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U.S. SECURITIES AND EXCHANGE COMMISSION



WASHINGTON DC 20549



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FORM 10-K/A-2



ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For the fiscal year
ended June 29, 2002



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Commission File No. 0-28452



VELOCITY EXPRESS CORPORATION

(Exact
name of registrant as specified in its charter)



|Delaware                                      |  | 0-28452                  |  | 87-0355929                       
|--------------------------------------------- |  | ------------------------ |  | ---------------------------------
|(State or other jurisdictionof incorporation) |  | (Commission File Number) |  | (IRS Employer Identification No.)



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



(612) 492-2400

(Registrants telephone number, including area code)



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Securities
registered pursuant to Section 12(b) of the Exchange Act:  None



Securities registered pursuant to Section 12(g) of the Exchange Act:  Common Stock, par value $0.004 per share.



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x



State the aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days: $8,917,666 as of September 18, 2002.



As of September 18, 2002, there were 4,162,120 shares of Common Stock of the registrant
issued and outstanding.



DOCUMENTS INCORPORATED BY REFERENCE



None



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TABLE OF CONTENTS



|PART I.                                                |  | 1 
|------------------------------------------------------ |  | --
|                                                       | 
|ITEM 1.    Description of Business                     |  | 1 
|                                                       | 
|ITEM 3.    Legal Proceedings                           |  | 5 
|                                                       | 
|PART II.                                               |  | 7 
|                                                       | 
|ITEM 7.    Managements Discussion and Analysis        |  | 7 
|                                                       | 
|ITEM 8.    Financial Statements and Supplementary Data |  | 18
|                                                       | 
|SIGNATURES                                             |  | 43
|                                                       | 
|POWER OF ATTORNEY                                      |  | 43
|                                                       | 
|EXHIBIT INDEX                                          |  | 44



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PART I.



Forward-Looking Information



In accordance with the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995, Velocity Express Corporation (the Company) notes that certain statements in this Form 10-K and elsewhere which are forward-looking and which provide other than
historical information, involve risks and uncertainties that may impact the Companys results of operations. These forward-looking statements include, among others, statements concerning the Companys general business strategies, financing
decisions, and expectations for funding capital expenditures and operations in the future. Additionally, such statements are based, in part, on assumptions made by, and information currently available to, management, including managements own
knowledge and assessment of the Company, the industry and competition. When used herein, the words believe, plan, continue, hope, estimate, project, intend,
expect, and similar expressions are intended to identify such forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical
results or from those results presently anticipated or projected.



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



ITEM 1.    DESCRIPTION OF BUSINESS



Organization



Velocity Express Corporation
(formerly known as United Shipping & Technology, Inc.) and its subsidiaries are engaged in the business of providing same-day transportation and distribution/logistics services to individual consumers and businesses. The Company operates
primarily in the United States with limited operations in Canada. The Company has not separately stated the revenues for its Canadian operations. The Company currently operates in a single-business segment.



Effective August 28, 1999, the Company acquired from CEX Holdings, Inc.
(CEX) all of the outstanding shares of common stock of Velocity Express, Inc. (Velocity), formerly known as Corporate Express Delivery Systems, Inc. (CEDS), a provider of same-day delivery solutions. CEDS was the
surviving corporation in the merger. CEDS changed its name to US Delivery Systems, Inc., and subsequently changed its name to Velocity Express, Inc. Velocity is incorporated in Delaware. The results of Velocitys operations have been included
in the Companys consolidated financial statements since August 28, 1999.



On December 18, 2001, United Shipping & Technology, Inc. reincorporated in Delaware through a merger with and into its wholly-owned Delaware subsidiary, Velocity Express Corporation. The merger was effective as of
January 4, 2002 at which time United Shipping & Technology, Inc. ceased to exist as a separate corporate entity, and all of its assets and liabilities became the assets and liabilities of Velocity Express Corporation. The name of the Company was
changed to Velocity Express Corporation.



Company Overview



The Company has one of the largest nationwide networks of customized,
time-critical delivery solutions in the United States and is a leading provider of scheduled, distribution and expedited logistics services. Our customers are comprised of multi-location, blue chip customers with operations in the financial,
healthcare, office 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 and delivered into multiple routes with
defined endpoints and 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 largest customer base for scheduled logistics consists of financial
institutions that need a wide variety of services including the pickup and delivery of non-negotiable instruments, primarily canceled checks and ATM receipts, the delivery of office supplies, and the transfer of inter-office mail and correspondence.
Distribution logistics typically involves receiving bulk shipments from the customer and dividing and sorting them for delivery to specific locations. Customers utilizing distribution logistics normally include pharmaceutical wholesalers, retailers,
manufacturers or other companies who must distribute merchandise every day from a single point of origin to many locations within a clearly defined geographic region. Most expedited logistics services occur within a major metropolitan area or radius
of 40 miles, and the Company usually offers one-hour, two- to four-hour and over four-hour delivery services depending on the customers time requirements. These services are typically available 24 hours a day, seven days a week. Expedited
logistics services also include critical parts management and delivery for companies.



Acquisition and Integration of CEDS



Immediately after the acquisition of CEDS, the Company initiated various post-merger integration and consolidation initiatives. In fiscal 2000, the Company integrated CEDS management team into its own, resulting in the elimination of
redundant positions and the realignment and right sizing of CEDS field management structure. Upon the completion of this integration, the Company then began divesting CEDS non-core air courier business operations, with the
sale of one of the three acquired air courier operations in June 2000 and the closing or consolidation of unprofitable locations.



In fiscal 2001, the Company divested the second of the three non-core air courier operations in October 2000 and in the third quarter of fiscal 2001
announced the implementation of a multi-faceted restructuring program allowing it to accelerate the right-sizing of its operations. As a result, the Company streamlined and downsized its operations by reducing its workforce and
consolidating various locations. The total charge associated with this restructuring program was $7.1 million consisting of severance costs of $2.2 million, $3.3 million for rental costs associated with the termination of building leases and
location rationalization costs and $1.6 million for the write off of equipment.



