         Equity instruments issued for
            compensation                                   801            --
         Stock option expense                              120            56
         Non-cash interest expense                         663           171
         Provision for bad debts                         3,718           749
         Other                                              (1)          (32)
         Gain on retirement of equipment                    --           (11)
   Change in operating assets and liabilities:
         Accounts receivable                                95        (3,084)
         Other current assets                               16         2,963
         Other assets                                      (59)          (28)
         Accounts payable                                1,091           461
         Accrued liabilities                            (4,378)       (6,850)
                                                      --------       -------
            Cash used in operating activities           (6,750)       (4,037)

INVESTING ACTIVITIES
   Proceeds from sale of assets                             --            11
   Capital expenditures                                 (1,194)       (1,154)
   Other                                                   (82)          (30)
                                                      --------       -------
            Cash used in investing activities           (1,276)       (1,173)

FINANCING ACTIVITIES
   Borrowings (repayments) under revolving
      credit agreement, net                            (16,223)        1,071
   Proceeds from bridge loan                             1,000            --
   Proceeds from senior subordinated debt                6,000            --
   Repayment of senior subordinated debt                (5,000)           --
   Proceeds from subscription notes                         --            18
   Proceeds from issuance of preferred stock, net       22,730         2,748
   Proceeds from issuance of common stock, net              --           400
   Issuance costs related to preferred stock              (494)           --
   Debt financing costs                                   (772)         (200)
                                                      --------       -------
            Cash provided by financing activities        7,241         4,037
                                                      --------       -------
Net decrease in cash and cash equivalents                 (785)       (1,173)

Cash and cash equivalents, beginning of period           1,589         2,704
                                                      --------       -------
Cash and cash equivalents, end of period              $    804       $ 1,531
                                                      ========       =======

                 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 nationwide 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; commercial liability insurance of up 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 December 27, 2003, and the results of its operations for
the six months ended December 27, 2003 and December 28, 2002, and its cash flows
for the six months ended December 27, 2003 and December 28, 2002 have been
included. The results of operations for the six months ended December 27, 2003
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 income (loss) - Comprehensive loss was $11.5 million and $0.6
million for the six months ended December 27, 2003 and December 28, 2002,
respectively. The difference between net loss and total comprehensive loss in
the respective periods related to foreign currency translation adjustments.

     New accounting pronouncements - In 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             Six Months Ended
                                                          ---------------------------   ---------------------------
                                                          December 27,   December 28,   December 27,   December 28,
                                                              2003           2002           2003           2002
                                                          ------------   ------------   ------------   ------------
                                                                (Amounts in thousands, except per share data)
<S>                                                         <C>             <C>           <C>             <C>
Numerator
   Net loss                                                 $ (9,662)       $  (773)      $(11,435)       $ (615)
   Accretion of beneficial conversion feature
      for Series H Preferred Stock                                --           (276)            --          (276)
   Beneficial conversion feature for Series I Preferred      (25,215)            --        (25,215)           --
                                                            --------        -------       --------        ------

   Net loss applicable to common shareholders               $(34,877)       $(1,049)      $(36,650)       $ (891)
                                                            ========        =======       ========        ======

Denominator for basic and diluted loss per share
   Weighted average shares                                     5,467          4,442          5,447         4,190
                                                            ========        =======       ========        ======

Basic and diluted loss per share                            $  (6.38)       $ (0.24)      $  (6.73)       $(0.21)
                                                            ========        =======       ========        ======
</TABLE>

     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:

