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U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON DC 20549



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FORM 10-Q



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(Mark One)

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

For the quarterly period ended September 30, 2006



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

For the transition period from  to
.

Commission File No. 0-28452



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VELOCITY EXPRESS CORPORATION

(Exact name of registrant as specified in its charter)



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

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

Westport, Connecticut 06880

(Address
of Principal Executive Offices including Zip Code)

(203) 349-4160

(Registrants telephone number, including area code)



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

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

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

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

As of November 16, 2006, there were 24,141,162 shares of common stock of the registrant issued and outstanding.



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##### Table of Contents

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

INDEX TO FORM 10-Q

September 30, 2006



|           |  |                                                                                                        |  |     
|---------- |  | ------------------------------------------------------------------------------------------------------ |  | ----
|           |  |                                                                                                        |  | Page
|PART I.    |  | FINANCIAL INFORMATION                                                                                  |  | 3   
|           |  |                                                                                                       
|ITEM 1.    |  | Financial Statements                                                                                   |  |     
|           |  |                                                                                                       
|           |  | Balance Sheets as of September 30, 2006 and July 1, 2006                                               |  | 3   
|           |  |                                                                                                       
|           |  | Statements of Operations for the Three Months Ended September 30, 2006 and October 1, 2005             |  | 4   
|           |  |                                                                                                       
|           |  | Statement of Shareholders Equity and Comprehensive Loss for the Three Months Ended September 30, 2006 |  | 5   
|           |  |                                                                                                       
|           |  | Statements of Cash Flows for the Three Months Ended September 30, 2006 and October 1, 2005             |  | 6   
|           |  |                                                                                                       
|           |  | Notes to Consolidated Financial Statements                                                             |  | 7   
|           |  |                                                                                                       
|ITEM 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                  |  | 21  
|           |  |                                                                                                       
|ITEM 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                             |  | 31  
|           |  |                                                                                                       
|ITEM 4.    |  | Controls and Procedures                                                                                |  | 31  
|           |  |                                                                                                       
|PART II.   |  | OTHER INFORMATION                                                                                      |  | 32  
|           |  |                                                                                                       
|ITEM 1.    |  | Legal Proceedings                                                                                      |  | 32  
|           |  |                                                                                                       
|ITEM 1A.   |  | Risk Factors                                                                                           |  | 32  
|           |  |                                                                                                       
|ITEM 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                            |  | 42  
|           |  |                                                                                                       
|ITEM 3.    |  | Defaults Upon Senior Securities                                                                        |  | 42  
|           |  |                                                                                                       
|ITEM 4.    |  | Submission of Matters to a Vote of Security Holders                                                    |  | 42  
|           |  |                                                                                                       
|ITEM 5.    |  | Other Information                                                                                      |  | 42  
|           |  |                                                                                                       
|ITEM 6.    |  | Exhibits                                                                                               |  | 42  
|           | 
|SIGNATURES |  | 43                                                                                                    



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##### Table of Contents

PART I.

ITEM 1. FINANCIAL STATEMENTS.

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Amounts in thousands, except
par value)



|                                                                                                                                                                  |  |                   |          |   |              |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ------------ | - | -------- | -
|                                                                                                                                                                  |  | September 30,2006 |          |   | July 1, 2006 |  
|ASSETS                                                                                                                                                            |  |                   |          |   |              |   |          |  
|Current assets:                                                                                                                                                   |  |                   |          |   |              |   |          |  
|Cash                                                                                                                                                              |  | $                 | 9,754    |   |              | $ | 1,715    |  
|Accounts receivable, net of allowance of $3,968 and $3,273 at September 30, 2006 and July 1, 2006, respectively                                                   |  |                   | 41,569   |   |              |   | 14,789   |  
|Accounts receivable - other                                                                                                                                       |  |                   | 567      |   |              |   | 1,031    |  
|Prepaid workers compensation and auto liability insurance                                                                                                        |  |                   | 8,898    |   |              |   | 1,932    |  
|Other prepaid expenses and other current assets                                                                                                                   |  |                   | 1,837    |   |              |   | 1,167    |  
|                                                                                                                                                                  |  |                   |          |   |              |   |          |  
|Total current assets                                                                                                                                              |  | $                 | 62,625   |   |              |   | 20,634   |  
|Property and equipment, net                                                                                                                                       |  |                   | 8,648    |   |              |   | 6,581    |  
|Assets held for sale                                                                                                                                              |  |                   | 1,136    |   |              |   | 973      |  
|Goodwill                                                                                                                                                          |  |                   | 70,845   |   |              |   | 42,830   |  
|Intangible assets                                                                                                                                                 |  |                   | 30,007   |   |              |   |         |  
|Deferred financing costs, net                                                                                                                                     |  |                   | 6,829    |   |              |   | 1,763    |  
|Other assets                                                                                                                                                      |  |                   | 2,200    |   |              |   | 2,872    |  
|                                                                                                                                                                  |  |                   |          |   |              |   |          |  
|Total assets                                                                                                                                                      |  | $                 | 182,290  |   |              | $ | 75,653   |  
|                                                                                                                                                                  |  |                   |          |   |              |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                              |  |                   |          |   |              |   |          |  
|Current liabilities:                                                                                                                                              |  |                   |          |   |              |   |          |  
|Trade accounts payable                                                                                                                                            |  | $                 | 18,534   |   |              | $ | 16,900   |  
|Accrued insurance and claims                                                                                                                                      |  |                   | 4,428    |   |              |   | 1,802    |  
|Accrued wages and benefits                                                                                                                                        |  |                   | 7,059    |   |              |   | 2,755    |  
|Accrued legal and claims                                                                                                                                          |  |                   | 6,662    |   |              |   | 4,688    |  
|Related party liabilities                                                                                                                                         |  |                   |         |   |              |   | 1,430    |  
|Other accrued liabilities                                                                                                                                         |  |                   | 8,146    |   |              |   | 1,247    |  
|Current portion of long-term debt                                                                                                                                 |  |                   | 1,857    |   |              |   | 1,363    |  
|                                                                                                                                                                  |  |                   |          |   |              |   |          |  
|Total current liabilities                                                                                                                                         |  |                   | 46,686   |   |              |   | 30,185   |  
|                                                                                                                                                                  |  |                  
|Long-term debt, less current portion                                                                                                                              |  |                   | 48,867   |   |              |   | 26,185   |  
|Accrued insurance and claims                                                                                                                                      |  |                   | 2,742    |   |              |   | 2,540    |  
|Restructuring liabilities                                                                                                                                         |  |                   | 53       |   |              |   | 111      |  
|Other long-term liabilities                                                                                                                                       |  |                   | 1,522    |   |              |   | 1,563    |  
|                                                                                                                                                                  |  |                  
|Commitments and contingencies                                                                                                                                     |  |                   |          |   |              |   |          |  
|                                                                                                                                                                  |  |                  
|Shareholders equity:                                                                                                                                             |  |                   |          |   |              |   |          |  
|Preferred stock, $0.004 par value, 299,515 shares authorized 13,998 and 10,321 shares issued and outstanding at September 30, 2006 and
July 1, 2006, respectively |  |                   | 75,983   |   |              |   | 33,243   |  
|Common stock, $0.004 par value, 700,000 shares authorized 23,702 and 16,965 shares issued and outstanding at September 30, 2006 and
July 1, 2006, respectively    |  |                   | 95       |   |              |   | 68       |  
|Stock subscription receivable                                                                                                                                     |  |                   | (43      | ) |              |   | (7,543   | )
|Additional paid-in-capital                                                                                                                                        |  |                   | 361,461  |   |              |   | 313,489  |  
|Accumulated deficit                                                                                                                                               |  |                   | (355,090 | ) |              |   | (324,200 | )
|Accumulated other comprehensive income                                                                                                                            |  |                   | 14       |   |              |   | 12       |  
|                                                                                                                                                                  |  |                   |          |   |              |   |          |  
|Total shareholders equity                                                                                                                                        |  |                   | 82,420   |   |              |   | 15,069   |  
|                                                                                                                                                                  |  |                   |          |   |              |   |          |  
|Total liabilities and shareholders equity                                                                                                                        |  | $                 | 182,290  |   |              | $ | 75,653   |  
|                                                                                                                                                                  |  |                   |          |   |              |   |          |  

See notes to consolidated financial statements.



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##### Table of Contents

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Amounts in thousands, except
per share data)



|                                                                                                              |  |                    |         |   |                |   |        |  
|------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | -------------- | - | ------ | -
|                                                                                                              |  | Three Months Ended |        
|                                                                                                              |  | September 30,2006  |         |   | October 1,2005 |  
|Revenue                                                                                                       |  | $                  | 111,094 |   |                | $ | 52,546 |  
|Cost of services                                                                                              |  |                    | 83,546  |   |                |   | 38,212 |  
|                                                                                                              |  |                    |         |   |                |   |        |  
|Gross profit                                                                                                  |  |                    | 27,548  |   |                |   | 14,334 |  
|                                                                                                              |  |                   
|Operating expenses:                                                                                           |  |                    |         |   |                |   |        |  
|Occupancy                                                                                                     |  |                    | 4,732   |   |                |   | 2,939  |  
|Selling, general and administrative                                                                           |  |                    | 26,076  |   |                |   | 14,309 |  
|Restructuring charges and asset impairments                                                                   |  |                    | 1,173   |   |                |   |       |  
|                                                                                                              |  |                    |         |   |                |   |        |  
|Total operating expenses                                                                                      |  |                    | 31,981  |   |                |   | 17,248 |  
|                                                                                                              |  |                    |         |   |                |   |        |  
|Loss from operations                                                                                          |  |                    | (4,433  | ) |                |   | (2,914 | )
|                                                                                                              |  |                   
|Other income (expense):                                                                                       |  |                    |         |   |                |   |        |  
|Interest expense                                                                                              |  |                    | (6,174  | ) |                |   | (1,096 | )
|Other                                                                                                         |  |                    | 180     |   |                |   | 513    |  
|                                                                                                              |  |                    |         |   |                |   |        |  
|Loss before income taxes and minority interest                                                                |  |                    | (10,427 | ) |                |   | (3,497 | )
|                                                                                                              |  |                   
|Income taxes                                                                                                  |  |                    | 9       |   |                |   |       |  
|Minority interest                                                                                             |  |                    | 367     |   |                |   |       |  
|                                                                                                              |  |                    |         |   |                |   |        |  
|Net loss                                                                                                      |  | $                  | (10,803 | ) |                | $ | (3,497 | )
|                                                                                                              |  |                    |         |   |                |   |        |  
|Net loss applicable to common shareholders                                                                    |  | $                  | (30,890 | ) |                | $ | (6,577 | )
|                                                                                                              |  |                    |         |   |                |   |        |  
|Basic and diluted net loss per share                                                                          |  | $                  | (1.42   | ) |                | $ | (0.47  | )
|                                                                                                              |  |                    |         |   |                |   |        |  
|Weighted average common stock shares outstanding used in the basic and diluted net loss per share calculation |  |                    | 21,830  |   |                |   | 14,139 |  
|                                                                                                              |  |                    |         |   |                |   |        |  

See notes to consolidated financial statements.



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VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY AND
COMPREHENSIVE LOSS

(Unaudited)

(Amounts in thousands)