In fiscal 2002, the Company divested its third air courier business operation in October 2001 and then focused its efforts on increasing the efficiency of its driver costs through the variable cost delivery model and
its back office processes. In July 2001, Company began the transition to a variable cost delivery model using independent contractors and employee-owner operators in greater proportion to employee drivers. This transition resulted in improved
insurance expense and improvement in overall driver and vehicle-related costs. During the same period the Company began integrating, through technology, all back office processes into one common platform, which allowed the Company to eliminate
numerous redundant functions within its back office structure.



For further discussion regarding the impact these initiatives had on the operating performance of the Company, please see additional discussion in the Managements Discussion and Analysis section below.



Industry Overview



The Company operates in the same-day transportation and logistics industry, which includes scheduled and non-scheduled,
same-day transportation of documents and packages in local and inter-city markets. The industry



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also provides warehousing, facilities management and logistics solutions, as well as supply chain management and cross-dock and package aggregation services.



The Company believes the market for same-day transportation
services is large and growing. Based on industry studies, the U.S. same-day transportation services market is estimated to generate revenues in excess of $20 billion per year. Although the market is large, it is highly fragmented. There are
relatively low entry barriers in this market as the capital requirements to start a local courier business are relatively small and the industry is not subject to extensive regulation. The Company believes there are currently as many as 6,000
same-day transportation companies in the United States. Most are privately held and operate only on the local level. The focus is generally on operations, with little attention given to marketing and sales. Accordingly, the Company believes there is
little perceived service differentiation between competitors, and that customer loyalty is generally short-term.



There are no dominant brands in the same-day transportation industry, and there is a relatively basic level of technology usage. By contrast, the next-day
package delivery industry is highly consolidated and dominated by large, well-recognized companies such as UPS® and Federal Express®, both of which use technology extensively.



The Company expects that further growth in the same-day transportation market will be fueled by corporate Americas trend toward outsourcing and
third-party logistics. Many businesses that outsource their distribution and logistics needs prefer to purchase such services from one source, capable of servicing multiple cities nationwide. Outsourcing decreases their number of vendors and also
maximizes efficiency, improves customer service and simplifies billing. Customers are also seeking to reduce their cycle times and implement supply chain management and just-in-time inventory management practices designed to
reduce inventory carrying costs. The growth of these practices has increased the demand for more reliable delivery and logistics services. The Company believes that same-day transportation customers increasingly seek greater reliability,
convenience, and speed from a trusted package delivery provider. Customers are also seeking to streamline their processes, improve their customer-vendor relationships and increase their productivity. The Company believes it is the only national
same-day transportation and logistics service provider with the geographic reach and national footprint to meet these evolving needs.



Regulation and Safety



The Companys business and operations are subject to various federal, state, and local regulations and, in many instances, require permits and
licenses from these authorities. The Company holds nationwide general commodities authority from the Federal Highway Administration of the U.S. Department of Transportation to transport certain property as a motor carrier on an inter-state basis
within the contiguous 48 states and, where required, holds statewide general commodities authority. The Company is also subject to regulation by the Federal Aviation Administration/Transportation Safety Administration for cargo shipments intended
for transport on commercial airlines.



In connection with the
operation of certain motor vehicles, the handling of hazardous materials in its delivery operations and other safety matters, including insurance requirements, the Company is subject to regulation by the U.S. Department of Transportation and the
states. The Company is also subject to regulation by the Occupational Safety and Health Administration, provincial occupational health and safety legislation and federal and provincial employment laws with respect to such matters as hours of work,
driver logbooks and workers compensation. The Company believes that it is in compliance with all of these regulations. Failure to comply with the applicable regulations could result in substantial fines or possible revocations of one or more
of the Companys operating permits.



From time to time,
the Companys drivers are involved in accidents. The Company carries liability insurance with a per claim self-insured retention of $750,000. Owner-operators and independent contractors are



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required to maintain auto liability insurance at amounts required by the Company. The Company also has insurance policies covering property and fidelity
liability, which coverage includes all drivers. The Company reviews prospective drivers to ensure that they have acceptable driving records, and pass a criminal background and drug test.



Sales and Marketing



The Company has initiated a comprehensive sales and marketing program that emphasizes its competitive position as the leading national provider of
same-day transportation services. The Company has also realigned its national accounts and logistics team, and restructured its field sales organization to effectively pursue growth opportunities. Sales efforts are conducted at both the local and
national levels through the Companys extensive network of local sales representatives. The Company employs 68 marketing and sales representatives who make regular calls on existing and potential customers to determine their ongoing delivery
and logistics needs. Sales efforts are coordinated with customer service representatives who regularly communicate with customers to monitor the quality of services and quickly respond to customer concerns.



The Companys sales department develops and executes marketing
strategies and programs that are supported by corporate communications and research services. The corporate communications department also provides ongoing communication of corporate activities and programs to employees, the press and the general
public. The expansion of the Companys national sales program and continuing investment in technology to support expanding operations have been undertaken at a time when large companies are increasing their demand for delivery providers who
offer a range of delivery services at multiple locations. As of the end of fiscal 2002, approximately 66 percent of the Companys revenues come from customers with whom the Company has entered into contracts, which typically carry a term of one
to three years.



Competition



The Company competes with a number of established, local, same-day couriers
and messenger services. Competition in local markets is intense. Nationally, the Company competes with other large companies having same-day transportation operations in multiple markets. Although many of the Companys competitors have
substantial resources and experience in the same-day transportation business, the Company believes that its national presence, wide array of service offerings, use of sophisticated technology and branding strategy will allow it to successfully
compete in any market in which it currently operates or may elect to enter.



There are also a number of national and international carriers who provide document and package shipment solutions to individuals and business customers. This market, which is dominated by major carriers such as
UPS®, Federal Express®, Airborne, DHL and the United States Postal Service, is also extremely competitive. However, these companies engage primarily in the next-day and second-day ground and air delivery businesses and
operate by imposing strict drop-off deadlines and rigid package dimension and weight limitations on customers. By comparison, the Company operates in the same-day transportation business, and handles customized delivery needs on either a scheduled,
distribution or expedited basis. Accordingly, the Company does not believe that it is in direct competition with these major carriers in same-day transportation services although there are no assurances that one of these entities might not enter its
market.