                                       6

<PAGE>

                  VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
                                   (Unaudited)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                         Three Months Ended             Six Months Ended
                                    ---------------------------   ---------------------------
                                    December 27,   December 28,   December 27,   December 28,
                                        2003           2002           2003           2002
                                    ------------   ------------   ------------   ------------
                                                    (Amounts in thousands)
<S>                                   <C>             <C>            <C>            <C>
Stock options                              --              7              --             7
Common warrants                         6,182            906           6,184           454
Preferred warrants:
   Series C Convertible Preferred       3,292            774           3,293           777
   Series D Convertible Preferred       2,107            480           2,107           480
Convertible preferred stock:
   Series B Convertible Preferred      16,193          3,942          16,193         3,942
   Series C Convertible Preferred       8,007          1,895           8,007         1,895
   Series D Convertible Preferred      14,963          4,191          14,963         4,230
   Series F Convertible Preferred      18,409          5,629          18,444         5,667
   Series G Convertible Preferred       4,865          1,239           4,865         1,238
   Series H Convertible Preferred      17,042          1,915          17,042           957
   Series I Convertible Preferred      80,615             --          40,307            --
                                      -------         ------         -------        ------
                                      171,675         20,978         131,405        19,647
                                      =======         ======         =======        ======
</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             Six Months Ended
                                                          ---------------------------   ---------------------------
                                                          December 27,   December 28,   December 27,   December 28,
                                                              2003           2002           2003           2002
                                                          ------------   ------------   ------------   ------------
                                                                    (In thousands, except per share amounts)
<S>                                                         <C>            <C>            <C>            <C>
Net loss applicable to common shareholders, as
   reported                                                 $(34,877)      $(1,049)       $(36,650)      $  (891)
   Add: Stock-based employee compensation expense
      included in reported net loss applicable to
      common shareholders                                         32            --              64            --
   Deduct: Stock-based compensation expense
      determined under fair value method for all awards          (91)         (376)           (366)         (808)
                                                            --------       -------        --------       -------
   Pro forma                                                $(34,936)      $(1,425)       $(36,952)      $(1,699)
                                                            ========       =======        ========       =======
Basic and diluted loss per common share:
   As reported                                              $  (6.38)      $ (0.24)       $  (6.73)      $ (0.21)
                                                            ========       =======        ========       =======
   Pro forma                                                $  (6.39)      $ (0.32)       $  (6.78)      $ (0.41)
                                                            ========       =======        ========       =======
</TABLE>

                                       7

<PAGE>

                  VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                   (Unaudited)
--------------------------------------------------------------------------------

     In December 2003, the Company agreed to issue common stock warrants to
certain members of management in connection with their offers of employment with
the Company. The Company has recorded the fair value of the warrants of $0.8
million as compensation expense in the statement of operations. 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
December 27, 2003 and June 28, 2003 amounts to $6.8 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 December 27,
2003 and June 28, 2003 was $8.3 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.

     On December 24, 2003 the Company finalized a claim regarding a vehicular
accident that occurred in May 2002 involving a Velocity Express truck and two
other vehicles. The Company's portion of the damage award was $0.8 million which
will be paid with proceeds from the self-insurance reserve. The self-insurance
fund is maintained and managed by the Company's insurer and at December 27, 2003
held $6.8 million in cash. The balance of the award will be paid by the insurer
in accordance with the policy held by the Company. 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.

4.   FINANCING ARRANGEMENTS

                           December 27,    June 28,
                               2003         2003
                           ------------   ---------
                            (Amounts in thousands)
Revolving note               $ 22,738     $ 38,961
Senior subordinated note        5,390        4,602
Other                           1,718          182
                             --------     --------
                               29,846       43,745
Less current maturities       (23,512)     (39,143)
                             --------     --------
Total                        $  6,334     $  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 December 27,
2003), 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
December 27, 2003, the Company has 88% of the facility under LIBOR contracts at
an average interest rate of 4.25%. 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.

                                       8

<PAGE>

                  VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                   (Unaudited)
--------------------------------------------------------------------------------

     In connection with the sale of the Series J Preferred Stock discussed in
note 5, the Company has entered into a second amended and restated revolving
credit facility with Fleet. The purpose of this amendment is to reset certain of
the financial covenants provided for in the original amendment discussed above.

     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 December 27,
2003, and is being amortized over the remaining term of the note. The 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 December 27, 2003, there were no violations of covenants
for which the Company did not obtain waivers.