|                                                  |  |                          |   |  |                          |        |                          |        |       |                          |   |        |                          |     |        |              |   |                              |   |  |                           |   |  |                     |        |        |                                              |       |        |   |        |   |  |        |  |   |    |  |   |        |   |  |   |         |   |  |   |          |   |  |   |    |  |   |         |  
|------------------------------------------------- |  | ------------------------ | - |  | ------------------------ | ------ | ------------------------ | ------ | ----- | ------------------------ | - | ------ | ------------------------ | --- | ------ | ------------ | - | ---------------------------- | - |  | ------------------------- | - |  | ------------------- | ------ | ------ | -------------------------------------------- | ----- | ------ | - | ------ | - |  | ------ |  | - | -- |  | - | ------ | - |  | - | ------- | - |  | - | -------- | - |  | - | -- |  | - | ------- | -
|                                                  |  | Series M Preferred Stock |   |  | Series N Preferred Stock |        | Series O Preferred Stock |        |       | Series P Preferred Stock |   |        | Series Q Preferred Stock |     |        | Common Stock |   | StockSubscription Receivable |   |  | AdditionalPaid-in Capital |   |  | Accumulated Deficit |        |        | Accumulated OtherComprehensive Income
(loss) |       | Total  |  
|                                                  |  | Shares                   |   |  | Amount                   |        |                          | Shares |       | Amount                   |   | Shares |                          |     | Amount |              |   | Shares                       |   |  | Amount                    |   |  | Shares              |        | Amount |                                              |       | Shares |   | Amount |   |  |        |  |  
|Balance at July 1, 2006                           |  | 5,372                    |   |  | $                        | 18,618 |                          |        | 1,375 |                          | $ | 4,547  |                          | 474 |        |              | $ | 1,680                        |   |  | 3,100                     |   |  | $                   | 8,398  |        |                                              |      |        | $ |       |   |  | 16,965 |  | $ | 68 |  | $ | (7,543 | ) |  | $ | 313,489 |   |  | $ | (324,200 | ) |  | $ | 12 |  | $ | 15,069  |  
|                                                  |  |                          |   |  |                          |        |                          |        |       |                          |   |        |                          |     |        |              |   |                              |   |  |                           |   |  |                     |        |        |                                              |       |        |   |        |   |  |        |  |   |    |  |   |        |   |  |   |         |   |  |   |          |   |  |   |    |  |   |         |  
|Stock option and warrant expense                  |  |                         |   |  |                          |       |                          |        |      |                          |   |       |                          |    |        |              |   |                             |   |  |                          |   |  |                     |       |        |                                              |      |        |   |       |   |  |       |  |   |   |  |   |       |   |  |   | 235     |   |  |   |         |   |  |   |   |  |   | 235     |  
|Warrants issued                                   |  |                         |   |  |                          |       |                          |        |      |                          |   |       |                          |    |        |              |   |                             |   |  |                          |   |  |                     |       |        |                                              |      |        |   |       |   |  |       |  |   |   |  |   |       |   |  |   | 28,500  |   |  |   |         |   |  |   |   |  |   | 28,500  |  
|Capital distribution                              |  |                         |   |  |                          |       |                          |        |      |                          |   |       |                          |    |        |              |   |                             |   |  |                          |   |  |                     |       |        |                                              |      |        |   |       |   |  |       |  |   |   |  |   | 7,500  |   |  |   | (7,500  | ) |  |   |         |   |  |   |   |  |   |        |  
|Preferred Stock PIK Dividends                     |  |                         |   |  |                          |       |                          |        |      |                          |   |       |                          |    |        |              |   |                             |   |  |                          |   |  |                     |       |        |                                              |      |        |   |       |   |  |       |  |   |   |  |   |       |   |  |   | 1,200   |   |  |   | (1,200   | ) |  |   |   |  |   |        |  
|Offering costs                                    |  |                         |   |  |                          | (47    | )                        |        |      |                          |   |       |                          |    |        |              |   |                             |   |  |                          |   |  |                     |       |        |                                              |      |        |   | (2,187 | ) |  |       |  |   |   |  |   |       |   |  |   |        |   |  |   |         |   |  |   |   |  |   | (2,234  | )
|Issuance of Common Stock                          |  |                         |   |  |                          |       |                          |        |      |                          |   |       |                          |    |        |              |   |                             |   |  |                          |   |  |                     |       |        |                                              |      |        |   |       |   |  | 2,773  |  |   | 11 |  |   |       |   |  |   | 3,862   |   |  |   |         |   |  |   |   |  |   | 3,873   |  
|Issuance of Series M Preferred Stock              |  | 194                      |   |  |                          | 716    |                          |        |      |                          |   |       |                          |    |        |              |   |                             |   |  |                          |   |  |                     |       |        |                                              |      |        |   |       |   |  |       |  |   |   |  |   |       |   |  |   | (716    | ) |  |   |         |   |  |   |   |  |   |        |  
|Issuance of Series N Preferred Stock              |  |                         |   |  |                          |       |                          |        | 46    |                          |   | 171    |                          |    |        |              |   |                             |   |  |                          |   |  |                     |       |        |                                              |      |        |   |       |   |  |       |  |   |   |  |   |       |   |  |   | (171    | ) |  |   |         |   |  |   |   |  |   |        |  
|Issuance of Series O Preferred Stock              |  |                         |   |  |                          |       |                          |        |      |                          |   |       |                          | 15  |        |              |   | 60                           |   |  |                          |   |  |                     |       |        |                                              |      |        |   |       |   |  |       |  |   |   |  |   |       |   |  |   | (60     | ) |  |   |         |   |  |   |   |  |   |        |  
|Issuance of Series P Preferred Stock              |  |                         |   |  |                          |       |                          |        |      |                          |   |       |                          |    |        |              |   |                             |   |  | 97                        |   |  |                     | 323    |        |                                              |      |        |   |       |   |  |       |  |   |   |  |   |       |   |  |   | (323    | ) |  |   |         |   |  |   |   |  |   |        |  
|Issuance of Series Q Preferred Stock              |  |                         |   |  |                          |       |                          |        |      |                          |   |       |                          |    |        |              |   |                             |   |  |                          |   |  |                     |       |        |                                              | 4,571 |        |   | 45,709 |   |  |       |  |   |   |  |   |       |   |  |   | (709    | ) |  |   |         |   |  |   |   |  |   | 45,000  |  
|Issuance of Series Q Preferred Stock for services |  |                         |   |  |                          |       |                          |        |      |                          |   |       |                          |    |        |              |   |                             |   |  |                          |   |  |                     |       |        |                                              | 278   |        |   | 2,778  |   |  |       |  |   |   |  |   |       |   |  |   |        |   |  |   |         |   |  |   |   |  |   | 2,778   |  
|Conversion of Series M Preferred to Common Stock  |  | (175                     | ) |  |                          | (381   | )                        |        |      |                          |   |       |                          |    |        |              |   |                             |   |  |                          |   |  |                     |       |        |                                              |      |        |   |       |   |  | 308    |  |   | 1  |  |   |       |   |  |   | 379     |   |  |   |         |   |  |   |   |  |   | (1      | )
|Conversion of Series O Preferred to Common Stock  |  |                         |   |  |                          |       |                          |        |      |                          |   |       |                          | (4  | )      |              |   | (14                          | ) |  |                          |   |  |                     |       |        |                                              |      |        |   |       |   |  | 6      |  |   |   |  |   |       |   |  |   | 14      |   |  |   |         |   |  |   |   |  |   |        |  
|Conversion of Series P Preferred to Common Stock  |  |                         |   |  |                          |       |                          |        |      |                          |   |       |                          |    |        |              |   |                             |   |  | (1,344                    | ) |  |                     | (4,388 | )      |                                              |      |        |   |       |   |  | 3,650  |  |   | 15 |  |   |       |   |  |   | 4,374   |   |  |   |         |   |  |   |   |  |   | 1       |  
|Beneficial conversion of Series N Preferred Stock |  |                         |   |  |                          |       |                          |        |      |                          |   |       |                          |    |        |              |   |                             |   |  |                          |   |  |                     |       |        |                                              |      |        |   |       |   |  |       |  |   |   |  |   |       |   |  |   | 2,325   |   |  |   | (2,325   | ) |  |   |   |  |   |        |  
|Beneficial conversion of Series O Preferred Stock |  |                         |   |  |                          |       |                          |        |      |                          |   |       |                          |    |        |              |   |                             |   |  |                          |   |  |                     |       |        |                                              |      |        |   |       |   |  |       |  |   |   |  |   |       |   |  |   | 918     |   |  |   | (918     | ) |  |   |   |  |   |        |  
|Beneficial conversion of Series P Preferred Stock |  |                         |   |  |                          |       |                          |        |      |                          |   |       |                          |    |        |              |   |                             |   |  |                          |   |  |                     |       |        |                                              |      |        |   |       |   |  |       |  |   |   |  |   |       |   |  |   | 2,295   |   |  |   | (2,295   | ) |  |   |   |  |   |        |  
|Beneficial conversion of Series Q Preferred Stock |  |                         |   |  |                          |       |                          |        |      |                          |   |       |                          |    |        |              |   |                             |   |  |                          |   |  |                     |       |        |                                              |      |        |   |       |   |  |       |  |   |   |  |   |       |   |  |   | 13,349  |   |  |   | (13,349  | ) |  |   |   |  |   |        |  
|Net loss                                          |  |                         |   |  |                          |       |                          |        |      |                          |   |       |                          |    |        |              |   |                             |   |  |                          |   |  |                     |       |        |                                              |      |        |   |       |   |  |       |  |   |   |  |   |       |   |  |   |        |   |  |   | (10,803  | ) |  |   |   |  |   | (10,803 | )
|Foreign currency translation                      |  |                         |   |  |                          |       |                          |        |      |                          |   |       |                          |    |        |              |   |                             |   |  |                          |   |  |                     |       |        |                                              |      |        |   |       |   |  |       |  |   |   |  |   |       |   |  |   |        |   |  |   |         |   |  |   | 2  |  |   | 2       |  
|                                                  |  |                          |   |  |                          |        |                          |        |       |                          |   |        |                          |     |        |              |   |                              |   |  |                           |   |  |                     |        |        |                                              |       |        |   |        |   |  |        |  |   |    |  |   |        |   |  |   |         |   |  |   |          |   |  |   |    |  |   |         |  
|Comprehensive loss                                |  |                         |   |  |                          |       |                          |        |      |                          |   |       |                          |    |        |              |   |                             |   |  |                          |   |  |                     |       |        |                                              |      |        |   |       |   |  |       |  |   |   |  |   |       |   |  |   |        |   |  |   |         |   |  |   |   |  |   | (10,801 | )
|                                                  |  |                          |   |  |                          |        |                          |        |       |                          |   |        |                          |     |        |              |   |                              |   |  |                           |   |  |                     |        |        |                                              |       |        |   |        |   |  |        |  |   |    |  |   |        |   |  |   |         |   |  |   |          |   |  |   |    |  |   |         |  
|Balance at September 30, 2006                     |  | 5,391                    |   |  | $                        | 18,906 |                          |        | 1,421 |                          | $ | 4,718  |                          | 485 |        |              | $ | 1,726                        |   |  | 1,853                     |   |  | $                   | 4,333  |        |                                              | 4,849 |        | $ | 46,300 |   |  | 23,702 |  | $ | 95 |  | $ | (43    | ) |  | $ | 361,461 |   |  | $ | (355,090 | ) |  | $ | 14 |  | $ | 82,420  |  
|                                                  |  |                          |   |  |                          |        |                          |        |       |                          |   |        |                          |     |        |              |   |                              |   |  |                           |   |  |                     |        |        |                                              |       |        |   |        |   |  |        |  |   |    |  |   |        |   |  |   |         |   |  |   |          |   |  |   |    |  |   |         |  

See notes to consolidated financial statements.



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VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands)



|                                                                                  |  |                    |         |   |                |   |        |  
|--------------------------------------------------------------------------------- |  | ------------------ | ------- | - | -------------- | - | ------ | -
|                                                                                  |  | Three Months Ended |        
|                                                                                  |  | September 30,2006  |         |   | October 1,2005 |  
|OPERATING ACTIVITIES                                                              |  |                    |         |   |                |   |        |  
|Net loss                                                                          |  | $                  | (10,803 | ) |                | $ | (3,497 | )
|Adjustments to reconcile net loss to net cash flows used in operating activities: |  |                    |         |   |                |   |        |  
|Depreciation and amortization of intangibles                                      |  |                    | 2,096   |   |                |   | 1,109  |  
|Accretion of interest and amortization of debt issue costs                        |  |                    | 4,582   |   |                |   | 381    |  
|Stock option and warrant expense                                                  |  |                    | 235     |   |                |   | 62     |  
|Change in fair value of settlement liability                                      |  |                    | (180    | ) |                |   |       |  
|Provision for doubtful accounts and sales allowances                              |  |                    | 345     |   |                |   | 1,010  |  
|Asset impairments                                                                 |  |                    | 18      |   |                |   |       |  
|Loss on the sale of assets                                                        |  |                    | 66      |   |                |   |       |  
|Change in operating assets and liabilities:                                       |  |                    |         |   |                |   |        |  
|Accounts receivable                                                               |  |                    | 1,621   |   |                |   | 1,406  |  
|Other current assets                                                              |  |                    | (3,544  | ) |                |   | (1,032 | )
|Other assets                                                                      |  |                    | (249    | ) |                |   | (36    | )
|Accounts payable                                                                  |  |                    | (7,039  | ) |                |   | (1,176 | )
|Accrued liabilities                                                               |  |                    | 5,163   |   |                |   | (1,328 | )
|                                                                                  |  |                    |         |   |                |   |        |  
|Cash used in operating activities                                                 |  |                    | (7,689  | ) |                |   | (3,101 | )
|INVESTING ACTIVITIES                                                              |  |                    |         |   |                |   |        |  
|Proceeds from sale of assets                                                      |  |                    | 76      |   |                |   |       |  
|Purchases of property and equipment                                               |  |                    | (298    | ) |                |   | (86    | )
|Acquisition of CD&L (net of cash acquired)                                        |  |                    | (53,145 | ) |                |   |       |  
|                                                                                  |  |                    |         |   |                |   |        |  
|Cash used in investing activities                                                 |  |                    | (53,367 | ) |                |   | (86    | )
|FINANCING ACTIVITIES                                                              |  |                    |         |   |                |   |        |  
|Repayments of revolving credit agreements, net                                    |  |                    | (29,918 | ) |                |   | (5,744 | )
|Proceeds from notes payable, net                                                  |  |                    | 63,596  |   |                |   |       |  
|Payments of notes payable and long-term debt                                      |  |                    | (7,396  | ) |                |   | (112   | )
|Proceeds from issuance of preferred stock, net                                    |  |                    | 42,813  |   |                |   | 5,372  |  
|                                                                                  |  |                    |         |   |                |   |        |  
|Cash provided by (used in) financing activities                                   |  |                    | 69,095  |   |                |   | (484   | )
|                                                                                  |  |                    |         |   |                |   |        |  
|Net change in cash                                                                |  |                    | 8,039   |   |                |   | (3,671 | )
|                                                                                  |  |                    |         |   |                |   |        |  
|Cash, beginning of period                                                         |  |                    | 1,715   |   |                |   | 5,806  |  
|                                                                                  |  |                    |         |   |                |   |        |  
|Cash, end of period                                                               |  | $                  | 9,754   |   |                | $ | 2,135  |  
|                                                                                  |  |                    |         |   |                |   |        |  

See notes to consolidated financial statements



6



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##### Table of Contents

1. DESCRIPTION OF BUSINESS

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

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of PresentationThe consolidated financial statements included herein have been prepared by the Company, pursuant to the
rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, all adjustments consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company as of
September 30, 2006, and the results of its operations for the three months ended September 30, 2006 and October 1, 2005, and its cash flows for the three months ended September 30, 2006 and October 1, 2005 have been
included. The results of operations for the three months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2007. 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 July 1, 2006, and the footnotes thereto, included in the Companys Report on Form 10-K filed with the Securities and Exchange Commission for such fiscal year. In connection with the preparation of such
consolidated financial statements for the year ended July 1, 2006, due to resource constraints, a material weakness became evident to management regarding the Companys inability to simultaneously close the books on a timely basis each
month and generate all the necessary disclosures for inclusion in its filings with the Securities and Exchange Commission. A material weakness is a significant deficiency in one or more of the internal control components that alone or in the
aggregate precludes the Companys internal controls from reducing to an appropriately low level the risk that material misstatements in its financial statements will not be prevented or detected on a timely basis.

Principles of ConsolidationThe consolidated financial statements include the accounts of Velocity Express Corporation and
its wholly-owned subsidiaries. Also included are those entities that the Company controls by ownership of a majority voting interest as well as variable interest entities for which the Company is the primary beneficiary. All inter-company balances
and transactions have been eliminated in the consolidation.

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

The consolidated financial statements for the quarter ended September 30, 2006 include Peritas as required by FASB Interpretation No. 46, Consolidation of Variable Interest Entities[FIN No. 46]. The
financial statements of Peritas have not been consolidated into the Companys financial statements for the quarter ended October 1, 2005, as the Company was not the primary beneficiary of Peritas during that time. The accompanying
financial statements for the three months ended September 30, 2006 include $0.2 million in



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##### Table of Contents

revenue and diminimus net income related to Peritas. For a description of the history of Peritas, see
Managements Discussion and Analysis of Financial Condition and Results of Operations  Liquidity  Variable Interest Entities.

Comprehensive LossComprehensive loss was $(10.8) million and $(3.5) million for the three months ended September 30, 2006 and October 1, 2005, respectively. The difference
between net loss and total comprehensive loss in the respective periods related to foreign currency translation adjustments.

New
Accounting PronouncementsIn September 2006, the Securities and Exchange Commission published Staff Accounting Bulletin No. 108, Quantifying Financial Statement Misstatements (SAB 108). SAB 108 adds
Section N to Topic 1, Financial Statements, of the Staff Accounting Bulletin Series. Section N provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a
materiality assessment. Registrants electing not to restate prior periods should reflect the effects of initially applying the guidance in Topic 1N in annual financial statements covering the first fiscal year ending after November 15, 2006.
The cumulative effect of the initial application should be reported in the carrying amount of assets and liabilities as of the beginning of that fiscal year, and the offsetting adjustment should be made to the opening balance of retained earnings
for that year. Early application of the guidance in Topic 1N is encouraged in any report for an interim period of the first fiscal year ending after November 15, 2006. There was no impact on the Companys financial statements during the
first quarter of fiscal 2007 related to SAB 108.

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

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



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##### Table of Contents

|                                                                                                  |  |                                               |         |   |                 |   |        |  
|------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ------- | - | --------------- | - | ------ | -
|                                                                                                  |  | Three Months Ended                            |        
|                                                                                                  |  | September 30, 2006                            |         |   | October 1, 2005 |  
|                                                                                                  |  | (Amounts in thousands, except per share data) |        
|Numerator                                                                                         |  |                                               |         |   |                 |   |        |  
|Net loss                                                                                          |  | $                                             | (10,803 | ) |                 | $ | (3,497 | )
|Beneficial conversion feature for Series N Preferred                                              |  |                                               | (2,325  | ) |                 |   |       |  
|Beneficial conversion feature for Series O Preferred                                              |  |                                               | (918    | ) |                 |   | (3,080 | )
|Beneficial conversion feature for Series P Preferred                                              |  |                                               | (2,295  | ) |                 |   |       |  
|Beneficial conversion feature for Series Q Preferred                                              |  |                                               | (13,349 | ) |                 |   |       |  
|Series M Preferred dividends paid-in-kind                                                         |  |                                               | (295    | ) |                 |   |       |  
|Series N Preferred dividends paid-in-kind                                                         |  |                                               | (84     | ) |                 |   |       |  
|Series O Preferred dividends paid-in-kind                                                         |  |                                               | (30     | ) |                 |   |       |  
|Series P Preferred dividends paid-in-kind                                                         |  |                                               | (124    | ) |                 |   |       |  
|Series Q Preferred dividends paid-in-kind                                                         |  |                                               | (667    | ) |                 |   |       |  
|                                                                                                  |  |                                               |         |   |                 |   |        |  
|Net loss applicable to common shareholders                                                        |  | $                                             | (30,890 | ) |                 | $ | (6,577 | )
|                                                                                                  |  |                                               |         |   |                 |   |        |  
|Denominator for basic and diluted loss per share Weighted average common stock shares outstanding |  |                                               | 21,830  |   |                 |   | 14,139 |  
|                                                                                                  |  |                                               |         |   |                 |   |        |  
|Basic and Diluted Loss Per Share                                                                  |  | $                                             | (1.42   | ) |                 | $ | (0.47  | )
|                                                                                                  |  |                                               |         |   |                 |   |        |  

The following table presents securities that could be converted into common shares and potentially
dilute basic earnings per share in the future. In the quarters ended September 30, 2006 and October 1, 2005, the potentially dilutive securities were not included in the computation of diluted earnings per share because to do so would have
been antidilutive:



|                               |  |                        |  |                
|------------------------------ |  | ---------------------- |  | ---------------
|                               |  | September 30, 2006     |  | October 1, 2005
|                               |  | (Amounts in thousands)
|Stock options                  |  | 1,357                  |  | 18             
|Common stock warrants          |  | 30,032                 |  | 607            
|Convertible preferred stock:   |  |                        |  |                
|Series M Convertible Preferred |  | 5,391                  |  | 5,224          
|Series N Convertible Preferred |  | 1,421                  |  | 1,940          
|Series O Convertible Preferred |  | 485                    |  | 800            
|Series P Convertible Preferred |  | 1,852                  |  |               
|Series Q Convertible Preferred |  | 4,849                  |  |               
|                               |  |                        |  |                
|                               |  | 45,387                 |  | 8,589          
|                               |  |                        |  |                

Share-Based Compensation Plans

The Company maintains the 2000 Stock Option Plan (the 2000 Plan) and the 2004 Stock Incentive Plan (the 2004 Plan), pursuant to
which it may grant equity awards to eligible persons. The Company also maintains the 1995 Stock Option Plan (the 1995 Plan) and the 1996 Director Stock Option Plan (the 1996 Director Plan), under which no additional options
may be granted, however, the 1995 Plan and the 1996 Director Plan and all outstanding options thereunder shall remain in effect until such outstanding options have expired or been canceled. The shareholders of the Company have approved the 1995
Plan, the 1996 Director Plan, the 2000 Plan, and the 2004 Plan.