Technology



The Company believes the integration of high-tech communications software
within the currently low-tech same-day transportation business can provide a market differentiation between its services and those of its competitors. The Company believes customers will be attracted to companies with the ability to offer greater
efficiency, service, and information through the use of technology. The Company plans to continue to use technology to manage and coordinate its dispatching, delivery, tracking, warehousing and logistics, and other back office functions in order to
help its customers and itself operate more efficiently and cost-effectively. To



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meet the customers needs for reliability, efficiency and speed, the Company has implemented and will continue to implement the following technology
initiatives:



| |  |  | Smart package tracking technology which will provide a single source of aggregated delivery information to national customers;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | A customer-oriented web portal for online information access to provide package tracking, chain-of-custody updates, electronic signature capture, and real-time proof of delivery
retrieval; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Route optimization software for large-market delivery efficiency
| | - |  | ----------------------------------------------------------------



Trademarks



The Company currently has applications for trademarks and service marks (marks) in the United States and internationally, including but not
limited to, Velocity ExpressSMand Relentless ReliabilitySM. There can be no assurance that any of these marks, if registered, will afford the Company protection against competitors with similar marks that may have a
prior use date. In addition, no assurance can be given that others will not infringe upon the Companys marks, or that the Companys 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 the Company, and if instituted, that such challenges will not be successful.



Employees



As of June 29, 2002, the Company had approximately 2,389 employees, of whom approximately 823 primarily were employed in various management, sales, and
other corporate positions and approximately 1,566 were employed as drivers and operations personnel. Additionally, the Company had contracts with approximately 3,557 independent contractor drivers in its delivery operations in North America. The
Company believes that its relations with its employees are good and the Company is not a party of any collective bargaining agreement.



ITEM 3.    LEGAL PROCEEDINGS



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



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



Cautionary Statements Regarding Pending Litigation and Claims



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



| |  |  | The Company has made estimates of its exposure in connection with the lawsuits and claims that have been made. As a result of litigation or settlement of cases, the
actual amount of exposure in a given
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | case could differ materially from that projected. In addition, in some instances, the Companys liability for claims may increase or decrease depending
upon the ultimate development of those claims.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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PART II.



ITEM 7.    MANAGEMENTS DISCUSSION AND ANALYSIS



This Managements Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Annual Report on Form 10-K contain
forward-looking statements that involve risks and uncertainties. The Companys actual results may differ significantly from the results discussed in the forward-looking statements and such differences may be material.



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. 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 and intangible assets, 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.



The
Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.



| |  |  | Allowance for Doubtful Accounts
| | - |  | -------------------------------



The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make payments when due or
within a reasonable period of time thereafter. Estimates are used in determining this allowance based on the Companys historical collection experience, current trends, credit policy and a percentage of accounts receivable by aging category. If
the financial condition of the Companys customers were to deteriorate, resulting in an impairment of their ability to make required payments, additional allowances may be required.



| |  |  | Goodwill and Intangible Impairment
| | - |  | ----------------------------------



The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets, in June 2001. Effective with fiscal 2002 as a result of adopting this new standard, the Company no longer amortizes goodwill. Rather, goodwill is subjected to impairment testing, which requires that the Company estimate
the fair value of its goodwill and compare that estimate to the amount of goodwill recorded on the balance sheet. The estimation of fair value requires making judgments concerning future cash flows and appropriate discount rates. These cash flow
estimates take into account current customer volumes and the expectation of new or renewed contracts, historic gross margins, historic working capital parameters and planned capital expenditures. The estimate of the fair value of goodwill could
change over time based on a variety of factors, including the actual operating performance of the Company. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for these
assets.



| |  |  | Insurance Reserves
| | - |  | ------------------



The Company maintains an insurance program with insurance policies that have deductibles as follows: $250,000 for workers compensation, $750,000 for
automobile liability and $200,000 for employee medical costs. The Company reserves the estimated amounts of uninsured claims and deductibles



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| | related to such insurance retentions for claims that have occurred in the normal course of business. These reserves are established by management based upon
the recommendations of third-party administrators who perform a specific review of open claims, with consideration of incurred but not reported claims, as of the balance sheet date. Actual claim settlements may differ materially from these estimated
reserve amounts.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Income Taxes
| | - |  | ------------



In determining the carrying value of the Companys net deferred tax assets, the Company must assess the likelihood of sufficient future taxable
income in certain tax jurisdictions, based on estimates and assumptions in order to realize the benefit of these assets. Management evaluates whether the deferred tax assets may be realized and assesses the need for additional valuation allowances
or reduction of existing allowances. During the year ended June 29, 2002, the Company recorded $5.3 million of valuation allowances related to its net deferred tax assets.



| |  |  | Contingencies
| | - |  | -------------



As discussed in Note 10 to the consolidated financial statements, the Company is involved in various legal proceedings and contingencies and has recorded
liabilities for these matters in accordance with SFAS No. 5, Accounting for Contingencies. SFAS No. 5 requires a liability to be recorded based on the Companys estimate of the probable cost of the resolution of a contingency. The actual
resolution of these contingencies may differ from our estimates. If a contingency were settled for an amount greater than the estimate, a future charge to income would result. Likewise, if a contingency were settled for an amount that is less than
the estimate, a future credit to income would result.



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Historical Results of Operations



Quarter and Year ended June 29, 2002 Compared to Quarter and Year Ended June 30, 2001



Revenue for the quarter ended June 29, 2002 decreased $25.7 million or 24.1%
to $81.0 million from $106.7 million for the quarter ended June 30, 2001. The decrease in revenue for the quarter ended June 29, 2002 is primarily the result of the elimination by the Company of $21.0 million of low-margin business and the
consolidation of unprofitable locations, and $4.7 million from the divesture of a non-core air courier business operation compared to the same period last year.