     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 Series I Convertible Preferred Stock
through a private placement. The Company is authorized to raise $25.2 million
through sales of its Series I Preferred. Further, the issuance of the Series I
Preferred is subject to shareholder approval and is non-voting unless it is
converted into common stock. In any event, no holder of the Series I Preferred
is allowed to convert to common stock even after shareholder approval if 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.

     In January 2004, the Company's Board of Directors authorized the sale of up
to $7.5 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. Due to

                                       9

<PAGE>

                  VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                   (Unaudited)
--------------------------------------------------------------------------------

the pricing of the Series J Preferred, the Company will be required to take a
charge in its third quarter to reflect the beneficial conversion in the Series J
Preferred.

     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
under way, directed at improving customer service levels, decreasing fixed
expenses and fueling new business development.

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 $9.2
million for the six months ended December 27, 2003. 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 $7.5 million
through a Series J private placement, the Company has amended and restated its
revolving credit and senior subordinated debt facilities in order to reset
certain of the financial covenants provided for in the credit facilities. As of
December 27, 2003, 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 is dependent upon achieving certain revenue
and expense targets in its financial plan for fiscal 2004. The Company expects
to meet its financial projections for the next fiscal year and 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.

                                       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 nationwide 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; commercial liability insurance of up 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 December 27, 2003 and December 28, 2002 are
as follows:

                                    2003   2002
                                    ----   ----
     Commercial & office products   35.6%  32.5%
     Financial services             30.3%  29.4%
     Healthcare                     21.2%  22.8%
     Transportation & logistics      4.7%   4.9%
     Energy                          4.8%   4.6%
     Technology                      3.4%   5.8%

Historical Results of Operations

     Revenue for the quarter ended December 27, 2003 decreased $3.7 million or
4.9% to $71.3 million from $75.0 million for the quarter ended December 28,
2002. The decrease in revenue for the quarter ended December 27, 2003 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 of approximately $7.5 million. This decline
was offset by revenue growth from new customer contracts during the second
quarter of approximately $3.8 million.

     Revenue for the six months ended December 27, 2003 decreased $5.1 million
or 3.3% to $147.9 million from $153.0 million for the six months ended December
28, 2002. The decrease in revenue for the six months ended December 27, 2003
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 of approximately $11.2 million. This
decline was offset by revenue growth from new customer contracts during the
first half of approximately $6.1 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 $70 million on an annual basis. The activity is consistent across
all geographic regions in which the Company operates. In addition, new business
wins in December 2003 were at near-record levels as the Company received 71% of
customer business awarded, resulting in approximately $6.0 million in expected
revenue on an annual basis. Implementation of newly awarded contracts generally
requires from thirty to sixty days for full implementation.

     Cost of services for the quarter ended December 27, 2003 was $57.8 million,
a decrease of $0.4 million or 0.7% from $58.2 million for the quarter ended
December 28, 2002. The decrease consists of $2.9 million in cost reductions
related to the reduced revenue described above and increases of $2.5 million
related to inefficiencies in our cost of services cost structure. The increases
included $1.5 million from driver pay as a result of maintaining the existing
route structure as revenue declined as described above, $0.7 million related to
increased umbrella and cargo insurance costs and $0.3 million related to other
increased delivery costs. As a result, gross margin declined from 22.5% in the
prior-year quarter to 18.9% for the quarter ended December 27, 2003.

     Cost of services for the six months ended December 27, 2003 was $118.9
million, an increase of $0.7 million or 0.6% from $118.2 million for the six
months ended December 28, 2002. The increase consists of $1.3 million from
one-time workers' compensation and auto liability insurance savings recognized
in the first quarter of fiscal 2003 that did not recur in fiscal 2004, $2.3
million due to increases in driver pay as a result of maintaining the existing
route structure as revenue declined as described above, and $1.0 million related
to increased umbrella and cargo insurance costs. The increase was offset by $3.9
million in reduced direct costs from the reduced revenue described above. As a
result, gross margin declined from 22.7% in the prior year first half to 19.6%
for the six months ended December 27, 2003. The Company is now implementing
route management technology that it has developed which it feels will allow the
Company to improve its gross margin effectiveness. This program is rolling out
over the next six months, beginning in February 2004.