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The 2000 Plan and the 2004 Plan combined provide for the issuance of up to 5,034,000 shares. Options may
be granted to employees, directors and consultants. The majority of the options vest annually in equal amounts over a two-year period.

The
Company had 3,089,912 shares available for grants under the option plans at September 30, 2006.

Under the assumptions indicated
below, the weighted-average fair value of stock option grants to employees for the three months ended September 30, 2006 was $1.30 per share. Expense recognized in the quarters ended September 30, 2006 and October 1, 2005 related to
these stock options was $0.2 million and $0.1 million, respectively.



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The table below indicates the key assumptions used in the options and warrant valuation calculations for
share based awards granted to employees in the quarters ended September 30, 2006 and October 1, 2005 and a discussion of our methodology for developing each of the assumptions used in the valuation model:



|                        |  |                    |   |  |                 |  
|----------------------- |  | ------------------ | - |  | --------------- | -
|                        |  | September 30, 2006 |   |  | October 1, 2005 |  
|Term                    |  | 3.91 years         |   |  | 5 years         |  
|Volatility              |  | 125.3              | % |  | 127.3           | %
|Dividend yield          |  | 0                  |   |  | 0               |  
|Risk-free interest rate |  | 5.13               | % |  | 3.85            | %
|Forfeiture rate         |  | 0.13               | % |  | 0.00            | %

Term - This is the period of time over which the awards granted are expected to remain
outstanding. The options and warrants issued in the three month periods ended September 30, 2006 and October 1, 2005 have a maximum contractual term of either five or seven years. An increase in the expected term will increase compensation
expense.

Volatility - This is a measure of the amount by which a price has fluctuated or is expected to fluctuate. Volatility is
based on historical volatility of the Companys common stock value and other factors, such as expected changes in volatility arising from planned changes in the Companys business operations. An increase in the expected volatility will
increase compensation expense.

Risk-Free Interest Rate - This is the U.S. Treasury rate for the week of the grant having a term
equal to the expected term of the warrant. An increase in the risk-free interest rate will increase compensation expense.

Dividend
Yield - The Company has not made any dividend payments during the last five fiscal years and has no plans to pay dividends in the foreseeable future. An increase in the dividend yield will decrease compensation expense.

Forfeiture Rate - This is the estimated percentage of awards granted that are expected to be forfeited or canceled before becoming fully vested.
An increase in the forfeiture rate will decrease compensation expense.

A summary of the status of the Companys outstanding stock
options as of September 30, 2006 and activity during the three month period then ended is presented below:



|                                              |  |                   |   |  |                                 |        |                                             |            |                                          |   |    
|--------------------------------------------- |  | ----------------- | - |  | ------------------------------- | ------ | ------------------------------------------- | ---------- | ---------------------------------------- | - | ---
|                                              |  | Number of Options |   |  | Weighted Average Exercise Price |        | Weighted Average Remaining Contractual
Life |            | Aggregate Intrinsic Value (in
thousands)
|Balance - Options Outstanding at July 1, 2006 |  | 606,613           |   |  | $                               | 20.29  |                                             |            |                                          |   |    
|Granted                                       |  | 750,000           |   |  |                                 | 1.40   |                                             |            |                                          |   |    
|Exercised                                     |  |                  |   |  |                                 |       |                                             |            |                                          |   |    
|Expired/Forfeited                             |  | (60               | ) |  |                                 | 157.50 |                                             |            |                                          |   |    
|                                              |  |                   |   |  |                                 |        |                                             |            |                                          |   |    
|Options outstanding, September 30, 2006       |  | 1,356,553         |   |  | $                               | 9.85   |                                             | 6.14 years |                                          | $ | 278
|                                              |  |                   |   |  |                                 |        |                                             |            |                                          |   |    
|Options exercisable, September 30, 2006       |  | 15,622            |   |  | $                               | 690.52 |                                             | 3.78 years |                                          | $ |   
|                                              |  |                   |   |  |                                 |        |                                             |            |                                          |   |    

As of September 30, 2006 there was $1.5 million of total unrecognized compensation cost
related to stock options. There were no exercises of stock options during the quarters ended September 30, 2006 and October 1, 2005.



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During fiscal 2006, the Company granted 2,715,022 common stock warrants to certain employees,
contractors, and other vendors for services provided. The Company calculated the fair value of the common stock warrants using the Black-Scholes option-pricing model using the parameters detailed above.

During the quarter ended September 30, 2006, the Company issued 28,500,116 common stock warrants primarily related to the CD&L acquisition and
related transactions. These warrants were valued at approximately $28.5 million based on valuation from a third party valuation consultant and the use of the Black-Scholes valuation model. A summary of the status of the Companys common stock
warrants outstanding as of September 30, 2006 and activity during the three month period then ended is presented below:



|                                                   |  |                    |   |  |                                 |        |                                             |            |                                          |   |       
|-------------------------------------------------- |  | ------------------ | - |  | ------------------------------- | ------ | ------------------------------------------- | ---------- | ---------------------------------------- | - | ------
|                                                   |  | Number of Warrants |   |  | Weighted Average Exercise Price |        | Weighted Average Remaining Contractual
Life |            | Aggregate Intrinsic Value (in
thousands)
|Balance - Warrants Outstanding Beginning of Period |  | 1,532,040          |   |  | $                               | 4.34   |                                             |            |                                          |   |       
|Granted                                            |  | 28,500,116         |   |  | $                               | 1.39   |                                             |            |                                          |   |       
|Exercised                                          |  |                   |   |  | $                               |       |                                             |            |                                          |   |       
|Forfeit/Expired                                    |  | (8,422             | ) |  | $                               | 142.00 |                                             |            |                                          |   |       
|                                                   |  |                    |   |  |                                 |        |                                             |            |                                          |   |       
|Warrants outstanding, September 30, 2006           |  | 30,023,734         |   |  | $                               | 1.51   |                                             | 3.77 years |                                          | $ | 11,279
|                                                   |  |                    |   |  |                                 |        |                                             |            |                                          |   |       
|Warrants exercisable, September 30, 2006           |  | 29,777,835         |   |  | $                               | 1.53   |                                             | 4.00 years |                                          | $ | 11,279
|                                                   |  |                    |   |  |                                 |        |                                             |            |                                          |   |       

3. ACQUISITION OF CD&L, INC. AND RELATED TRANSACTIONS:

On July 3, 2006, the Company, its wholly owned subsidiary CD&L Acquisition Corp (Merger Sub) and CD&L, Inc.
(CD&L), entered into an agreement and plan of merger (the Merger Agreement) to acquire CD&L. CD&L was another leading provider of time-definite logistics services. The Merger Agreement provided that, at the
closing, following CD&L shareholder approval, Merger Sub would be merged with and into CD&L (the Merger), with each then-outstanding share of common stock of CD&L being converted into the right to receive $3.00 per share in
cash. As a result of the Merger, which closed on August 17, 2006, CD&L became a wholly owned subsidiary of the Company. Contemporaneously with the signing of the Merger Agreement, the Company:



| |  |  | sold 75,000 units, each of which was comprised of (a) $1,000 aggregate principal amount at maturity of 12% senior secured notes due 2010 and (b) a warrant to purchase 345
shares of common stock at an initial exercise price of $1.45 per share, subject to adjustment from time to time (the Units);
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | sold 4,000,000 shares of Series Q Convertible Preferred Stock, each of which was initially convertible into 9.0909 shares of common stock (the Series Q Preferred Stock);
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | acquired approximately 49% of CD&Ls outstanding common stock in consideration for which the Company issued 3,205 Units valued at their par value of $3.2 million, 2,465,418
shares of common stock valued at $3.2 million or $1.30 per share, equal to the closing price of common shares on the day the final terms of the transaction were agreed; and paid $19.0 million in cash, pursuant to purchase agreements entered into
with the holders of certain of CD&Ls convertible debentures and convertible preferred stock;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | repaid approximately $20.5 million of indebtedness owed to Bank of America, N.A.
| | - |  | --------------------------------------------------------------------------------



| |  |  | repaid approximately $5.8 million of indebtedness owed to BET Associates, LP
| | - |  | ----------------------------------------------------------------------------

At the closing of the Merger on August 17, 2006, the Company:



| |  |  | acquired the remaining 51% of CD&Ls outstanding common stock;
| | - |  | --------------------------------------------------------------



| |  |  | repaid approximately $9.6 million of indebtedness owed by CD&L to Bank of America, N.A.;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | paid off approximately $1.6 million of CD&L seller-financed debt from acquisitions; and
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | paid $1.0 million to the former Chairman and Chief Executive Officer of CD&L in fulfillment the change of control provision in his employment agreement
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

On August 21, 2006, the Company sold an additional 500,000 shares of Series Q Preferred Stock.

In total, the aggregate net cash proceeds from the sale of the Units and the Series Q Preferred Stock were approximately $106.4 million. Approximately
$53.1 million of the proceeds were used to finance the CD&L acquisition, $37.3 million was used to repay CD&L and our indebtedness and $16.0 million was retained for general corporate purposes.

In addition, the Company assumed a contingent liability to make a maximum of $3.5 million in payments under the change of control provisions of the
employment agreements of four former CD&L executives within 110 days of the receipt of their letters of resignation, which must be tendered before August 17, 2007, one year following the Merger closing. On August 17, 2006, three of the
four former CD&L executives submitted letters of resignation. In accordance with the change of control provisions of the applicable employment agreements, a total of $2.6 million will be paid to the three executives in December 2006 and this
amount will be accounted for as an addition to the purchase price for CD&L at that time.

The purchase price for CD&L was
determined in negotiations with the Board of Directors of CD&L and the holders of CD&Ls Series A Convertible Preferred Stock. The $3.00 price paid for most CD&L common shares represented a 34% premium to the closing market price of
CD&L common shares on June 23, the day the final terms of the transaction were agreed. We believe the acquisition of CD&L will result in several economic benefits that will support the recognition of goodwill in excess of the value of
the tangible assets acquired. The determination of the value of CD&Ls tangible and intangible assets and goodwill has been determined by independent valuation experts and included in these financial statements.

Senior Secured Notes

On July 3, 2006, the
Company issued $78.2 million aggregate principal amount of 12% senior secured notes due 2010 (the Senior Notes) in a private placement transaction. The Senior Notes were issued at a discount of 5.66% of face value. The net proceeds from
the sale of the Senior Notes, after deducting the discount and estimated offering expenses payable by the Company, were approximately $63.4 million. The Senior Notes were issued in units comprised of (a) $1,000 aggregate principal amount at
maturity of Senior Notes and (b) a warrant to purchase 345 shares of the Companys common stock exercisable at $1.45 per share. See Note 6  Long-Term Debt.



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Warrants

As part of the Units, the Company issued warrants to purchase an aggregate of 26,966,897 shares of Velocity common stock at an initial exercise price of $1.45 per share, subject to adjustment. The term of these
warrants expires on July 3, 2010. The warrants are subject to an automatic exercise feature, based on the trading price of Velocity common stock, subject to specified limitations. The warrants contain other customary terms and provisions.

In addition to issuing warrants as part of the Units, the Company also issued warrants on July 3, 2006 to purchase 797,500 shares of
Velocity common stock to affiliates of THLPV in consideration of services provided by one or more of these parties, at an exercise price of $0.01 per share. The warrants issued to affiliates of THLPV have terms similar to the warrants issued as part
of the Units except that they do not provide for automatic exercise to affiliates of THLPV. Mr. James G. Brown, founder and Managing Director of TH Lee Putnam Ventures L.P., is one of our directors.

Series Q Convertible Preferred Stock

In addition to the sales of Series Q Preferred Stock discussed above, the Company also issued on July 3, 2006 an aggregate of 277,770 shares of Series Q Preferred Stock in consideration of services, determined by the Company to have a
value of not less than $10.00 per share, to certain of the investors, the placement agents for the Unit and Series Q Preferred Stock offerings and affiliates of THLPV for various services they provided to Velocity. See Note 7 
Shareholders Equity for further discussion of the terms of the Series Q Preferred Stock.

CD&L Series A Preferred Stock,
Common Stock and Warrant Purchase Agreements

On July 3, 2006, Velocity entered into a Series A Preferred Stock and Warrant
Purchase Agreement with BNP Paribas (Paribas) and two Series A Preferred Stock, Common Stock and Warrant Purchase Agreements with Exeter Capital Partners IV, L.P. (Exeter IV), one of which related to securities purchased on
June 30, 2006, by Exeter IV from the United States Small Business Administration as receiver for Exeter Venture Lenders, L.P. (Exeter I) and one relating to CD&Ls securities held by Exeter IV prior to that date
(collectively, the Preferred Purchase Agreements). Under the Preferred Purchase Agreements, Velocity purchased the 393,701 shares of CD&Ls Series A Preferred Stock and the 506,250 warrants from Paribas and Exeter IV and the
656,168 shares of CD&Ls common stock held by Exeter IV.

Shortly after consummations of such purchases, Velocity provided notice
of conversion of the Preferred Stock, effective as of July 11, 2006, into an aggregate of 3,937,010 shares of the CD&Ls common stock, and exercised the 506,250 warrants on a cashless basis for an aggregate exercise price of $506.25,
so that it received 506,075 shares. As a result, under the Preferred Purchase Agreements, Velocity acquired, in the aggregate, 5,099,253 shares of CD&Ls common stock.

CD&L Series A Convertible Subordinated Debenture Purchase Agreement

On July 3, 2006, Velocity entered into a Series A Convertible Subordinated Debenture Purchase Agreement (the Debenture Purchase
Agreement) with the 14 individuals who held all of CD&Ls Series A Convertible Notes in the aggregate principal amount of $4,000,000, including Mark Carlesimo, the former General Counsel of CD&L and the current General Counsel of
Velocity Express. Under the Debenture Purchase Agreement, Velocity purchased the Series A Convertible Notes for an aggregate price of $12,795,276.

The Series A debenture sellers had been parties to a shareholders agreement with CD&L and the holders of the Series A Preferred Stock under which they had a right of first refusal to acquire the Series A Preferred Stock. As a condition
to Velocitys entry into the Debenture Purchase Agreement, the Series A debenture sellers also entered into an agreement whereby they waived those rights of first refusal in connection with Velocitys purchase of the Series A Preferred
Stock.