Revenue for the year ended June 29, 2002 decreased $129.0 million or 27.3% to $342.7 million from $471.7 million for the
year June 30, 2001. The decrease in revenue for the year ended June 29, 2002 is primarily the result of the elimination by the Company of $96.4 million of low-margin business and the consolidation of unprofitable locations, and $32.6 million from
the divesture of a non-core air courier business operation compared to the same period last year. Revenue by service offering for the year ended June 29, 2002 was as follows:



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



Cost of services for
the quarter ended June 29, 2002 was $61.4 million, a reduction of $24.7 million or 28.7% from $86.1 million for the quarter ended June 30, 2001. Cost of services improved 4.9 percentage points as our costs as a percentage of revenue decreased from
80.7% to 75.8% for the quarter ended June 29, 2002. Approximately $20.9 million of the savings in cost of services correlates to the reduced revenue described above, including $4.0 million as a result of the divestiture of a non-core air courier
business operation. Approximately $3.8 million relates to efficiencies gained as the Company continues to move to a variable cost model using independent contractors and employee-owner operators in greater proportion to employee drivers. This
variable cost strategy has resulted in improved insurance expense and improvement in overall driver and vehicle-related costs. For example, at this time last year, the Company was funding $1.3 million per month in self-insurance risk for
workers compensation and auto liability. Today, because of improvements, the Company funds the same risk for $0.5 million per month, a savings of $0.8 million per month. Cost of services as a percentage of revenue also improved 0.6 percentage
points when comparing the results of the fourth quarter of 2002 to those of the third quarter of 2002.



Cost of services for the year ended June 29, 2002 was $264.8 million, a reduction of $112.7 million or 29.9% from $377.5 million for the year ended June
30, 2001. Cost of services improved 2.7 percentage points as our costs as a percentage of revenue decreased from 80.0% to 77.3% for the year ended June 29, 2002. Approximately $103.6 million of the savings in cost of services relates to the reduced
revenue described above, including $26.7 million as a result of divesture of a non-core air courier business operation. Approximately $9.1 million relates to the Companys continued efforts of moving to a variable cost model using independent
contractors and employee-owner operators in greater proportion to employee drivers. This variable cost strategy has resulted in improved insurance expense and improvement in overall driver and vehicle-related costs. The improvement in the gross
margin percentage was due to a 2.4 percentage point improvement in insurance expense resulting from focus on numerous safety initiatives and a 0.3 percentage point improvement in overall driver and vehicle-related costs resulting from the
Companys continued efforts of moving to a variable cost model using independent contractors and employee-owner operators in greater proportion to employee drivers.



Selling, general and administrative (SG&A) expenses for the quarter ended June 29, 2002 were $14.9 million
or 18.4% of revenue, a reduction of $6.8 million or 31.3% as compared with $21.7 million or 20.4% of revenue for the quarter ended June 30, 2001. The decrease in SG&A for the quarter is a result of integrating, through technology, all back
office processes into one common platform resulting in savings of approximately $4.8 million, the sale of a non-core air courier business operation of $0.5 million, and the impact of implementing SFAS No. 142 Goodwill and Other Intangible Assets,whereby the Company no longer amortizes



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its goodwill resulting in savings of $1.5 million in amortization. This focus has enabled the Company to realize a year-over-year improvement of 2.0
percentage points. Compared to the third quarter of fiscal 2002, SG&A as a percentage of revenue improved by 0.5 percentage points.



SG&A expenses for the year ended June 29, 2002 were $63.0 million or 18.4% of revenue, a reduction of $37.9 million or 37.6% as compared with $100.9
million or 21.4% of revenue for the year ended June 30, 2001. The decrease in SG&A is the result of integrating, through technology, all back office processes into one common platform of approximately $27.0 million, the sale of a non-core air
courier business operation of $4.8 million, and goodwill amortization savings of $6.1 million.



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



Occupancy charges for the quarter ended June 29, 2002 were $3.0 million, a reduction of $0.8 million or 21.1% from $3.8 million for the quarter ended June 30, 2001. Occupancy charges for the year ended June 29, 2002
were $13.1 million, a reduction of $2.5 million or 16.0% from $15.6 million for the year ended June 30, 2001. The improvement for the quarter and the year is due to divestitures of a non-core air courier business operation, the consolidation of
operating locations, and the closure of the former corporate headquarters in Houston, Texas.



Interest expense for the quarter ended June 29, 2002 decreased $0.8 million to $0.8 million from $1.6 million for the quarter ended June 30, 2001 as a result of lower interest rates.



Interest expense for the year ended June 29, 2002 increased $6.3 million to
$12.6 million from $6.3 million for the year ended June 30, 2001. Included in interest expense for the period are certain non-cash charges related to the conversion of the Series D Bridge Notes and interest thereon amounting to approximately $4.7
million as well as a non-cash charge of $4.0 million related to a long-term guarantee the Company received from its largest shareholder on two letters of credit supporting the Companys revolving credit facility. Interest expense related to the
Companys borrowings decreased over the same period in the prior year as a result of lower interest rates.



As a result of the foregoing factors, the net income for the quarter ended June 29, 2002 was $0.9 million, compared with a net loss of $8.6 million for
the same period in fiscal 2001, an improvement of $9.5 million or 110%.



The net loss for the year ended June 29, 2002 was $10.5 million, compared with $35.3 million for the same period in fiscal 2001, an improvement of $24.8 million or 70.3%. Had the effect of one-time non-cash interest charges of $9.1 million
been excluded, net loss for the year ended June 29, 2002 would have been $1.4 million, compared with $35.3 million for the same period in fiscal 2001, which would have been an improvement of $33.9 million.



Net loss applicable to common shareholders was $20.4 million for the year
ended June 29, 2002 as compared with $35.0 million for the year ended June 30, 2001. The difference between net loss applicable to common shareholders and net loss was comprised of non-cash charges associated with the Companys redeemable
preferred stock. With the elimination of the redemption features, the preferred stock is now classified as permanent equity, and the Company is no longer required to take charges of this nature.



Quarter and Year ended June 30, 2001 Compared to Quarter and Year Ended July 1, 2000



In comparing the results of fiscal 2001 to fiscal
2000, there are several factors to consider. Although fiscal 2001 contained two additional months of Velocity results compared with fiscal 2000, many consolidation and post-merger integration initiatives that were started in fiscal 2000 continued to
be implemented throughout fiscal



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2001. These initiatives included divestiture of specific non-core business operations at the end of fiscal 2000 and early in fiscal 2001, the closing of
unprofitable locations, and the consolidation of other strategic locations. Additionally, beginning in the third quarter of fiscal 2001, a Company-wide restructuring program that included continued location and business rationalization as well as
significant general and administrative cost savings measures was implemented.