                                       12

<PAGE>

     Selling, general and administrative ("SG&A") expenses for the quarter ended
December 27, 2003 were $18.6 million or 26.1% of revenue, an increase of $5.0
million or 36.8% as compared with $13.6 million or 18.1% of revenue for the
quarter ended December 28, 2002. The increase in SG&A for the quarter resulted
from charges associated with the valuation of certain accounts receivable of
$3.3 million. In connection with the review of accounts receivable at year end,
the Company implemented improved credit standards to mitigate credit risk. The
recent loss of revenue in the second quarter and on-going disputes with certain
customers, in connection with these strengthened credit standards, has led
management to reassess the Company reserves and increase its allowance for
doubtful accounts. The Company will continue to pursue any disputed accounts
through active collection practices. The Company also recorded a charge of
approximately $0.8 million in connection with warrants issued to certain members
of management. Additionally, approximately $0.5 million of the increase relates
to telecommunication savings recognized in the prior-year quarter that did not
recur in the current year, $0.2 million of the increase relates to the write off
of bank fees in connection with the new senior subordinated note and $0.2
million is related to other miscellaneous items.

     SG&A expenses for the six months ended December 27, 2003 were $31.7 million
or 21.4% of revenue, an increase of $4.3 million or 15.7% as compared with $27.4
million or 17.9% of revenue for the six months ended December 28, 2002. The
increase in SG&A for the first half of fiscal 2004 resulted from charges
associated with the valuation of certain accounts receivable of $3.6 million. In
connection with the review of accounts receivable at the mid-year point, the
revenue loss in the first six months and the Company's strengthening of its
credit standards, the Company recorded this charge to mitigate credit risk. The
Company also recorded a charge of approximately $0.8 million in connection with
warrants issued to certain members of management. Approximately $0.5 million of
the increase relates to telecommunication savings recognized in the prior year
that did not recur in the current year and $0.2 million of the increase relates
to the write off of bank fees in connection with the new senior subordinated
note. The Company realized savings of approximately $0.2 million related to
reduced headcounts as a result of centralization of back office functions.

     Occupancy charges for the quarter ended December 27, 2003 were $3.3
million, an increase of $0.1 million or 3.1% from $3.2 million for the quarter
ended December 28, 2002. The net increase is due to higher utility and common
area maintenance charges of approximately $0.2 million, partially offset by
lower net rental expense of approximately $0.1 million.

     Occupancy charges for the six months ended December 27, 2003 were $6.5
million, an increase of $0.1 million or 1.6% from $6.4 million for the six
months ended December 28, 2002. The net increase for the first six months is due
to higher utility and common area maintenance charges of approximately $0.3
million, partially offset by lower net rental expense of approximately $0.2
million.

     Interest expense for the quarter ended December 27, 2003 increased $0.4
million to $1.2 million from $0.8 million for the quarter ended December 28,
2002. Interest expense related to the Company's borrowings increased over the
same period in the prior year as a result of higher interest rates under the
revolving credit and senior subordinated debt facilities.

     Interest expense for the six months ended December 27, 2003 increased $0.6
million to $2.2 million from $1.6 million for the six months ended December 28,
2002. Interest expense related to the Company's borrowings increased over the
same period in the prior year as a result of higher 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
December 27, 2003 was $9.7 million, compared with $0.8 million for the same
period in fiscal 2003, a decline of $8.9 million. Net loss for the six months
ended December 27, 2003 was $11.4 million, compared with $0.6 million for the
same period in fiscal 2003, a decline of $10.8 million.

     Net loss applicable to common shareholders was $34.9 million for quarter
ended December 27, 2003 as compared with $1.0 million for the same period in
fiscal 2003. Net loss applicable to common shareholders was $36.7 million for
six months ended December 27, 2003 as compared with $0.9 million for the same
period in fiscal 2003. For both the quarter and the six-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 six months, the
difference between net loss

                                       13

<PAGE>

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 $6.8 million for the first half of fiscal
2004. This cash flow was comprised of cash used in operations of $3.5 million
and cash used as a result of working capital changes of $3.3 million. Cash
provided as a result of the decrease in accounts receivable of approximately
$0.1 million was due to ongoing collection activity during the second quarter.
Accounts payable provided approximately $1.1 million as a result of changes in
payment terms with various vendors. The remaining use of working capital of $4.5
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 $1.3 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 $7.2 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 $16.2 million,
while debt financing costs and costs associated with the issuance of preferred
stock used $1.3 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 December 27, 2003, the Company had no outstanding purchase
commitments for capital improvements.