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Shortly after the consummation of the debenture purchase, Velocity converted the Series A debentures into
an aggregate of 3,937,008 shares of CD&Ls common stock. As a result of this conversion and the Preferred Purchase Agreement, as of July 11, 2006, Velocity owned 9,036,261 shares of CD&Ls common stock, representing 49.1% of
the outstanding shares of common stock.

CD&L Voting Agreements

As a condition to entering into the Merger Agreement and the Debenture Purchase Agreement, Velocity required that each of Albert W. Van Ness, Jr.,
Chairman and Chief Executive Officer of CD&L, William T. Brannan, President and a director of CD&L, Michael Brooks, Group Operations President and a director of CD&L, Russell Reardon, Chief Financial Officer of CD&L, Matthew J.
Morahan, a director of CD&L, Vincent P. Brana (a consultant to CD&L and a former officer) and Jack McCorkell (an officer of one of CD&L subsidiaries) enter into a voting agreement. Under the voting agreement each such stockholder agreed
to vote in favor of the merger and the Merger Agreement and against any action which would result in a breach of the Merger Agreement or voting agreement. The voting agreement also provided that such stockholders would vote against any extraordinary
corporate transaction, sale or transfer of assets, change to the Board of Directors, change in capitalization, charter or bylaws, change to the structure or business of CD&L, or any other action which would potentially interfere, delay or
adversely effect the merger or transactions contemplated thereby. The prohibition did not apply to a vote for a competing merger offer that the CD&L Board of Directors determined to be on more favorable terms than the Velocity Merger Agreement,
provided that the CD&L Board of Directors recommended that the stockholders not approve the merger transaction with Velocity. The voting agreement terminated upon the effective date of the merger.

CD&L Seller-Financed Debt

Contemporaneously with the Companys merger with CD&L, Inc., the Company was obligated under the Indenture for the Companys 12% Senior Secured Notes to satisfy all indebtedness of CD&L. That indebtedness included four
promissory notes in an aggregate principal amount of approximately $1,600,000 (the CD&L Seller Notes) and a letter of credit issued by Bank of America for the account of CD&L in the approximate amount of $3,800,000 (the
CD&L Letter of Credit). In addition, the Company chose to cash collateralize the CD&L Letter of Credit until it puts in place a working capital line of credit under which a replacement letter of credit would be issued.

Purchase Accounting

The acquisition was accounted for as a purchase business combination. The consolidated financial statements include the results of CD&L from July 3, 2006. The Company recorded a minority interest for the portion of CD&L not
controlled for the period from July 3, 2006 to August 17, 2006 when the minority interest was acquired. The combined purchase price of $63.1 million is comprised of $52.1 million in cash, 2,465,418 shares of common stock valued at $1.40 per share on
July 3, 2006, 3,205 12% senior secured notes due 2010 with attached warrants (see Note 7) valued at $3.0 million, and transaction costs of $4.5 million. The purchase price was allocated to the net assets acquired and liabilities assumed based on
their estimated fair values as of the acquisition date. The Company engaged a third party to assist with the valuation of certain acquired intangibles. The excess of the purchase price over the estimated fair value of the net assets acquired,
including identifiable intangible assets, of $28.0 million was allocated to goodwill. A final determination of the purchase price allocation will be made within one year of the acquisition date.

The following table represents the preliminary allocation of the purchase price to assets acquired and liabilities assumed (dollars in thousands):



|                                          |  |   |       
|----------------------------------------- |  | - | ------
|Assets                                    |  |   |       
|Current assets:                           |  |   |       
|Cash                                      |  | $ | 543   
|Accounts receivable                       |  |   | 28,745
|Prepaid expenses and other current assets |  |   | 3,300 
|                                          |  |   |       
|Total current assets                      |  |   | 32,588
|Fixed assets                              |  |   | 3,228 
|Goodwill                                  |  |   | 28,015
|Intangible assets:                        |  |   |       
|Customer relationships                    |  |   | 28,900
|Non compete agreements                    |  |   | 1,900 
|                                          |  |   |       
|Total intangible assets                   |  |   | 30,800
|Other assets                              |  |   | 741   
|                                          |  |   |       
|Total assets                              |  |   | 95,372
|                                          |  |   |       
|Liabilities                               |  |   |       
|Current liabilities:                      |  |   |       
|Accounts payable and accrued liabilities  |  |   | 20,920
|Short term borrowings                     |  |   | 9,371 
|Current maturities of long-term debt      |  |   | 542   
|                                          |  |   |       
|Total current liabilities                 |  |   | 30,833
|Other liabilities                         |  |   | 1,424 
|                                          |  |   |       
|Total liabilities:                        |  |   | 32,257
|                                          |  |   |       
|Net assets acquired                       |  | $ | 63,115
|                                          |  |   |       

Intangible assets recorded on the CD&L acquisition are being amortized on a straight-line
basis over their estimated remaining lives. Customer relationships are amortized over thirteen years and the non-compete agreements are amortized over the life of the agreements, two years.

The following table summarizes the unaudited pro forma financial information for the acquisition and the related financing as if the acquisition of
CD&L had been consummated on July 2, 2006 and July 3, 2005 under the purchase method of accounting (dollars in thousands, except per share amounts):



|                                             |  |                    |         |   |                 |   |         |  
|-------------------------------------------- |  | ------------------ | ------- | - | --------------- | - | ------- | -
|                                             |  | Three Months Ended |        
|                                             |  | September 30.2006  |         |   | October 1. 2005 |  
|Revenues                                     |  | $                  | 111,094 |   |                 | $ | 109,681 |  
|Net loss                                     |  |                    | (10,436 | ) |                 |   | (8,358  | )
|Basic and diluted net loss per common share: |  |                    | (1.40   | ) |                 |   | (0.67   | )

The unaudited pro forma combined financial information does not necessarily represent what would
have occurred if the acquisition had taken place on the dates presented and is not representative of the Companys future consolidated results. The future combined Company results will not reflect the historical combined Company results of both
entities. Future cost of delivery and future general and administrative expenses are expected to be lower on a combined company basis as a result of the expected integration cost savings. The net financial impact of these matters has not been
reflected in the pro forma information. Achievement of any of the expected cost savings is subject to risks and uncertainties and no assurance can be given that such cost savings or synergies will be achieved.

The pro forma information does not include all liabilities that may result from the operation of CD&Ls business in conjunction with that of
Velocitys following the acquisition and all adjustments in respect of possible settlements of outstanding liabilities (other than those already included in the historical financial statements of either company), as these are not presently
estimable. Therefore, the actual amounts ultimately recorded may differ materially from the information presented in the accompanying pro forma information.

4. RESTRUCTURING

During the first quarter of fiscal 2007, in connection with the integration of CD&L into Velocity, the
Companys management commenced its integration plan which included staff reduction of approximately 200 employees due to redundant positions, a retention incentive program for key individuals of CD&L and the designation of approximately 40
operating centers for closure. In connection with this integration plan, the Company recorded a restructuring charges of $953,000 related to severance costs, $54,000 in retention incentives and $98,000 in lease termination costs related to five
facilities which closed during the three months ended September 30, 2006. In addition, a charge of $87,000 was recorded related to revisions in the Companys estimates of previously recorded costs and losses associated with excess
facilities.



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Approximately $1.5 million of the liability remained accrued at September 30, 2006, which is
included with current accrued liabilities.



|                              |  |                                        |     |                     |   |          |  |   |                                      |   |  |                                              |     |   |  |   |      
|----------------------------- |  | -------------------------------------- | --- | ------------------- | - | -------- |  | - | ------------------------------------ | - |  | -------------------------------------------- | --- | - |  | - | -----
|                              |  | Restructuring Liabilities July 1,
2006 |     | Restructuring Costs |   | Payments |  |   | Adjustments and Changes in
Estimates |   |  | Restructuring Liabilities September 30, 2006
|Employee termination benefits |  | $                                      | 161 |                     | $ | 1,009    |  | $ | (83                                  | ) |  | $                                            | (19 | ) |  | $ | 1,068
|Lease termination costs       |  |                                        | 266 |                     |   | 98       |  |   | (111                                 | ) |  |                                              | 86  |   |  |   | 339  
|Other                         |  |                                        | 90  |                     |   |         |  |   |                                     |   |  |                                              |    |   |  |   | 90   
|                              |  |                                        |     |                     |   |          |  |   |                                      |   |  |                                              |     |   |  |   |      
|                              |  | $                                      | 517 |                     | $ | 1,107    |  | $ | (194                                 | ) |  | $                                            | 67  |   |  | $ | 1,497
|                              |  |                                        |     |                     |   |          |  |   |                                      |   |  |                                              |     |   |  |   |      

5. PREPAID WORKERS COMPENSATION AND AUTO LIABILITY INSURANCE

The Company is a member of a captive insurance company (the Captive) with a self-insured retention of $500,000 per claim. A portion of the
premium payments made to the Captive includes amounts to prepay member-specific losses and a risk-sharing layer of the Captive. If losses of a member of the Captive exhaust the funds that the member is required to pay to the Captive for a given
policy year, the excess losses are shared among all other members of the Captive on a proportional basis based on member premiums. The maximum amount any member could be required to pay for any policy year is limited to approximately 150% of the
amount of the annual premium. Any unused loss funds are returned to the member when the policy year has matured and is closed out. The Captive engages independent experts to value all losses. Each member is required to provide a letter of credit or
a cash deposit to guarantee its potential obligations. In the past, CD&L provided a letter of credit supported by its revolving credit facility. Under the terms of the CD&L merger and the related financing transactions, the existing
revolving credit facilities for both CD&L and Velocity were paid in full and terminated and the letter of credit with the Captive was replaced by cash collateral of $3,492,000. The Company has recorded this payment on its balance sheet as
prepaid workers compensation expense.

The Company is currently in discussions with a lending institution for a new revolving credit
facility and, upon closing of the new facility, intends to provide a new letter of credit to the Captive after which the Captive will return $3,492,000 in cash to the Company.

6. ASSETS HELD FOR SALE - VEHICLES

Vehicles held by Peritas have been classified as assets held for
sale and reclassified to current assets on the consolidated balance sheet. The vehicles are being sold over a period of nine months in order to prevent a scenario in which the used vehicle market is not flooded with all of the trucks driving prices
down. The loss recognized in conjunction with the write down of the vehicles to fair-value was less than $0.1 million.

7. LONG-TERM DEBT

Long-term debt consisted of the following:



|                              |  |                        |        |   |              |   |        |  
|----------------------------- |  | ---------------------- | ------ | - | ------------ | - | ------ | -
|                              |  | September 30, 2006     |        |   | July 1, 2006 |  
|                              |  | (Amounts in thousands) |       
|12% Senior Secured Notes      |  | $                      | 48,821 |   |              | $ |       |  
|Revolving note                |  |                        |       |   |              |   | 20,547 |  
|Senior subordinated note      |  |                        |       |   |              |   | 5,587  |  
|Variable interest entity note |  |                        | 908    |   |              |   | 1,117  |  
|Other                         |  |                        | 995    |   |              |   | 297    |  
|                              |  |                        |        |   |              |   |        |  
|                              |  |                        | 50,724 |   |              |   | 27,548 |  
|Less current maturities       |  |                        | (1,857 | ) |              |   | (1,363 | )
|                              |  |                        |        |   |              |   |        |  
|Total Long Term Debt          |  | $                      | 48,867 |   |              | $ | 26,185 |  
|                              |  |                        |        |   |              |   |        |  

Senior Secured Notes

On July 3, 2006, the Company issued $78.2 million aggregate principal amount of 12% senior secured notes due 2010 (the Senior Notes) in a
private placement transaction. The Senior Notes were sold at a discount of 5.66% of face value. The net proceeds from the sale of the Senior Notes, after deducting the discount and estimated offering expenses payable by the Company, were
approximately $63.4 million. The



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Senior Notes were issued in units comprised of (a) $1,000 aggregate principal amount at maturity of Senior Notes and
(b) a warrant to purchase 345 shares of the Companys common stock exercisable at $1.45 per share.

The net proceeds of $46.9
million were allocated to the Senior Notes and $26.9 million to the warrants based on their relative fair values. The Company will accrete the difference between the carrying amount of the Senior Notes and their face value over the remaining term
using the effective interest method.

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

Holders of Senior Notes have the right to cause us to redeem, at par, up to 25% of the original principal amount of Senior Notes if the Companys
consolidated cash flow, for the period of four consecutive fiscal quarters preceding the second anniversary of the issue date, is less than $20 million. The holders also have the right to cause the Company to redeem, at par, up to an additional 25%
of the original principal amount of Senior Notes if our consolidated cash flow, for the period of four consecutive fiscal quarters preceding the third anniversary of the issue date, is less than $25 million. The holders right to cause the
Company to redeem Senior Notes will terminate under certain circumstances, if at or prior to such second or third anniversary date the volume-weighted average trading price for Velocity common stock exceeds $2.75 per share for any 20 trading days
within any consecutive 30-trading-day period from the issue date through such anniversary date. Upon a change of control, holders will also have the right to require the Company to repurchase all or any part of their Senior Notes at a price equal to
101% of the aggregate principal amount thereof.

The indenture contains restrictive covenants regarding the ability of the Company and its
restricted subsidiaries to incur additional indebtedness and issue of preferred stock, make restricted payments, incur liens, enter into asset sales, enter into transactions with affiliates, enter into sale and leaseback transactions, consolidate,
merge and sell all or substantially all of their assets, enter into a new senior credit facility (or refinance any such facility) without giving the holders a right of first refusal to provide such financing and other covenants customary for similar
transactions. In addition, the Company must maintain specified levels and cash, cash equivalents and qualified accounts receivable.

The
Senior Notes are guaranteed by our domestic subsidiaries and are secured by a first-priority lien on collateral consisting of substantially all of the Companys and its domestic subsidiaries tangible and intangible assets. The trustee is
required by the Indenture to subordinate the lien securing the Senior Notes to the lien securing a working capital facility if the Company enters into such a facility in compliance with the terms of the Indenture. The indenture contains customary
events of default.

Comerica Loan and Security Agreement

On November 14, 2004, a loan and security agreement was entered into by and between Comerica Bank (Comerica) and Peritas (see Note 5
 Consolidated Financial Interest Entity). Under the terms of this agreement, Comerica agrees to make equipment advances to Peritas in an aggregate amount not to exceed (a) $1,900,000 until such time as Comerica has received satisfactory
evidence from Peritas that each borrowing subsidiary of Peritas has qualified to do business in the jurisdiction(s) in which they conduct business; and (b) $3,000,000 thereafter. Peritas was entitled to request equipment advances at any time
from the date of the agreement through March 19, 2005. Each equipment advance amount (a) was a minimum of $100,000 and (b) did not exceed 100% of the lesser of (i) the invoice amount or (ii) the estimated value of the
vehicles at auction established pursuant to a third-party appraisal in accordance with the terms of the agreement.

Interest on the
equipment advances accrues at a rate of prime plus 1% and is due on the first calendar day of each month during the term of the agreement. Any equipment advances outstanding on March 19, 2005 are payable in forty-two equal monthly installments
of principal, plus all accrued interest, beginning on first business day following March 19, 2005 and continuing on the same days of each month thereafter through July 19, 2008, at which time all amounts due in connection with the
equipment advances and all other amounts due



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under this agreement, shall be immediately due and payable. At September 30, 2006, the outstanding principal balance
in connection with this agreement was $908,000 with accrued interest of $7,000.

Under the terms of the agreement, Peritas is required to
maintain certain financial ratios and comply with other financial conditions. This agreement also prohibits Peritas from incurring certain additional indebtedness, limits certain investments and restricts substantial asset sales and certain
distributions. As of September 30, 2006, Peritas was in compliance with the debt covenants.