Revenue for the year ended June 30, 2001 increased $0.6 million or 0.1% to $471.7 million from $471.1 million for the year ended July 1, 2000. Results of fiscal 2000 include the results of Velocity as of the August
1999 acquisition date and are inclusive of ten months rather than twelve months of activity as in fiscal 2001. Revenues year over year remained relatively flat despite the additional two months of activity in fiscal 2001 principally due to the
Companys ongoing efforts to rationalize its business going forward and to exit unprofitable markets. Furthermore, the Company realized lower revenues in fiscal 2001 as a result of certain operations that were sold at the end of fiscal 2000 and
during the current year.



Revenue for the quarter ended June
30, 2001, decreased $32.9 million or 23.6% to $106.7 million from $139.6 million for the quarter ended July 1, 2000. The decrease in revenue for the quarter ended June 30, 2001 is primarily the result of the following: (1) the loss of revenues from
divesture of non-core business operations of approximately $19.5 million over the same quarter last year, (2) the closing or consolidation of unprofitable locations of approximately $8.0 million; and (3) adverse economic conditions resulting in lost
revenue of approximately $5.5 million.



Cost of services for
the year ended June 30, 2001 increased $12.6 million or 3.5% to $377.5 million from $364.9 million for the year ended July 1, 2000, and as a percentage of revenue, increased from 77.4% to 80.0%. The increase in cost of services resulted from
increased costs associated with having twelve months of activity in fiscal 2001 compared to ten months in fiscal 2000 as well as from increased insurance costs compared to the prior year. The increase was offset by decreased costs resulting from the
revenue decrease described above as certain of these costs are variable and follow the revenue level, as well as from decreased costs associated with operations that were sold as describe above.



Cost of services for the quarter ended June 30, 2001 decreased $22.3 million
or 20.6% to $86.1 million from $108.4 million for the quarter ended July 1, 2000, and as a percentage of revenue, increased from 77.6% to 80.7%. The overall dollar decrease is consistent with the revenue trend discussed above, while the increase in
cost of services as a percentage of revenue is principally the result of increased insurance costs associated with the Companys self-insurance program and an overall hardening in the insurance market.



SG&A expenses for the year ended June 30, 2001 were $116.4 million or
24.7% of revenue as compared with $129.6 million or 27.5 % of revenue for the year ended July 1, 2000, a decrease of $13.2 million or 10.2%. The decrease in SG&A, despite the additional two months of activity for Velocity in fiscal 2001, is the
result of the Companys cost-cutting initiatives in fiscal 2000 as well as the result of the restructuring programs initiated in the third quarter of fiscal 2001.



SG&A expenses for the quarter ended June 30, 2001 were $25.5 million or 23.9% of revenue as compared with $36.6 million
or 26.2 % of revenue for the quarter ended July 1, 2000, a decrease of $11.1 million or 30.2%. The decrease in SG&A for the quarter is a result of the sale of various operations of $4.1 million, and the continued efforts by the Company to
integrate the administrative functions of the Company of approximately $7.0 million.



The Company began implementing a multi-faceted restructuring program in March 2001 to allow it to achieve a cost structure to better position itself to achieve profitability in the ever-changing logistics and
transportation marketplace. The Company has streamlined and downsized its operations by reducing its workforce and consolidating various locations. As of June 30, 2001, the Company has taken a restructuring charge of $7.1 million consisting of
severance costs in the amount of $2.2 million related to the workforce



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reduction of 234 full-time employees, $3.3 million for rental costs associated with the termination of building leases and location rationalization costs,
and $1.6 million for the write off of equipment. As of June 30, 2001, approximately $4.8 million in costs have been charged against the reserve.



Interest expense for the year ended June 30, 2001 increased $1.1 million to $6.3 million from $5.3 million for the year ended July 1, 2000. The increase
for the fiscal year is primarily due to twelve months of borrowings under the revolving note in fiscal 2001 compared to ten months of borrowings in fiscal 2000.



Interest expense for the quarter ended June 30, 2001 decreased $0.5 million to $1.6 million from $2.1 million for the quarter ended July 1, 2000. The
decrease for the quarter is principally attributable to lower interest rates and lower average borrowings under the Companys revolving note.



As a result of the foregoing factors, the net loss for the year and quarter ended June 30, 2001, including one-time restructuring charges of $7.1 million
and $2.6 million, respectively, was $35.3 million and $8.6 million, respectively, compared with $28.2 million and $7.5 million, respectively, for the same periods in 2000.



Use of EBITDA



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



In the fourth quarter of fiscal 2002, the Company reported income from operations of $1.7 million as compared to a loss from
operations of $7.5 million in the fourth quarter of fiscal 2001, an improvement of $9.2 million. Furthermore, the Company reported positive EBITDA of $3.0 million as compared to negative EBITDA of $3.9 million in the fourth quarter of fiscal 2001,
an improvement of $6.9 million.



For the year ended June 29,
2002, the Company reported income from operations of $1.9 million as compared to a loss from operations of $29.3 million for the same period in fiscal 2001. The Company also reported positive EBITDA of $6.8 million as compared to negative EBITDA of
$17.3 million for the same period in fiscal 2001, an improvement of $24.1 million. These improvements are the result of the Companys transition to a variable cost driver model, back office consolidation, and improvements to the balance sheet,
which have been discussed above.