     The Company reported a loss from operations of approximately $9.2 million
for the first six months of fiscal 2004 and has negative working capital of
approximately $6.5 million at December 27, 2003, 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 Series I Convertible Preferred Stock ("Series I Preferred") through a
private placement. The Company was authorized to raise $25.2 million through
sales of its Series I Preferred. The issuance of the Series I Preferred is
subject to shareholder approval and is non-voting unless it is converted into
common stock. In any event, no holder of the Series I Preferred is allowed to
convert to common stock even after shareholder approval if 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 and to meet its fiscal 2004 financial plan. 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

                                       14

<PAGE>

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 January 2004, the Company's Board of Directors authorized the sale of up
to $7.5 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. Due to the pricing of the Series J Preferred, the Company will be
required to take a charge in its third quarter to reflect the beneficial
conversion in the Series J Preferred.

     In connection with this new equity infusion, the Company has entered into a
second amended and restated revolving credit facility with Fleet. The purpose of
this amendment is to reset certain of the financial covenants provided for in
the original amendment discussed in note 4 to the financial statements. As of
December 27, 2003, 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 December 27, 2003), 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 based upon the Company's
achieving certain conditions as defined in the agreement. As of December 27,
2003, the Company has 88% of the facility under LIBOR contracts at an average
interest rate of 4.25%. 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 $22.7 million at December 27, 2003.
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 $0.2 million.

ITEM 4. CONTROLS AND PROCEDURES.

     (a) Evaluation of disclosure controls and procedures

                                       15

<PAGE>

          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.

     (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
          27, 2003, there were no significant changes to internal controls or in
          other factors that could significantly affect the Company's internal
          controls.

                                     PART II

ITEM 1. LEGAL PROCEEDINGS.

     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

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<PAGE>

          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 authorized the issuance of up to $25.2 million of Series I
Convertible Preferred Stock ("Series I Preferred") through a private placement
and between October 20, 2003 and December 19, 2003, entered into stock purchase
agreements with individual investors to sell $25.2 million of the Series I
Preferred. The issuance of the Series I Preferred is subject to shareholder
approval and is non-voting unless it is converted into common stock. In any
event, no holder of the Series I Preferred is allowed to convert to common stock
even after shareholder approval if 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.

     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:

          10.1 Amended and Restated Loan and Security Agreement by and among
               Velocity Express, Inc. and related borrowers, and Fleet Capital
               Corporation dated as of November 26, 2003.

          10.2 Note Purchase Agreement by and among Velocity Express, Inc.,
               Velocity Express Corporation and BET Associates LP dated as of
               November 26, 2003.

          10.3 Senior Subordinated Note by and among Velocity Express, Inc.,
               Velocity Express Corporation and BET Associates LP, dated as of
               November 26, 2003.

          10.4 Amendment to the Employment Agreement between Velocity Express,
               Inc. and Wesley C. Fredenburg.

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<PAGE>

          10.5 Employment Agreement between Velocity Express, Inc. and Jeffrey
               Hendrickson dated December 15, 2003.

          10.6 Employment Agreement between Velocity Express, Inc. and John
               Marsalisi dated December 22, 2003.

          10.7 Form of Stock Purchase Agreement to purchase Series I Convertible
               Preferred Stock

          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

                                   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 February 10,
2004.

                                          VELOCITY EXPRESS CORPORATION.


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


                                         By /s/  Mark E. Ties
                                            ------------------------------------
                                            Mark E. Ties
                                            Chief Financial Officer
                                            (Principal Financial and Accounting
                                             Officer)

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