Refinancing of Revolving Credit Facility

During fiscal year 2006, the Company maintained a revolving credit facility with Bank of America/Fleet Capital Corporation (the Senior
Lender) that allowed for borrowings up to the lesser of $42.5 million or an amount based on a defined portion of eligible receivables. Interest was payable monthly at a rate, which was adjusted annually by an amount not exceeding 25 basis
points depending upon the Companys achieving certain conditions as defined in the agreement, of prime plus 1.25%, or, at the Companys election, at LIBOR plus 3.25%. On July 3, 2006, the credit facility was refinanced with the proceeds
from the Unit offering (discussed above). In connection with the July 3, 2006 debt financing, the Company expensed at remaining unamortized finance costs of $1.7 million related to the old debt.

Refinancing of Senior Subordinated Note

The Company also maintained a $6.0 million senior subordinated note with interest payable quarterly at 15% per annum. 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.

The senior subordinated note was refinanced on July 3, 2006 with the proceeds from the Unit offering
(discussed above). In connection with the July 3, 2006 debt refinancing, the Company expensed its remaining unamortized debt discount of $0.2 million.

8. SHAREHOLDERS EQUITY

Series Q Convertible Preferred Stock-On July 3, 2006, the Company
entered into a Stock Purchase Agreement by and among the Company and certain investors named therein, pursuant to which the Company sold for cash an aggregate of 4,000,000 shares of Series Q Convertible Preferred Stock (Series Q
Preferred) for net proceeds of $41.7 million. Each share of the Companys Series Q Preferred Stock is initially convertible into 9.0909 shares of Velocity common stock, representing an initial conversion price of $1.10 per share, subject
to adjustment and other customary terms for similar offerings. The Company may force holders of Series Q Preferred Stock to convert their shares if the daily weighted average market price of our common stock is equal to or greater than 200 percent
of the then applicable Series Q Preferred Stock conversion price for a specified period of time, subject to specified conditions. In addition, for so long as any of these shares are outstanding, the Company may not enter into any equity line of
credit, variable or future-priced resetting, self-liquidating, adjusting or conditional fund raising, or similar financing arrangements.

In addition, the Company also issued on July 3, 2006 an aggregate of 277,770 shares of Series Q Preferred Stock in consideration of services, determined by the Company to have a value of not less than



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$10.00 per share, to certain of the investors, the placement agents for the Unit and Series Q Preferred Stock offerings
and affiliates of THLPV for various services they provided to Velocity.

On August 17, 2006, the Company entered into a Stock Purchase
Agreement pursuant to which the Company sold for cash an aggregate of 500,000 shares of Series Q Convertible Preferred Stock (the Additional Series Q Preferred Stock) for net proceeds of $4.3 million.

In connection with these offerings, the investors received customary registration rights regarding the shares of common stock issuable upon exercise of
the warrants and upon conversion of the Series Q Preferred Stock.

Capital DistributionIn 2004, the Company
issued shares of Series J and Series K Convertible Preferred Stock worth $7.5 million to THLPV. In connection therewith, THLPV issued a standby Letter of Credit guarantee of $7.5 million to support the Companys revolving credit facility.
Funding of the Series J and Series K Convertible Preferred Stock with the standby Letter of Credit guarantee was recorded as a subscription receivable. On July 3, 2006, Velocity paid off the credit facility in full, without drawing any funds
from the standby Letter of Credit guarantee. As a result, on July 3, 2006, the $7.5 million subscription receivable was returned to THLPV as a distribution of capital.

Amendments to Series M, N, O, P and Q Convertible Preferred Stock-On July 3, 2006, the holders of the Series M Preferred, the
Series N Preferred, the Series O Preferred and the Series P Preferred consented to ranking junior to the Series Q Preferred in the event of any liquidation or winding up of the Company. In addition, on October 19, 2006, the Registration Rights
Agreements between the Company and the holders of the Series M Preferred, the Series N Preferred, the Series O Preferred, the Series P Preferred and the Series Q Preferred were amended to clarify that liquidated damages would not accrue if, after a
Registration Statement covering the registrable securities has been declared effective, the Registration Statement is not available to permit investors to resell the shares of common stock issuable upon conversion of their Preferred Stock because
the Company is required to update the Registration Statement in accordance with the applicable rules and regulations of the SEC.

9. LIQUIDITY

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 reported a loss from operations of approximately $4.4 million for the first fiscal quarter of 2007 and had working capital of
approximately $15.9 million at September 30, 2006.

Historically, the Company has financed its operations and has met its capital
requirements primarily through a combination of private and public issuances of equity securities, bank borrowings and cash generated from operations. As a result of the CD&L acquisition and related transactions, the Company had $78 million in
outstanding senior notes. The Company believes that, barring any unforeseen changes, its existing cash and cash expected to be generated from operations will be sufficient to fund its operations, capital expenditures and provide adequate working
capital through the end of the fiscal year 2007.

On July 3, 2006, contemporaneously with the signing of the Merger Agreement, the
Company:



| |  |  | sold 75,000 units, each of which was comprised of (a) $1,000 aggregate principal amount at maturity of 12% senior secured notes due 2010 and (b) a warrant to purchase 345
shares of common stock at an initial exercise price of $1.45 per share, subject to adjustment from time to time (the Units);
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | sold 4,000,000 shares of Series Q Convertible Preferred Stock, each of which was initially convertible into 9.0909 shares of common stock (the Series Q Preferred Stock);
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | acquired approximately 49% of CD&Ls outstanding common stock in consideration for which the Company issued 3,205 Units valued at their par value of $3.2 million, 2,465,418
shares of common stock valued at $3.2 million or $1.30 per share, equal to the closing price of common shares on the day the final terms of the transaction were agreed; and paid $19.0 million in cash, pursuant to purchase agreements entered into
with the holders of certain of CD&Ls convertible debentures and convertible preferred stock;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | repaid approximately $20.5 million of indebtedness owed to Bank of America, N.A.
| | - |  | --------------------------------------------------------------------------------



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| |  |  | repaid approximately $5.8 million of indebtedness owed to BET Associates, LP
| | - |  | ----------------------------------------------------------------------------

At the closing of the Merger on August 17, 2006, the Company:



| |  |  | acquired the remaining 51% of CD&Ls outstanding common stock;
| | - |  | --------------------------------------------------------------



| |  |  | repaid approximately $9.6 million of indebtedness owed by CD&L to Bank of America, N.A.;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | paid off approximately $1.6 million of CD&L seller-financed debt from acquisitions; and
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | paid $1.0 million to the former Chairman and Chief Executive Officer of CD&L in fulfillment the change of control provision in his employment agreement
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

On August 21, 2006, the Company sold an additional 500,000 shares of Series Q Preferred Stock.

In total, the aggregate net cash proceeds from the sale of the Units and the Series Q Preferred Stock were approximately $106.4 million. Approximately
$53.1 million of the proceeds were used to finance the CD&L acquisition, $37.3 million was used to repay CD&L and our indebtedness and $16.0 million was retained for general corporate purposes.

Currently, the Company is finalizing a new revolving credit facility with a major lending institution. The lender has informed the Company that its
credit committee has reviewed and approved the credit. Documentation of the facility is substantially complete. The Company now intends to seek consent of the bondholders to the terms of the facility, which was anticipated in the bond indenture and
requires the consent of a simple majority of the bondholders. The Company intends to use the credit facility to collateralize letters of credit and to provide additional liquidity.

10. SUBSEQUENT EVENTS

Amendment to Certificate of Incorporation

On October 20, 2006, the Company filed a Certificate of Amendment (the Amendment) to its Certificate of Incorporation with the Delaware
Secretary of State. Pursuant to the Amendment, each holder of the Companys Series N Convertible Preferred Stock (the Series N Preferred) and Series O Convertible Preferred Stock (the Series O Preferred and, together
with the Series N Preferred, the Preferred Stock) may, upon delivering written notice to the Company, elect to limit its ability to convert its Preferred Stock, subject to certain exceptions, if such conversion would cause such
stockholder, together with its affiliates, to beneficially own a number of shares of the Companys common stock that would exceed 4.99% of its outstanding shares of common stock.

Material Modification to Rights of Security Holders

On October 19, 2006, the Registration Rights Agreements between the Company and the holders of the Series M Preferred, the Series N Preferred, the Series O Preferred, the Series P Preferred and the Series Q
Preferred were amended to clarify that liquidated damages would not accrue if, after a Registration Statement covering the registrable securities has been declared effective, the Registration Statement is not available to permit investors to resell
the shares of common stock issuable upon conversion of their Preferred Stock because the Company is required to update the Registration Statement in accordance with the applicable rules and regulations of the SEC. This amendment permits the Company
not to pay the liquidated damages that would otherwise have been due because the Company suspended the use of the existing shelf Registration Statement in connection with the Merger.

Amended Agreement with Financial Advisor

On November 7, 2006, Velocity and Meritage Capital Advisors LLC (Meritage) entered into a letter agreement (the 2006 Letter Agreement), pursuant to which the Company and Meritage agreed to amend certain terms of
their letter agreement dated September 1, 2005 (the 2005 Letter Agreement). Pursuant to the 2006 Letter Agreement, the Company agreed, as consideration for the financial advisory services Meritage provided to the Company pursuant to
the 2005 Letter Agreement, to (i) pay to Meritage $150,000 in cash, (ii) issue 45,000 shares of the Companys Series Q Convertible Preferred Stock $0.004 par value per share (the Series Q Preferred) and
(iii) reimburse Meritage for certain out-of-pocket expenses. The issuance of the 45,000 shares of Series Q Preferred to Meritage and our agreement to register the resale of the Conversion Shares was initially disclosed in our Current Report on
Form 8-K filed on July 10, 2006 and was previously approved by the Companys stockholders in connection with the CD&L, Inc. acquisition and other related transactions.



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

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

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

Overview

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

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

The Companys service offerings are divided into the following
categories:



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



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



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

The Companys customers represent a variety of industries and utilize the Companys services across multiple service offerings. Revenue
categories and percentages of total revenue for the quarters ended September 30, 2006 and October 1, 2005 were as follows:



|                             |  |                    |   |  |                |  
|---------------------------- |  | ------------------ | - |  | -------------- | -
|                             |  | Three Months Ended |  
|                             |  | September 30,2006  |   |  | October 1,2005 |  
|Office products              |  | 26.1               | % |  | 30.3           | %
|Healthcare                   |  | 24.8               | % |  | 20.4           | %
|Financial services           |  | 18.9               | % |  | 18.5           | %
|Commercial                   |  | 9.8                | % |  | 12.5           | %
|Transportation and logistics |  | 8.1                | % |  | 7.2            | %
|Retail and consumer products |  | 7.1                | % |  | 4.3            | %
|Technology                   |  | 2.9                | % |  | 1.8            | %
|Energy                       |  | 2.2                | % |  | 4.9            | %

The mix of revenue in the quarter ended September 30, 2006 reflects the combination with
CD&L. CD&Ls historically greater weighting in healthcare, retail, and technology resulted in the relative increase in those segments, whereas CD&Ls lower weighting in office products, commercial and energy caused the relative
decrease in those segments compared to the legacy Velocity business in the prior year. The companies had comparable weightings in the financial services and transportation and logistics industries.

CD&L Acquisition & Related Transactions

On July 3, 2006, the Company, Merger Sub and CD&L entered into the Merger Agreement. The Merger Agreement provided that, at the closing, Merger Sub would be merged with and into CD&L (the Merger), with each
outstanding share of common stock of CD&L being converted into the right to receive $3.00 per share in cash. As a result of the Merger, which closed on August 17, 2006, CD&L became the Companys wholly owned subsidiary. As
discussed in Note 3 of the Companys consolidated financial statements included elsewhere in this report, as of July 3, 2006, the Company had control over a majority of CD&Ls voting shares. Consequently, the financial statements
of CD&L have been consolidated with those of the Company since July 3, 2006. However, because of the Merger, period-to-period comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication
of future performance.

Contemporaneously with the signing of the Merger Agreement, the Company acquired beneficial ownership of
approximately 49% of CD&Ls outstanding common stock pursuant to several purchase agreements, including those relating to certain of CD&Ls then outstanding convertible debt. In consideration for these securities, the Company:



| |  |  | issued 3,205 Units;
| | - |  | -------------------



| |  |  | issued 2,465,418 shares of the Companys common stock; and
| | - |  | ----------------------------------------------------------



| |  |  | paid approximately $19.0 million in cash.
| | - |  | -----------------------------------------



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In addition on July 3, 2006, the Company sold:



| |  |  | 75,000 Units; and
| | - |  | -----------------



| |  |  | 4,000,000 shares of Series Q Convertible Preferred Stock.
| | - |  | ---------------------------------------------------------

In total, the aggregate net cash proceeds from the sale of the Units and the Series Q Preferred Stock were approximately $106.4 million. Approximately $53.1 million of the proceeds were used to finance the CD&L acquisition, $37.3
million was used to repay CD&L and our indebtedness and $16.0 million was retained for general corporate purposes. See Liquidity and Capital Resources. In addition, the Company granted customary registration rights with respect
to the shares of the Companys common stock issuable upon conversion of the Series Q Preferred Stock and the warrants.

Management
believes that the acquisition of CD&L will benefit the Company in several ways. The combined company has more than $440 million in annual revenues based on the combined revenues for the two companies for the twelve months ended July 1,
2006, and approximately 5,500 independent contractor drivers operating from 150 locations in leading markets across the United States and Canada. In addition, the combination is proving to show the following strategic and financial benefits:



| |  |  | increased market coverage due to a combination of routes of the two companies provides our customers with a broader national reach;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | superior customer programs combining proprietary track and trace and electronic signature capture technology, which management believes is the industrys best service offering
in the time definite delivery industry;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a diverse and expanded customer base across multiple market sectors, including healthcare, retail, service parts replenishment and financial industries, among others;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a strengthening of our already excellent managerial team; and
| | - |  | -------------------------------------------------------------



| |  |  | operational costs savings of approximately $39 million over the next 18 months, as described below.
| | - |  | ---------------------------------------------------------------------------------------------------

Based on the Companys current estimates of the integration of CD&L, management expects to achieve the following operational cost savings. In delivery operations, the Company expects to save up to $12.7
million annually, primarily resulting from occupancy and staff cost reductions resulting from the consolidation of facilities in the same geographic area. Savings of up to $10.5 million annually are anticipated in general and administrative expenses
through the elimination of duplicate management, public company expenses and insurance coverage. In addition, the Company anticipates savings of up to $16.0 million annually from the centralized management of drivers and increased customer density.
The Company expects to incur approximately $11.7 million of expense to integrate CD&L. Each of the foregoing operational cost savings we expect to achieve in connection with the integration of CD&L is discussed in more detail below under
Factors Affecting Future Results of Operations.

Restructurings

In 2005 and 2006, the Company implemented several restructurings that management believes have repositioned the Company for greater success in the future.

In 2005, the Company conducted an analysis of its route profitability that indicated the Company was operating in a number of locations
that did not have sufficient customer density for the Company to profitably deliver its targeted service levels. As a result, at the end of the third quarter of fiscal 2005, the Company closed over 40 of its locations (primarily smaller facilities
in low density areas), terminated several unprofitable



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customer contracts and reduced employee headcount by approximately 200. At that time, the Company recorded a charge of
$602,000 related to the restructuring, mostly reflective of severance costs. During the final quarter of fiscal 2005, the Company ceased use of most of the named facilities and recorded an additional $550,000 in net lease contract termination costs
and fixed asset impairments, recorded $100,000 in severance costs and recorded an estimated $300,000 charge to recognize the cost of service contracts that had no future economic benefit to the Company. During the third quarter of fiscal 2006, the
Company recorded a charge of $300,000 related to severance and benefits for approximately 120 employees and revised its estimates of previously recorded costs and losses associated with excess facilities. For fiscal 2006, the Companys revenue
declined largely due to lower volume experienced as a result of the restructuring implemented at the end of the Companys third quarter of fiscal 2005, as described in more detail below. The revenue decline was partially offset by new customer
contracts and business expansion with existing customers approximating $20.0 million. For more information, see Note 4 (Restructuring) to the Companys consolidated financial statements.