Cash flow used in operations
was $4.4 million for the fourth quarter of fiscal 2002 as compared to $3.9 million in the prior year comparable period. In the fourth quarter of fiscal 2002, the use of funds was comprised of cash flow provided by operations of $2.3 million and cash
flow consumed as a result of working capital changes of $6.7 million, while in fiscal 2001, the use of funds was comprised of cash flow used in operations of $6.4 million and cash flow provided as a result of working capital changes of $2.5 million.
During the fourth quarter of fiscal 2002, the Company generated $2.9 million in working capital through the reduction of accounts receivable, while the implementation of the variable cost strategy has lowered the days required to fund accounts
payable leading to a use of working capital of $2.9 million. The remaining use of working capital included



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approximately $3.0 million for the funding of the Companys self-insurance risk associated with workers compensation and auto liability insurance
and settlement of pre-acquisition legal lawsuits, and $3.7 million for other accruals, including wages and benefits. During the fourth quarter of fiscal 2001, the Company generated $3.3 million in working capital through the reduction of accounts
receivable and $1.7 million from increased accounts payable. The remaining use of working capital included approximately $3.2 million for the funding of the Companys self-insurance risk associated with workers compensation and auto
liability insurance and settlement of pre-acquisition legal lawsuits, offset by $0.7 million for other accruals, including wages and benefits.



Cash flow used as a result of investing activities during the fourth quarter of fiscal 2002 was $1.3 million and consisted of capital expenditures used
for the Companys customer-driven technology solutions initiative and capitalized costs related to the integration of the back office. During the fourth quarter of 2001, cash flow provided as a result of investing activities was $2.6 million
and consisted of proceeds from the sale of assets of $1.7 million and the settlement of a note receivable of $0.9 million.



Cash flow generated from financing activities in the fourth quarter of fiscal 2002 amounted to $4.9 million, compared to $3.4 million in the fourth
quarter of fiscal 2001. In fiscal 2002, the source of funds was primarily from the private placement of Series G Convertible Preferred Stock through which the Company raised net cash proceeds of approximately $4.1 million. Long-term debt and notes
payable resulted in net cash flow of $0.8 million, comprised of $0.3 million paid for debt financing costs, and $1.1 million provided by the revolving credit facility. During the fourth quarter of 2001, cash flow from financing activities was mainly
from long-term debt and notes payable resulting in cash flow of $3.2 million, including $3.7 million provided by the revolving credit facility, $0.4 paid against acquisition notes and $0.1 million paid for debt financing costs. Net proceeds from
issuance of preferred stock related to $0.2 million received on the Series D subscription notes. For more information on long-term debt or equity, refer to Notes 7 and 8, respectively, to the consolidated financial statements.



|                                                    |  | Three Months Ended                            |        |   | Year Ended    |  
|--------------------------------------------------- |  | --------------------------------------------- | ------ | - | ------------- | -
|                                                    |  | June 29, 2002                                 |        |   | June 30, 2001 |  
|                                                    |  | (Amounts in thousands, except per share data) |       
|Revenue                                             |  | $                                             | 80,985 |   |               | $
|Income (loss) from operations                       |  |                                               | 1,690  |   |               |  
|Net income (loss)                                   |  |                                               | 909    |   |               |  
|Net income (loss) applicable to common shareholders |  |                                               | 909    |   |               |  
|                                                    |  |                                               |        |  
|Net income (loss) per common share:                 |  |                                               |        |   |               |  
|Basic net income (loss) per share                   |  | $                                             | 0.25   |   |               | $
|Diluted net income (loss) per share                 |  |                                               | 0.04   |   |               |  
|                                                    |  |                                               |        |  
|Other financial data:                               |  |                                               |        |   |               |  
|Cash used in operating activities                   |  |                                               | (4,393 | ) |               |  
|Cash (used in) provided by investing activities     |  |                                               | (1,278 | ) |               |  
|Cash provided by financing activities               |  |                                               | 4,852  |   |               |  
|EBITDA                                              |  |                                               | 2,950  |   |               |  



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



|                  |  | Three Months Ended     |       |   | Year Ended    |  
|----------------- |  | ---------------------- | ----- | - | ------------- | -
|                  |  | June 29, 2002          |       |   | June 30, 2001 |  
|                  |  | (Amounts in thousands) |      
|EBITDA            |  | $                      | 2,950 |   |               | $
|Interest expense  |  |                        | (792  | ) |               |  
|Income taxes      |  |                        | 24    |   |               |  
|Depreciation      |  |                        | (978  | ) |               |  
|Amortization      |  |                        | (295  | ) |               |  
|                  |  |                        |       |   |               |  
|Net income (loss) |  | $                      | 909   |   |               | $
|                  |  |                        |       |   |               |  



Liquidity and Capital Resources



Cash flow used in operations was $9.8 million for fiscal
2002. This use of funds was comprised of cash flow provided by operations of $3.4 million and cash flow absorbed as a result of working capital changes of $13.2 million. The execution of the Companys restructuring plan which was implemented in
fiscal 2001, the integration, through technology, of all back office processes into one common platform, and the implementation of the variable cost strategy were the principal drivers in the change in working capital during fiscal 2002. During
fiscal 2002 the Company has funded $3.9 million of its restructuring plans via the payment of severance costs and rental costs associated with the termination of building leases and location rationalizations. The Company generated $7.3 million in
working capital through the reduction of accounts receivable, while the implementation of the variable cost strategy has lowered the days required to fund accounts payable leading to a use of working capital of $3.9 million. The remaining use of
working capital during fiscal 2002 of $12.7 million included approximately $7.8 million for the funding of the Companys self-insurance risk associated with workers compensation and auto liability insurance and settlement of
pre-acquisition legal lawsuits, and $4.9 million for other accruals, including wages and benefits.



Cash flow used as a result of investing activities during fiscal 2002 was $3.8 million and consisted of capital expenditures of $4.9 million used for the
Companys customer-driven technology solutions initiative and capitalized costs related to the integration of the back office, offset by proceeds of $1.2 million, primarily from the sale of a non-core air courier business operation. The
Companys customer-driven technology solutions initiative is comprised of two elements: (i) smart package tracking technology which will provide a single source of aggregated delivery information to national customers, and (ii) a
customer-oriented web portal for online information access to provide package tracking, chain-of-custody updates, electronic signature capture, and real-time proof of delivery retrieval. Management accelerated the implementation of this technology
solutions initiative in order to meet the needs of its targeted national customers. This solution will provide the Companys national customers with a single source of aggregated delivery information.



Cash flow generated from financing activities in fiscal 2002 amounted to
$13.4 million during fiscal 2002. The primary source of cash during fiscal 2002 was the private placement of Series F and Series G Convertible Preferred Stock through which the Company raised net cash proceeds of approximately $11.3 million and $4.1
million, respectively. The exercise of stock options resulted in proceeds of $0.2 million. Long-term debt and notes payable resulted in a use of cash flow of $2.0 million during fiscal 2002, which included a $2.0 million payment made to CEX in
connection with the finalization of all purchase price adjustments, $1.8 million paid for debt financing costs, and $1.7 million provided by the revolving credit facility. For more information on long-term debt or equity, please see Notes 7 and 8,
respectively, to the consolidated financial statements.



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The Company reported operating income of approximately $1.9 million for fiscal 2002 and has positive
working capital of approximately $21.2 million at June 29, 2002. In August 2001, the Company completed certain purchase price adjustments to the CEX merger agreement related to the acquisition of Velocity that resulted in an improvement to the
balance sheet of $42.8 million.



The Company reviews the
adequacy of its provision for bad debts on a regular basis, taking into consideration customer payment trends, accounts receivable balances that have been outstanding greater than 90 days, customer payment trends in the transportation sector, and
the strength of the overall economy. As a result of these reviews, the Company noticed a deterioration in its customers payment practices in fiscal 2002 and increased its provision for bad debts to $2.3 million, an increase of $1.1 million
over fiscal 2001s year-end balance of $1.2 million.



Contractual
Obligations and Available Commercial Commitments



As
of June 29, 2002, the Company had no outstanding purchase commitments for capital improvements. The following table presents information regarding contractual obligations by fiscal year (amounts in thousands):



|                 |  | Payments Due
|---------------- |  | ------------
|                 |  | 2003        
|Operating leases |  | $           
|Long-term debt   |  |             
|                 |  |             
|Total            |  | $           
|                 |  |             

---

|(1) |  | Net of original issue discount of $740. Amount due at maturity is $5,000.
|--- |  | -------------------------------------------------------------------------



The following table presents information regarding available commercial commitments and their expiration dates by fiscal year (amounts in thousands):



|               |  | Commitment Expiration
|-------------- |  | ---------------------
|               |  | 2003                 
|Line of credit |  | $                    
|               |  |                      

---



Note:    for more information regarding operating leases, long-term debt and the line of credit, refer to Notes 10 and 7, respectively.



In the short term, the Company intends to continue the execution of activities it previously initiated over the past 18
months to further improve the operating performance of the Company and to meet its fiscal 2003 financial plan. These activities include, but are not limited to, expanding the variable cost model using independent contractors and employee
owner-operators in greater proportion to employee drivers, the implementation of customer-driven technology solutions and continued leveraging of the consolidated back office SG&A platform. Currently, the Company has sufficient cash to fund the
fiscal 2003 operating plan as discussed above. If, however, the Company elects to accelerate its transition to a variable cost model using independent contractors and employee owner-operators as a result of continued increases in insurance and fuel
costs or expands the implementation of its customer-driven technology solutions due to customer demands or competitive pressures as a result of continued softness in the economy, the Company may need to secure additional funding. If additional
funding is required, the Company will continue to secure additional financing from its lenders or through the issuance of additional equity; however, there can be no assurance that such funding can be obtained.



In the long term, the Company intends to continue to fund its operations
through the extension of its existing revolving credit and senior subordinated debt facilities. The revolving credit facility with Fleet Capital



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Corporation, allows for borrowings under the revolving note limited to the lesser of $40 million or an amount based on a defined portion of receivables.
Interest for the first year is payable monthly at a rate of prime plus 1.25% (6.0% at June 29, 2002). The Company may elect the rate of LIBOR plus 3% at its discretion in which case interest is payable at the end of a LIBOR advance period. In
addition, the Company is required to pay a commitment fee of 0.375% on unused amounts of the total commitment, as defined in the agreement. The term of the facility is two years, ending January 2004. The Companys accounts receivable have been
pledged to secure borrowings under the revolving note. The Company is subject to certain restrictive covenants, the more significant of which include limitations on dividends, acquisitions, new indebtedness in excess of $0.5 million and changes in
capital structure. The Company is also required to maintain financial covenants related to capital expenditures and maintaining of minimum availability levels. The senior subordinated note has interest payable quarterly at 12% per annum and is due
September 30, 2004. The note is subordinate to the revolving note. The initial carrying value of the senior subordinated note was reduced by $1.7 million for the fair value of the common stock warrant issued to the senior subordinated lender. The
unamortized discount was $0.7 million at June 29, 2002, and is being amortized over the remaining three-year life of the note. The warrant has an exercise price of $8.46 per share and entitles the holder to acquire, in whole or in part 534,939
shares of the Companys common stock, as adjusted to reflect certain anti-dilution rights as defined in the warrant purchase agreement. If additional funding is required as a result of working capital requirements due to business expansion or
changes in working capital requirements, the Company will attempt to secure additional financing from its existing lenders through the expansion of these facilities or through the issuance of additional equity; however, there can be no assurance
that such funding can be obtained.



Risk Factors



The Loss of Significant Customers Could Adversely Affect the
Companys Business.    The Companys contracts with its commercial customers typically have a term of one to three years, but are terminable upon 30 or 60 days notice. Although the Company has no reason to believe
that these contracts will be terminated prior to the expiration of their terms, early termination of these contracts could have a material adverse effect on the Companys business, financial condition and results of operations.



The Company Could Face Significant Risks of Tax Authorities Classifying
Independent Contractors as Employees.    A significant number of the Companys drivers are currently independent contractors (meaning that they are not its 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. The Company does not pay or withhold federal or state employment taxes with respect to drivers who are
independent contractors. Although the Company believes that the independent contractors the Company utilize are not employees under existing interpretations of federal and state laws, the Company 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 were to successfully assert that the Companys independent
contractors are in fact its employees, the Company would be required to pay withholding taxes, extend additional 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, the Company could be required to increase their compensation since they may no longer be receiving commission-based compensation. Any of the foregoing
possibilities could increase the Companys operating costs and have a material adverse effect on its business, financial condition and results of operations.