The Company expects to incur costs relating to the CD&L integration as described above. In the quarter ending September 30, 2006, the company
recorded a charge of $954,000 associated with the reduction of force, $54,000 in retention bonuses and $184,000 in lease contract termination costs associated with the integration. To date 5 locations have been vacated as a result of facility
consolidations. It is anticipated that the Company will consolidate facilities in approximately 30 additional cities and will incur additional lease contract termination costs when cease use criteria is achieved.

Factors Affecting Future Results of Operations

The
Companys revenues consist primarily of charges to customers for delivery services and weekly or monthly charges for recurring services, such as facilities management. Sales are recognized when the service is performed. The revenue and profit
for a particular service is dependent upon a number of factors, including size and weight of articles transported, distance transported, special handling requirements, requested delivery time and local market conditions. Generally, articles of
greater weight transported over longer distances and those that require special handling produce higher revenue.

The Company is
continually engaged in bidding for additional contract work for a variety of new and existing customers. Management believes our current pipeline of bidding activity remains robust, with potential customers that could generate annual billings of up
to $75 million, although no assurance can be given that the Company will be successful in obtaining these clients. The activity is consistent across all geographic regions in which the Company operates. Full implementation of newly awarded contracts
generally takes from thirty to sixty days.

With the enactment of the Federal Law known as Check 21 on October 28, 2004, the Company
anticipates continued deterioration of financial services revenue as financial institutions will now electronically scan and process checks, without the need to move the physical documents to the clearing institution. Off-setting this deterioration
of revenue in the financial services industry, the Company believes it will continue to benefit from the growth in healthcare and healthcare related services industries within the United States, and be able to effectively leverage its broad coverage
footprint to capitalize on this national growth industry.

Cost of sales consists of costs relating directly to performance of the
Companys services, including driver and messenger costs, transportation services purchased from third parties, and costs to staff, equip and insure our warehouse facilities. Substantially all of the drivers the Company uses are independent
contractors who provide their own vehicles. Drivers and messengers are compensated based on the number of stops they make, the number of packages they deliver and/or a percentage of the delivery charge. Consequently, the Companys driver,
messenger and purchased transportation costs are variable in nature. The Company also employs workers in its own leased warehouse facilities and certain facilities owned by the Companys customers. The salary and employee benefit costs related
to them, such as payroll taxes and insurance, are also included in cost of sales.

The integration of CD&L is expected to result in $16
million in routing savings due to increased density in geographies where both companies had operated and through utilization of Velocitys route management technology. An additional $1.3 million of cost savings is expected from the conversion
of employee drivers to independent contractors and reduction of duplicate line hauls.



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During fiscal 2007, the Company plans to continue to invest in technologies that will increase its
competitive advantage in the market by providing more economical delivery routing, enhanced package tracking and increased productivity from both a frontline delivery and back office perspective. During fiscal years 2004 and 2005, the Company spent
over $5 million in the development and implementation of route management software solutions that have proven to have had a significant impact on reducing overall delivery cost and enhancing the Companys ability to better manage its variable
operating cost. During fiscal year 2006, the Company spent $900,000 in the development of package tracking technology.

Selling, general
and administrative (SG&A) expenses include salaries, wages and benefit costs incurred at the branch level related to taking orders and dispatching drivers and messengers, as well as administrative costs related to such functions.
Also included in SG&A expenses are regional and corporate level marketing and administrative costs and occupancy costs related to branch and corporate locations.

The acquisition of CD&L will have a significant impact on the combined SG&A, with an expected savings of $21.9 million. These expected savings represent a subset of the total estimated savings described above
under CD&L Acquisition and Related Transactions. As operational sites integrate, it is anticipated that there will be savings of $4.9 million of occupancy costs and $7.1 million through elimination of duplicate branch
management and staff. With the consolidation of the corporate functions, the Company expects to have staff reductions in the finance, accounting, and IT departments of $3.0 million and an additional $2.6 million reduction in management and sales
compensation. In addition, $4.9 million of the savings are anticipated in the reduction of corporate insurance, professional fees, travel, and board fees. To date, we believe staffing reductions have resulted in approximately $3.8 million of
expected annual cost savings.

Critical Accounting Policies and Estimates

The Companys discussion and analysis of financial condition and results of operations are based upon the Companys consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to bad debts, goodwill, insurance
reserves, income taxes and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a discussion of the Companys
critical accounting policies, see the Companys Annual Report on Form 10-K for the year ended July 1, 2006.

Historical Results of Operations

Three Months Ended September 30, 2006 Compared to Three Months Ended October 1, 2005

Revenue for the quarter ended September 30, 2006 increased by $58.6 million or 111% to $111.1 million from $52.5 million for the quarter ended
October 1, 2005. The increase in revenue for the quarter ended September 30, 2006 compared to the same period last year was the result of adding approximately $61.0 million of revenue due to the acquisition of CD&L, which was partially
offset by the loss of approximately $2.5 million of revenue in the Velocity standalone business. This revenue loss is the result of the restructuring initiated at the end of the third fiscal quarter of 2005 as described above. Approximately $2.5
million of revenue was realized in the September 2005 quarter from customers running out their contractual termination periods.

Cost
of services for the quarter ended September 30, 2006 was $83.5 million, an increase of $45.3 million or 119% from $38.2 million for the quarter ended October 1, 2005. The increase was primarily due to the



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acquisition of CD&L which added approximately $46.5 million in cost, and was partially offset by a decrease of
approximately $1.0 million largely due to the reduced revenue in the Velocity standalone business.

Gross margin declined from 27.3% in the
quarter ended October 1, 2005 to 24.8% in the quarter ended September 30, 2006. The decline was due to the CD&L acquisition. CD&L had historically operated at a lower gross margin than Velocity, with the largest variances as a
percent of revenue in payments to drivers, purchased transportation, vehicle cost and messenger costs.

Selling, general and administrative
expenses for the quarter ended September 30, 2006 were $26.1 million or 23.5% of revenue, an increase of $11.8 million or 86% as compared with $14.3 million or 27.2% of revenue for the quarter ended October 1, 2005. The increase in
SG&A for the quarter resulted primarily from the acquisition of CD&L which added approximately $11.8 million in additional expenses. In addition there were reductions in expense due to reduced bad debt, savings due to new telecommunications
contracts and expense control of travel and supplies.

Occupancy charges for the quarter ended September 30, 2006 were $4.7 million,
an increase of $1.8 million or 61% from $2.9 million for the quarter ended October 1, 2005. Approximately $1.8 million of the change was due to the acquisition of CD&L.

Net Interest expense for the quarter ended September 30, 2006 increased by $5.1 million to $6.2 million from $1.1 million for the quarter ended
October 1, 2005. In 2005, the interest related primarily to the Companys revolving credit facility and subordinated debt. With the replacement of that debt with the Senior Notes, the Company now has quarterly interest payments of
approximately $2.35 million and an ongoing non-cash expense of $2.0 million that includes amortization of deferred financing charges and accretion of the discount at which the bond units were issued. In the quarter, there was an acceleration of
deferred financing cost associated with the replaced debt of $2.2 million. In addition, interest income, net of miscellaneous interest was $0.3 million.

Restructuring and asset impairments for the quarter ended September 30, 2006 were $1.2 million. There were none for the quarter ended October 1, 2005. Of these $1.0 million was associated with severance and
retention bonuses in conjunction with the integration of CD&L, $0.1 million was the result of lease terminations associated with the CD&L integration, and $0.1 million related to revision in estimates of previously recorded costs associated
with excess facilities.

As a result of the above, the Company had a net loss of $10.8 million for the quarter ended September 30,
2006 compared to a net loss of $3.5 million in the quarter ended October 1, 2005.

Net loss applicable to common stockholders was
$30.9 million for the quarter ended September 30, 2006 compared with $6.6 million for the quarter ended October 1, 2005. For September 30, 2006 quarter, the difference between net loss applicable to common stockholders and net loss
relates to the beneficial conversion associated with the sale of the Series Q Convertible Preferred Stock, beneficial conversion associated with the antidilution provisions of Series N, Series O, and Series P Convertible Preferred Stock resulting
from the issuance of Series Q Convertible Preferred Stock, dividends paid-in-kind on Series M, Series N, Series O, Series P and Series Q Convertible Preferred Stock, and the beneficial conversion associated with dividends paid-in-kind on Series N,
Series O, Series P and Series Q Convertible Preferred Stock. In the quarter ended October 1, 2005, the difference between net loss applicable to common stockholders and net loss related to the beneficial conversion associated with the sale of
the Series O Convertible Preferred Stock.

Liquidity and Capital Resources

Overview

Historically, the Company has financed its operations and has met its capital
requirements primarily through a combination of private and public issuances of equity securities, bank borrowings and cash generated from operations. As a result of the CD&L acquisition and related transactions, the Company had $78 million in
outstanding senior notes. The Company believes that, barring any unforeseen changes, its existing cash and cash expected to be generated from operations will be sufficient to fund its operations, capital expenditures and provide adequate working
capital through the end of the fiscal year 2007.



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Operating Activities, Investing Activities & Financing Activities

During the quarter ended September 30, 2006, the net increase in quarter-end cash was $8.0 million compared to a net decrease of $3.7 million during the
quarter ended October 1, 2005. As reported in our consolidated statements of cash flows, the (decrease) increase in cash during the quarters ended September 30, 2006 and October 1, 2005 is summarized as follows (in thousands):



|                                          |  |                    |         |   |                 |   |        |  
|----------------------------------------- |  | ------------------ | ------- | - | --------------- | - | ------ | -
|                                          |  | Quarter Ended      |        
|                                          |  | September 30, 2006 |         |   | October 1, 2005 |  
|Net cash used in operating activities     |  | $                  | (7,689  | ) |                 | $ | (3,101 | )
|Net cash used in investing activities     |  |                    | (53,367 | ) |                 |   | (86    | )
|Net cash provided by financing activities |  |                    | 69,095  |   |                 |   | (484   | )
|                                          |  |                    |         |   |                 |   |        |  
|Total increase (decrease) in cash         |  | $                  | 8,039   |   |                 | $ | (3,671 | )
|                                          |  |                    |         |   |                 |   |        |  

Cash used in operations was $7.7 million for the quarter ended September 30, 2006. This use of
funds was comprised of a net loss of $10.8 million offset by non-cash expenses of $7.2 million and by net cash used as a result of working capital changes of $4.0 million. The use of cash in working capital includes a reduction of accounts
receivable of $1.6 million, reflecting continued focus on the service delivery and collections processes, offset by a $1.9 million decrease in accounts payable/accrued liabilities and a $3.5 million increase in prepaid workers compensation
insurance. The increase in prepaid insurance represents a payment to support the Companys program with an offshore insurance captive. The Company expects to replace the cash support of this program with a letter of credit when the Company puts
in place a revolving credit facility as described below.

Cash used in investing activities was $53.4 million for the quarter ended
September 30, 2006 and consisted of $53.1 million of net cash used for the acquisition of CD&L and $0.3 million of capital expenditures for the Companys continued development and implementation of cost savings and driver efficiency
technology solutions initiatives.

Cash provided from financing activities for the quarter ended September 30, 2006 amounted to $69.1
million. The primary sources of cash were net proceeds of $63.6 million from the issuance of senior secured notes and $42.8 million form the issuance Series Q Convertible Preferred Stock. This was offset by the $29.9 million to repay Velocitys
and CD&L revolving credit facilities, $5.8 million to repay Velocitys subordinated debt, and $1.5 million to repay CD&L seller financed debt. The Company sold 75,000 bond units for $70.7 million, net of a $4.3 million discount for the
first semi-annual interest payment. Each bond unit is comprised of (a) $1,000 aggregate principal amount at maturity of 12% senior secured notes due 2010 and (b) a warrant to purchase 345 shares of common stock at an initial exercise price of $1.45
per share. $7.1 million of fees associated with the placement of the notes are netted against the cash generated. The company sold 4,500,000 shares of Series Q Convertible Preferred Stock, each of which was initially convertible into 9.0909 shares
of common stock preferred stock for $45.0 million. $2.2 million in fees associated with the placement of the shares are netted against the cash generated.

Currently, the Company is finalizing a new revolving credit facility with a major lending institution. The lender has informed the Company that its credit committee has reviewed and approved the credit. Documentation
of the facility is substantially complete. The Company now intends to seek consent of the bondholders to the terms of the facility, which was anticipated in the bond indenture and requires the consent of a simple majority of the bondholders. The
Company intends to use the credit facility to collateralize letters of credit and to provide additional liquidity.

CD&L
Transactions

In connection with the CD&L acquisition, the Company issued Units, consisting of the senior secured notes and
warrants, and Series Q Preferred Stock. The issuance was effected as a private placement exempt from the registration requirements of the Securities Act of 1933, as amended.

Senior Secured Notes

The
senior secured notes were issued pursuant to the Indenture dated as of July 3, 2006 between the Company and Wells Fargo Bank, N.A., as trustee. The senior secured notes bear interest at an annual rate of 12%. They may be redeemed at the
Companys option after June 30, 2009, upon payment of the then applicable redemption price. Beginning 90 days after issuance, the Company may also redeem up to 35% of



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the aggregate principal amount of the senior secured notes issued, with proceeds derived from the sale of the
Companys capital stock. The Company may also redeem senior secured notes with proceeds derived from the exercise of warrants subject to specified limits. In each instance, the optional redemption price is 112% of the principal balance of the
senior secured notes redeemed if the redemption occurs before June 30, 2007; 106% if the redemption occurs between June 30, 2007 and June 29, 2009; and 100% if the redemption occurs thereafter.

Holders of senior secured notes have the right to cause the Company to redeem, at par, up to 25% of the original principal amount of senior secured notes
if the Companys consolidated cash flow, for the period of four consecutive fiscal quarters preceding the second anniversary of the issue date, is less than $20 million. The holders also have the right to cause the Company to redeem, at par, up
to an additional 25% of the original principal amount of senior secured notes if our consolidated cash flow, for the period of four consecutive fiscal quarters preceding the third anniversary of the issue date, is less than $25 million. The
holders right to cause the Company to redeem senior secured notes will terminate under certain circumstances, if at or prior to such second or third anniversary date the volume-weighted average trading price for the Companys common stock
exceeds $2.75 per share for any 20 trading days within any consecutive 30-trading-day period from the issue date through such anniversary date. Upon a change of control, holders will also have the right to require the Company to repurchase all or
any part of their senior secured notes at a price equal to 101% of the aggregate principal amount thereof.

The indenture contains
restrictive covenants regarding the ability of the Company and its restricted subsidiaries to incur additional indebtedness and issue of preferred stock, make restricted payments, incur liens, enter into asset sales, enter into transactions with
affiliates, enter into sale and leaseback transactions, consolidate, merge and sell all or substantially all of their assets, enter into a new senior credit facility (or refinance any such facility) without giving the holders a right of first
refusal to provide such financing and other covenants customary for similar transactions. In addition, the Company must maintain specified levels and cash, cash equivalents and qualified accounts receivable.

The senior secured notes are guaranteed by the Companys domestic subsidiaries and are secured by a first-priority lien on collateral consisting of
substantially all of the Companys and its domestic subsidiaries tangible and intangible assets. The trustee is required by the Indenture to subordinate the lien securing the senior secured notes to the lien securing a working capital
facility if the Company enters into such a facility in compliance with the terms of the Indenture. The indenture contains customary events of default.

Warrants

As part of the Units, the Company issued warrants to purchase an aggregate of
26,966,897 shares of its common stock at an initial exercise price of $1.45 per share, subject to adjustment. The term of these warrants expires on July 3, 2010. The warrants are subject to an automatic exercise feature, based on the trading
price of the Companys common stock, subject to specified limitations. The warrants contain other customary terms and provisions.

In
addition to issuing warrants as part of the Units, the Company also issued warrants on July 3, 2006 to purchase 797,500 shares of its common stock to affiliates of THLPV in consideration of services provided by one or more of these parties, at
an exercise price of $.01 per share. The warrants issued to affiliates of THLPV have terms similar to the warrants issued as part of the Units except that they do not provide for automatic exercise to affiliates of THLPV. Mr. James G.
Brown, founder and Managing Director of TH Lee Putnam Ventures L.P., is one of the Companys directors.

Series Q Convertible
Preferred Stock

Each share of the Companys Series Q Preferred Stock is initially convertible into 9.0909 shares of the
Companys common stock, representing an initial conversion price of $1.10 per share, subject to adjustment and other customary terms for similar offerings. The Company may force holders of Series Q Preferred Stock to convert their shares if the
daily weighted average market price of our common stock is equal to or greater than 200 percent of the then applicable Series Q Preferred Stock conversion price for a specified period of time, subject to specified conditions. In addition, for so
long as any of these shares are outstanding, the



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Company may not enter into any equity line of credit, variable or future-priced resetting, self-liquidating,
adjusting or conditional fund raising, or similar financing arrangements.

In addition, the Company also issued on July 3, 2006 an
aggregate of 277,770 shares of Series Q Preferred Stock in consideration of services, determined by the Company to have a value of not less than $10.00 per share, to certain of the investors, the placement agents for the Unit and Series Q Preferred
Stock offerings and affiliates of THLPV for various services they provided to the Company.

In connection with these offerings, the
investors received customary registration rights regarding the shares of common stock issuable upon exercise of the warrants and upon conversion of the Series Q Preferred Stock.

Use of Proceeds

In total, the
aggregate net cash proceeds from the sale of the Units and the Series Q Preferred Stock were approximately $106.4 million. Approximately $53.1 million of the proceeds were used to finance the CD&L acquisition, $37.3 million was used to repay
CD&L and our indebtedness and $16.0 million was retained for general corporate purposes. In addition, the Company granted customary registration rights with respect to the shares of our common stock issuable upon conversion of the Series Q
Preferred Stock and the warrants.

New Credit Facility

Currently, the Company is negotiating a new revolving credit facility with prospective lenders. There is no assurance that the Company will be successful in entering into any such facility on commercially reasonable
terms or at all.

Commitments and Significant Contractual Obligations

As of September 30, 2006, the Company had outstanding operating lease commitments of $24 million, payable over multiple years. Some of these
commitments were for space that was no longer being used, which resulted in restructuring charges of $98,000 during the quarter ended September 30, 2006. The Company has entered into subleases for some of this excess space and are in the
process of attempting to sublease such space, but it is considered unlikely that any sublease income generated will offset the entire future commitment.

As of September 30, 2006, the Companys significant future contractual obligations and payments by fiscal year were as follows (in thousands):



|                        |      |                        |        |  |      |       |      |   |       |  |            |       |       |   |        |  |   |     |  |   |       
|----------------------- | ---- | ---------------------- | ------ |  | ---- | ----- | ---- | - | ----- |  | ---------- | ----- | ----- | - | ------ |  | - | --- |  | - | ------
|Contractual Obligations |      | Payments Due By Period
|                        | 2007 |                        | 2008   |  | 2009 |       | 2010 |   | 2011  |  | Thereafter |       | Total
|Operating leases        |      | $                      | 8,195  |  | $    | 7,587 |      | $ | 4,217 |  | $          | 2,806 |       | $ | 902    |  | $ | 755 |  | $ | 24,462
|Capital leases          |      |                        | 351    |  |      | 252   |      |   | 112   |  |            | 41    |       |   |       |  |   |    |  |   | 756   
|Debt                    |      |                        | 1,506  |  |      |      |      |   |      |  |            |      |       |   | 48,821 |  |   |    |  |   | 50,327
|                        |      |                        |        |  |      |       |      |   |       |  |            |       |       |   |        |  |   |     |  |   |       
|Total                   |      | $                      | 10,052 |  | $    | 7,839 |      | $ | 4,329 |  | $          | 2,847 |       | $ | 49,723 |  | $ | 755 |  | $ | 75,545
|                        |      |                        |        |  |      |       |      |   |       |  |            |       |       |   |        |  |   |     |  |   |       



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Variable Interest Entities

Peritas LLC (Peritas) was formed in 2004 by MCG Global, then one of our largest investors, with a strategic objective of acquiring a fleet of
vehicles and to lease such vehicles to independent contractors (ICs) to service outsourced customer business endeavors. Peritas provides vehicle leases to ICs interested in providing outsource services to some customers on our behalf and
the Company provides administrative services to Peritas, such as collection of vehicle rental fees from ICs for a fee.

For the fiscal year
2004, Peritas had net sales of $36,000 which were included in the Companys consolidated statement of operations in accordance with Interpretation No. 46 of the FASB, Consolidation of Variable Interest Entities (FIN
46R), which requires the consolidation of variable interest entities. The Company recorded its interest in Peritas as an interest in a variable interest entity under FIN 46R because of the account receiveable it had against Peritas in
connection with a purchase of vehicles for a customer of Peritas.

During fiscal year 2005, Peritas was deconsolidated from the
Companys financial statements for the reasons described below. In 2005, Peritas was purchased from MCG by TH Lee Putnam Ventures (THLPV), another of the Companys investors, and Peritas entered into a $3.0 million Loan and
Security Agreement with Comerica, which included a guarantee by THLPV of which 35% of the outstanding amounts due under the line. As a result of these transactions, Comericas outstanding debt, net of the THLPV guarantee, exceeded the
Companys interest in Peritas. Specifically, under FIN 46R, Velocity no longer had a variable interest in Peritas that was at risk of disproportionate loss relative to its voting rights. Accordingly, Peritas was deconsolidated from the
Companys financial statements upon the completion of these transactions during fiscal 2005.

For fiscal year 2006, Peritas was
consolidated with the Companys financial statements for the reasons described below. In 2006, the Companys variable interest in Peritas increased to an amount that exceeded the outstanding balance under the line with Comerica, net of the
THLPV guarantee, with the result that, under FIN 46R, the Company once again became the primary beneficiary to absorb a majority of Peritas expected losses. Upon consolidation, the company recorded Peritas assets and liabilities at their
historical carrying value of $1.1 million and $2.2 million, respectively, due to common ownership. Peritas accumulated losses of $1.1 million were recognized by the Company as an expense in the fourth quarter of fiscal 2006.

The accompanying financial statements for the three months ended September 30, 2006 include $0.2 million in revenue and de minimus net income
related to Peritas.



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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

As of September 30, 2006, we had $78.2 million in aggregate principal amount of fixed rate long-term debt obligations with an estimated fair market value of $75.9 million based on an overall weighted average
interest rate of 12.0% and an overall weighted maturity of 3.75 years, compared to rates and maturities currently available in long-term debt markets. Market risk is estimated as the potential loss in fair value of our fixed rate long-term debt
resulting from a hypothetical increase of 10.0% in interest rates. Such an increase in interest rates would have resulted in a decrease of $1.6 million in the fair market value of our fixed-rate long-term debt.

Except as described above, we are not currently subject to material market risks for interest rates, foreign currency rates or other market price risks.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions
rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls
and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2006. Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer
concluded that the design and operation of our disclosure controls and procedures were deficient.

In connection with the preparation of
our consolidated financial statements for the year ended July 1, 2006, due to resource constraints, a material weakness became evident to management regarding our inability to simultaneously close the books on a timely basis each month and
generate all the necessary disclosure for inclusion in our filings with the Securities and Exchange Commission. A material weakness is a significant deficiency in one or more of the internal control components that alone or in the aggregate
precludes our internal controls from reducing to an appropriately low level the risk that material misstatements in our financial statements will not be prevented or detected on a timely basis. This material weakness was still present at
September 30, 2006.

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



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PART II

ITEM 1. LEGAL PROCEEDINGS.

The Company is a party to litigation and has claims asserted against it in the
normal course of its business. Most of these claims are routine litigation that involve workers compensation claims, claims arising out of vehicle accidents and other claims arising out of the performance of same-day transportation services.
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.

From time to time, the Companys independent contractor drivers are involved in accidents. The Company attempts to manage this risk by requiring its
independent contractor drivers to maintain commercial motor vehicle liability insurance of at least $300,000 with a minimal deductible and by carrying additional liability insurance in the Companys name totaling an additional $5.0 million. In
addition, the Company performs extensive screening of all prospective drivers to ensure that they have acceptable driving records and pass a criminal background and drug test, among other criteria. The Company believes its driver screening programs
have established an important competitive advantage for the Company.

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

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 any pending lawsuits, if resolved or settled unfavorably
to the Company, would have a material adverse effect upon the Companys financial condition or results of operations. The Company has established reserves for litigation, which it believes are adequate. In addition, in connection with the
CD&L acquisition, the Company assumed a $1.0 million reserve for a tentative settlement of an employment tax assessment against CD&L in the State of California.

ITEM 1A. RISK FACTORS

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

Risks Related to Our Business

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

Our net losses applicable to common stockholders for the quarters ended
September 30, 2006 and October 1, 2005, were $30.9 million and $6.6 million, respectively. The respective periods net losses were $10.8 million and $3.5 million. The increased amount of net losses applicable to common stockholders
for such periods was caused by beneficial conversion charges of $18.9 million and $3.1 million, and preferred stock dividends paid-in-kind of $1.2 million and $0 million for the respective periods. To achieve profitability,



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we expect we will be required to successfully integrate CD&L and pursue new revenue opportunities, effectively limit
the impact of competitive pressures on pricing and freight volumes, and fully implement our technology initiatives and other cost-saving measures. We cannot assure you that we will ever achieve or sustain profitability or positive cash flow. If we
cannot achieve or sustain profitability or positive cash flow, the market price of our common stock could decline significantly.

If we are not
successful in achieving the established CD&L integration plan, we will likely have higher costs and fail to achieve expected cost savings, which could have a material adverse effect on our results of operations.

The success of the CD&L acquisition will depend, in part, upon our ability to realize the anticipated cost savings, synergies and growth opportunities
from combining our business with that of CD&L. To realize the anticipated benefits of the acquisition, members of the management team must develop strategies and implement a business plan that will:



| |  |  | effectively combine operations, management, independent contractors, technologies and infrastructure;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | effectively and efficiently integrate policies, procedures and operations;
| | - |  | --------------------------------------------------------------------------



| |  |  | successfully achieve savings through reductions in occupancy and staffing costs, corporate and public company expenses, insurance costs and management of drivers and increased
customer density;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | successfully retain and attract employees, including operating personnel, as well as continuing to retain and attract independent drivers for delivery operations; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | while integrating operations, maintain focus on the core business to take advantage of competitive opportunities and to respond to competitive challenges.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

Problems or delays in integrating CD&L may result in substantial unanticipated costs and the diversion of managements attention from our existing
operations. In addition, integration delays could cause us to lose key employees and customers of CD&L, thereby diluting the value of the CD&L acquisition.

To the extent we pursue other acquisitions in the future, the integration risks summarized above could increase. In addition, if we pursue other acquisitions in the future, we would face additional risks, including
the following:



| |  |  | diversion of managements time away from managing our business, whether or not such pursuits are successful;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | the possible need to finance such acquisitions with debt or equity, if available to us; and
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | increased legal risks, for example, regarding inherited employee benefit plans and inadequate reserves.
| | - |  | -------------------------------------------------------------------------------------------------------

Many of these risks are beyond our ability to control. If any of these risks were to materialize, it could have a material adverse effect on our results of operations.

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

We have depended, and if we are unable to execute against our business plans, are likely to continue to depend, on our ability to obtain additional
financing to fund our future liquidity and capital needs. We may not be able to continue to obtain additional capital when needed, and additional capital may not be available on satisfactory terms. Achieving our financial goals involves maximizing
the effectiveness of the variable cost model, the implementation of customer-driven technology solutions, continued leverage of the consolidated back office selling, general and administrative platform and effectively and efficiently integrating
CD&L. To date, we have primarily relied upon debt and equity investments to fund these activities. We may be required to engage in additional financing activities to raise capital required for our operations. If we issue additional



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equity securities or convertible debt to raise capital, the issuance may be dilutive to the holders of our common stock.
In addition, any additional issuance may require us to grant rights or preferences that adversely affect our business, including financial or operating covenants.

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

Our contracts with our
commercial customers typically have a term of one to three years, but are often terminable earlier at will upon 30 or 60 days notice. We often have significant start-up costs when we begin servicing a new customer in a new location.
Termination or non-renewal of these contracts, including contracts originally entered into by CD&L, could have a material adverse effect on our business, financial condition, operating results and cash flows.

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

For the quarter ended
September 30, 2006, we had one customer that accounted for more than 10% of our revenues and our top ten customers in aggregate account for approximately 43% of our revenues. The loss of the one large customer or some of the top ten customers
or a material reduction in their purchases of our services could materially and adversely affect our business, financial condition, results of operations and cash flows.

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

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

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

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



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



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



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



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



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



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

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

Our success depends on the skills, experience and performance of certain key members of our management. The loss of the services of any of these key employees could have a material adverse effect on



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our business, financial condition, results of operations and cash flows. Our future success and plans for growth also
depend on our ability to attract and retain skilled personnel in all areas of our business. There is strong competition for skilled management personnel in the time definite logistics businesses and many of our competitors have greater resources
than we have to hire qualified personnel. Accordingly, if we are not successful in attracting or retaining qualified personnel in the future, our ability to manage our business could be materially and adversely affected.

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

We utilize the services of approximately 5,700 drivers and messengers. From time to time, these persons are involved in
accidents or other activities that may give rise to liability claims against us. We cannot assure you that claims against us will not exceed the applicable amount of our liability insurance coverage, that our insurer will be solvent at the time of
settlement of an insured claim, that the liability insurance coverage held by our independent contractors will be sufficient or that we will be able to obtain insurance at acceptable levels and costs in the future. If we were to experience a
material increase in the frequency or severity of accidents, liability claims, workers compensation claims, unfavorable resolutions of claims or insurance costs, our business, financial condition, results of operations and cash flows could be
materially adversely affected.

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

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

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

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

We must continually evaluate and upgrade our pool of available
independent contractors to keep pace with demands for delivery services. We cannot assure you that qualified delivery personnel will continue to be available in sufficient numbers and on terms acceptable to us. The inability to attract and retain
qualified



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delivery personnel, could materially and adversely affect our business, financial condition, results of operations and
cash flows.

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

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

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

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

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

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



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We face trademark infringement and related risks.

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

We may face higher litigation and settlement costs than anticipated.

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

Risks Related to Our Capital Structure

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

We have a significant amount of debt outstanding. For the quarter ended September 30, 2006, we had $78.2 million in aggregate principal amount of
long-term debt outstanding and $84.1 million of stockholders equity. The degree to which we are leveraged could have important consequences for you, including:



| |  |  | requiring us to dedicate a substantial portion of our cash flow from operations to make interest payments on our debt, which we currently expect to be approximately $4.7 million in
fiscal year 2007 and approximately $9.4 million for each year thereafter, thereby reducing funds available for operations, future business opportunities and other purposes;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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

In addition, we may incur additional indebtedness in the future, subject to certain restrictions, exceptions and financial tests set forth in the
indenture governing our senior notes. As of September 30, 2006, except for our ability to enter into a new revolving credit facility under certain circumstances, we would have been restricted from incurring additional debt under the terms of
our indenture. While we are currently negotiating a new revolving credit facility with prospective lenders, we cannot assure you that we will be successful in entering into any such facility on commercially reasonable terms or at all.



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

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

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



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



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



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



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



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



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



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



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



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



| |  |  | consolidate or merge; and
| | - |  | -------------------------



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

The indenture also contains certain financial covenants under which we must maintain cash and cash
equivalents at specified levels and cash, cash equivalents and qualified accounts receivable at specified levels. In addition, we expect to enter into a new credit facility that we expect will require us to comply with similar covenants as well as
specified financial ratios, including ratios regarding interest coverage, total leverage, senior secured leverage and fixed charge coverage. Our ability to comply with these ratios may be affected by events beyond our control.

A breach of any of these covenants could result in an event of default, or possibly a cross-default or cross-acceleration of other debt that may be
outstanding in the future. In that event, the holders of the senior notes and any other then outstanding debt could allow the holders of that debt to declare all borrowings outstanding to be due and payable. In the event of a default under the
indenture, the holders of the senior notes, and any other secured debt then outstanding, could foreclose on the collateral pledged to secure our obligations under that debt, assets and capital stock pledged to them. The senior notes are secured by a
first-priority lien, subject to permitted liens, on collateral consisting of substantially all of our tangible and intangible assets. We cannot assure you that our assets would be sufficient to repay in full the money owed to these secured debt
holders.

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



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



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



| |  |  | entering into transactions with affiliates or our stockholders;
| | - |  | ---------------------------------------------------------------



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



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



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



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



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

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

Our senior notes mature in 2010. We may not be able to refinance our senior notes or renew or refinance any new credit facility we may enter into, or any
renewal or refinancing may occur on less favorable terms. If we are unable to refinance or renew our senior notes or any new credit facility, our failure to repay all amounts due on the maturity date would cause a default under the indenture or the
applicable credit agreement. In addition, our interest expense may increase significantly if we refinance our senior notes, which bear interest at 12% per year, or any new credit facility, on terms that are less favorable to us than the
existing terms of our senior notes or any new credit facility.

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

Holders of our senior notes have the right to cause us to redeem, at a redemption price of 100%
of the principal amount of the notes, subject to certain exceptions:



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



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

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



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commercially reasonable terms or at all. In addition, any new credit facility we enter into may have similar provisions
or may cause us to be in default if a change of control occurs.

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

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

Our stock price is subject to fluctuation and volatility.

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

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

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

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

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

If we were to issue additional equity securities at a per share price lower than the current market price (in the case of our outstanding warrants) or the conversion price (in the case of our outstanding warrants and preferred stock), then
the exercise price of such warrants and the conversion price of such preferred stock would automatically adjust downward. While we have no current plans to issue securities in a manner that would trigger these anti-dilution provisions, we could
elect to do so in the future or be required to do so in order to finance the company. Such adjustments would have a dilutive effect on our existing common stockholders.

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

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



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If we do not maintain our NASDAQ listing, you may have difficulty trading our securities.

We will need to maintain certain financial and corporate governance qualifications to keep our securities listed on the NASDAQ Capital Market
(NASDAQ). At various times in the past, we have received notices from NASDAQ that we would be delisted due to a variety of matters, including failure to maintain a minimum bid price of $1.00, failure to timely hold an annual stockholders
meeting and failure to meet the minimum levels of stockholders equity. In each instance, we have taken the actions required by NASDAQ to maintain continued listing, but we cannot assure you that we will at all times meet the criteria for
continued listing. In the event of delisting, trading, if any, would be conducted in the over-the-counter market in the so-called pink sheets or on the OTC Bulletin Board. In addition, our securities could become subject to the
SECs penny stock rules. These rules would impose additional requirements on broker-dealers who effect trades in our securities, other than trades with their established customers and accredited investors. Consequently, the
delisting of our securities and the applicability of the penny stock rules may adversely affect the ability of broker-dealers to sell our securities, which may adversely affect your ability to resell our securities. If any of these events take
place, you may not be able to sell as many securities as you desire, you may experience delays in the execution of your transactions and our securities may trade at a lower market price than they otherwise would.

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

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



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



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



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

In addition, TH Lee Putnam Ventures, L.P. beneficially owned, as of September 30, 2006, approximately 19.2% of our outstanding common
stock on a fully diluted basis, which means it can influence matters requiring stockholder approval, including important corporate matters such as a change in control of our company.

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

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

Under Section 404 of the Sarbanes-Oxley
Act, the SEC adopted rules requiring public companies to include a report of management on internal control over financial reporting in their annual reports. In addition, the independent registered public accounting firm auditing a public
companys financial statements must attest to and report on managements assessment of the effectiveness of the companys internal control over financial reporting as well as the operating effectiveness of the companys internal
controls over financial reporting. We



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do not expect to be subject to these requirements for fiscal 2007. We are evaluating our internal controls over financial
reporting in order to allow our management to report on, and our independent registered public accounting firm to attest to, our internal controls, as a required part of our annual report, beginning with our annual report for fiscal 2008.

We expect to expend significant resources during fiscal 2007 in developing the necessary documentation and testing procedures required by
Section 404 of the Sarbanes-Oxley Act. But, there is a risk that we will not comply with all of the requirements imposed thereby. Accordingly, we cannot assure you that we will not receive an adverse report on our assessment of our internal
controls over financial reporting and/or the operating effectiveness of our internal controls over financial reporting from our independent registered public accounting firm. If we identify significant deficiencies or material weaknesses in our
internal controls over financial reporting that we cannot remediate in a timely manner or we receive an adverse report from our independent registered public accounting firm with respect to our internal controls over financial reporting, investors
and others may lose confidence in the reliability of our financial statements and our ability to obtain equity or debt financing could be adversely affected.

In addition, if our independent registered public accounting firm is unable to rely on our internal controls over financial reporting in connection with their audit of our financial statements, and in the further
event that they are unable to devise alternative procedures in order to satisfy themselves as to the material accuracy of our financial statements and related disclosures, it is possible that we could receive a qualified or adverse audit opinion on
those financial statements. In that event, the market for our common stock could be adversely affected. Investors and others may lose confidence in the reliability of our financial statements and our ability to obtain equity or debt financing could
be adversely affected.

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

See the Companys Current
Reports on Form 8-K filed with the Securities and Exchange Commission on July 10, 2006 and August 23, 2006.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

Not Applicable.

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

Not Applicable.

ITEM 5. OTHER INFORMATION.

Not Applicable.

ITEM 6. EXHIBITS.

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



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the Town of Westport, State of Connecticut on November 20, 2006.



VELOCITY EXPRESS CORPORATION.By

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

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




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##### Table of Contents

EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                               
|2.1           |  | Merger Agreement, dated September 8, 1999, by and among CEX Holdings, Inc., Corporate Express Delivery Systems, Inc., United Shipping & Technology, Inc. and United Shipping &
Technology Acquisition Corp. (incorporated by reference from the Companys Current Report on Form 8-K, filed October 8, 1999).                                                                                             
|              | 
|2.2           |  | Amendment No. 1 to Merger Agreement, dated September 22, 1999, by and among CEX Holdings, Inc., Corporate Express Delivery Systems, Inc., United Shipping & Technology, Inc. and United
Shipping & Technology Acquisition Corp. (incorporated by reference from the Companys Current Report on Form 8-K, filed October 8, 1999).                                                                         
|              | 
|2.3           |  | Amendment No. 2 to Merger Agreement, Settlement and General Release Agreement, dated August 2, 2001, by and among Corporate Express, Inc., successor by merger to CEX Holdings, Inc., Velocity
Express, Inc. f/k/a Corporate Express Delivery Systems, Inc., and United Shipping & Technology, Inc. (incorporated by reference from the Companys Quarterly Report on Form 10-Q, filed November 13, 2001).
|              | 
|2.4           |  | Agreement and Plan of Merger, dated July 3, 2006, by and among Velocity Express Corporation, CD&L Acquisition Corp., a wholly-owned subsidiary of Velocity Express Corporation, and
CD&L, Inc., (incorporated by reference from the Companys Current Report on Form 8-K, filed July 10, 2006).                                                                                                           
|              | 
|3.1           |  | Amended and Restated Certificate of Incorporation of Velocity Express Corporation.                                                                                                                                                                                                                                                                                                                        
|              | 
|3.2           |  | Bylaws of Velocity Express Corporation (incorporated by reference from the Companys Current Report on Form 8-K, filed January 9, 2002).                                                                                                                                                                                                                                                                  
|              | 
|4.1           |  | Specimen form of common stock certificate (incorporated by reference from the Companys Annual Report on Form 10-K, filed September 27, 2002).                                                                                                                                                                                                                                                            
|              | 
|4.2           |  | Indenture, dated July 3, 2006, between Velocity Express Corporation and Wells Fargo Bank, N.A., as trustee, with respect to the Companys 12% Senior Secured Notes due 2010 (incorporated
by reference from the Companys Current Report on Form 8-K, filed July 10, 2006).                                                                                                                               
|              | 
|4.3           |  | Security Agreement, dated July 3, 2006, by Velocity Express Corporation and the Subsidiary Guarantors named therein, to and in favor of Wells Fargo Bank, N.A., as trustee (incorporated by
reference from the Companys Current Report on Form 8-K, filed July 10, 2006).                                                                                                                                
|              | 
|4.4           |  | Form of Warrant issued together with the 12% Senior Secured Notes due 2010 (incorporated by reference from the Companys Current Report on Form 8-K, filed July 10,
2006).                                                                                                                                                                                                                                
|              | 
|4.5           |  | Form of Warrant issued in connection with services (incorporated by reference from the Companys Current Report on Form 8-K, filed July 10, 2006).                                                                                                                                                                                                                                                        
|              | 
|4.6           |  | Form of Common Stock Warrant between Velocity Express Corporation and management, dated February 12, 2004 (incorporated by reference from the Companys Quarterly Report on Form 10-Q,
filed May 11, 2004).                                                                                                                                                                                               
|              | 
|4.7           |  | Registration Rights Agreement, dated July 3, 2006, between Velocity Express Corporation and the Investors named therein with respect to the Series Q Convertible Preferred Stock (incorporated
by reference from the Companys Current Report on Form 8-K, filed July 10, 2006).                                                                                                                          
|              | 
|4.8           |  | Registration Rights Agreement, dated December 21, 2004, between Velocity Express Corporation and the Investors named therein with respect to the Series M Convertible Preferred Stock
(incorporated by reference from the Companys Current Report on Form 8-K, filed December 27, 2004).                                                                                                                 



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|              |  |                                                                                                                                                                                                                                                                                                                                         
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                             
|4.9           |  | Registration Rights Agreement, dated April 28, 2005, between Velocity Express Corporation and the Investors named therein with respect to the Series N Convertible Preferred Stock
(incorporated by reference from the Companys Current Report on Form 8-K, filed May 4, 2005).                                                        
|              | 
|4.10          |  | Registration Rights Agreement, dated July 18, 2005, between Velocity Express Corporation and the Investors named therein with respect to the Series O Convertible Preferred Stock (incorporated
by reference from the Companys Current Report on Form 8-K, filed July 26, 2005).                                                       
|              | 
|4.11          |  | Registration Rights Agreement, dated October 14, 2005, between Velocity Express Corporation and the Investors named therein with respect to the Series P Convertible Preferred Stock
(incorporated by reference from the Companys Current Report on Form 8-K, filed October 20, 2005).                                                 
|              | 
|4.12          |  | Stock Purchase Warrant to purchase up to 193,552 shares of common stock issued to TH Lee Putnam Ventures, L.P., TH Lee Putnam Parallel Ventures, L.P., THLi Coinvestment Partners, LLC and Blue
Star I, LLC, dated December 21, 2004 (incorporated by reference from the Companys Annual Report on Form 10-K, filed December 23, 2004).
|              | 
|4.13          |  | Warrant to purchase up to 4,000 shares of common stock issued to BLG Ventures, LLC, dated August 23, 2001 (incorporated by reference from the Companys Quarterly Report on Form 10-Q,
filed November 13, 2001).                                                                                                                        
|              | 
|10.1          |  | 1995 Stock Option Plan (incorporated by reference from the Companys Quarterly Report on Form 10-QSB, filed February 15, 2000).                                                                                                                                                                                                         
|              | 
|10.2          |  | 1996 Director Stock Option Plan, as amended (incorporated by reference from the Companys Quarterly Report on Form 10-QSB, filed February 15, 2000).                                                                                                                                                                                    
|              | 
|10.3          |  | 2000 Stock Option Plan (incorporated by reference from the Companys Definitive Schedule 14A, filed May 8, 2000).                                                                                                                                                                                                                       
|              | 
|10.4          |  | 2004 Stock Incentive Plan (incorporated by reference from the Companys Definitive Schedule 14A, filed January 31, 2005).                                                                                                                                                                                                               
|              | 
|10.5          |  | Form of non-qualified stock option issued to employees as of June 2000 (incorporated by reference from the Companys Annual Report on Form 10-KSB, filed September 29,
2000).                                                                                                                                                           
|              | 
|10.6          |  | Form of Incentive Stock Option Agreement, dated October 29, 2001, between United Shipping & Technology, Inc., and management (incorporated by reference from the Companys Quarterly
Report on Form 10-Q, filed May 3, 2002).                                                                                                           
|              | 
|10.7          |  | Employment Agreement, dated November 28, 2001, between Velocity Express, Inc. and Andrew B. Kronick (incorporated by reference from the Companys Annual Report on Form 10-K, filed
December 23, 2004).                                                                                                                                 
|              | 
|10.8          |  | Employment Agreement, dated March 6, 2006, between Velocity Express Corporation and Edward W. Stone, Jr. (incorporated by reference from the Companys Current Report on Form 8-K, filed
March 7, 2006).                                                                                                                                
|              | 
|10.9          |  | Contractor Services Agreement, between Velocity Express Corporation and MCG Global, LLC (incorporated by reference from the Companys Annual Report on Form 10-K, filed December 23,
2004).                                                                                                                                             
|              | 
|10.10         |  | Agency Agreement, dated May 25, 2004, between Velocity Express, Inc. and Peritas, LLC (incorporated by reference from the Companys Annual Report on Form 10-K, filed December 23,
2004).                                                                                                                                               
|              | 
|10.11         |  | Reimbursement Agreement, dated June 29, 2006, between Velocity Express Corporation and TH Lee Putnam Ventures (incorporated by reference from the Companys Current Report on Form 8-K,
filed July 6, 2006).                                                                                                                            



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.12         |  | Purchase Agreement for 12% Senior Secured Notes and Warrants, dated July 3, 2006, between Velocity Express Corporation, the guarantors and purchasers named therein (incorporated by reference
from the Companys Current Report on Form 8-K/A, filed September 19, 2006).                                                                                                                                                                                                                                                           
|              | 
|10.13         |  | Unit Purchase Agreement, dated July 3, 2006, by and among Velocity Express Corporation, the guarantors named therein and Exeter Capital Partners IV, L.P. (incorporated by reference from the
Companys Current Report on Form 8-K, filed July 10, 2006).                                                                                                                                                                                                                                                                            
|              | 
|10.14         |  | Stock Purchase Agreement, dated as of July 3, 2006, for Series Q Preferred Stock, between Velocity Express Corporation and the Purchasers named therein (incorporated by reference from the
Companys Current Report on Form 8-K/A, filed September 19, 2006).                                                                                                                                                                                                                                                                       
|              | 
|10.15         |  | Stock Purchase Agreement to purchase up to 500,000 additional shares of Series Q Convertible Preferred Stock, dated August 17, 2006, between Velocity Express Corporation and the purchasers
named therein (incorporated by reference from the Companys Current Report on Form 8-K, filed August 23, 2006).                                                                                                                                                                                                                         
|              | 
|10.16         |  | Settlement Agreement and Mutual Release, dated December 2005, by and among Velocity Express, Inc., formerly known as Corporate Express Delivery Systems, Velocity Express Corporation, Banc of
America Commercial Finance Corporation, Banc of America Leasing & Capital, LLC, John Hancock Life Insurance Company, Hancock Mezzanine Partners, L.P., Charles F. Short, III, Sidewinder Holdings, Ltd. and Sidewinder, N.A., Ltd. (incorporated by
reference from the Companys Current Report on Form 8-K, filed December 13, 2005).
|              | 
|31.1          |  | Section 302 Certification of CEO.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|              | 
|31.2          |  | Section 302 Certification of CFO.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|              | 
|32.1          |  | Section 906 Certification of CEO and CFO.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            



46