Recent Terrorist Attacks Harmed The Companys Business and May Harm Business in the Future.The terrorist
attacks of September 11, 2001 and their aftermath have negatively impacted the logistics industry generally and the Companys business specifically. Given the magnitude and unprecedented nature of the September 11 terrorist attacks, it is
unclear what the long-term impact of these events will be on the logistics industry in general and on the Companys business in particular. Additional terrorist attacks, the fear of such attacks or increased hostilities could further negatively
impact the logistics industry and the Companys business, financial condition and results of operations.



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The Company May Need Additional Capital if it Accelerates its Operating Plan. Achieving the
Companys financial goals involves the continued execution of activities initiated over the past 18 months, including expanding the variable cost model using independent contractors and employee owner-operators in greater proportion to employee
drivers, the implementation of customer-driven technology solutions and continued leverage of the consolidated back office SG&A platform. In the event that the Company elects to accelerate these activities due to customer demands or competitive
pressures, the Company may need to secure additional funding.



To date, the Company has primarily relied upon debt and equity investments to fund operations and growth. If its strategy requires additional funding, the Company will continue to seek the required additional financing from lenders or
through the issuance of additional equity; however, there can be no assurance that this funding can be obtained.



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##### Table of Contents

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Consolidated Financial Statements



|CONTENTS                                                  |  | PAGE
|--------------------------------------------------------- |  | ----
|Report of Independent Auditors                            |  | 19  
|                                                          | 
|Consolidated Financial Statements                         |  |     
|                                                          | 
|Consolidated Balance Sheets                               |  | 20  
|                                                          | 
|Consolidated Statements of Operations                     |  | 21  
|                                                          | 
|Consolidated Statements of Shareholders Equity (Deficit) |  | 22  
|                                                          | 
|Consolidated Statements of Cash Flows                     |  | 24  
|                                                          | 
|Notes to Consolidated Financial Statements                |  | 25  



18



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##### Table of Contents

Report of Independent Auditors



The Board of Directors and Shareholders

Velocity Express Corporation and Subsidiaries



We have audited the accompanying consolidated balance sheets of Velocity Express Corporation and subsidiaries as of June 29, 2002 and June 30, 2001, and the related
consolidated statements of operations, cash flows and shareholders equity (deficit) for each of the three years in the period ended June 29, 2002. Our audits also included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the
United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.



Since the date of
completion of our audit of the accompanying financial statements and initial issuance of our report thereon dated September 4, 2002, the Company, as described in Note 13, has experienced negative cash flows from operations. The liquidity of the
Company is dependent in part on its revolving credit facility which expires in January 2004. Note 13 describes managements plans to address these issues.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Velocity
Express Corporation and subsidiaries at June 29, 2002, and June 30, 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 29, 2002 in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set
forth therein.



As discussed in Notes 2 and 6 to the consolidated financial
statements, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,in 2002.



/s/    Errnst & Young LLP





Ernst & Young LLP



Minneapolis, Minnesota

|                                      
|--------------------------------------
|September 4, 2002, except for Note 13,
|as to which the date is July 24, 2003 



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##### Table of Contents

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in
thousands, except par value)



|                                                                                                                                                       |  | June 29,2002 |         |   | June 30,2001 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------- | - | ------------ | -
|ASSETS                                                                                                                                                 |  |              |         |   |              |  
|Current assets:                                                                                                                                        |  |              |         |   |              |  
|Cash                                                                                                                                                   |  | $            | 2,704   |   |              | $
|Accounts receivable, net of allowance of $2,250 and $1,160at June 29, 2002 and June 30, 2001, respectively                                             |  |              | 38,816  |   |              |  
|Accounts receivableother                                                                                                                              |  |              | 1,895   |   |              |  
|Prepaid workers compensation and auto liability insurance                                                                                             |  |              | 11,939  |   |              |  
|Other prepaid expenses                                                                                                                                 |  |              | 1,304   |   |              |  
|Other current assets                                                                                                                                   |  |              | 552     |   |              |  
|                                                                                                                                                       |  |              |         |   |              |  
|Total current assets                                                                                                                                   |  |              | 57,210  |   |              |  
|Property and equipment, net                                                                                                                            |  |              | 10,970  |   |              |  
|Goodwill                                                                                                                                               |  |              | 42,830  |   |              |  
|Deferred financing costs, net                                                                                                                          |  |              | 1,916   |   |              |  
|Other assets                                                                                                                                           |  |              | 963     |   |              |  
|                                                                                                                                                       |  |              |         |   |              |  
|Total assets                                                                                                                                           |  | $            | 113,889 |   |              | $
|                                                                                                                                                       |  |              |         |   |              |  
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)                                                                                                         |  |              |         |   |              |  
|Current liabilities:                                                                                                                                   |  |              |         |   |              |  
|Trade accounts payable                                                                                                                                 |  | $            | 19,543  |   |              | $
|Accrued insurance and claims                                                                                                                           |  |              | 6,084   |   |              |  
|Accrued wages and benefits                                                                                                                             |  |              | 2,871   |   |              |  
|Accrued legal and claims                                                                                                                               |  |              | 4,017   |   |              |  
|Other accrued liabilities                                                                                                                              |  |              | 3,510   |   |              |  
|Current portion of long-term debt                                                                                                                      |  |              | 30      |   |              |  
|                                                                                                                                                       |  |              |         |   |              |  
|Total current liabilities                                                                                                                              |  |              | 36,055  |   |              |  
|Long-term debt                                                                                                                                         |  |              | 38,756  |   |              |  
|Accrued insurance and claims                                                                                                                           |  |              | 9,763   |   |              |  
|Redeemable preferred stock                                                                                                                             |  |              |        |   |              |  
|Shareholders equity (deficit):                                                                                                                        |  |              |         |   |              |  
|Preferred stock, $0.004 par value, 50,000 shares authorized13,568 shares issued and outstanding at June 29,
2002                                       |  |              | 64,480  |   |              |  
|Preferred warrants, 1,042 outstanding at June 29, 2002                                                                                                 |  |              | 7,600   |   |              |  
|Common stock, $0.004 par value, 150,000 shares authorized3,663 and 3,429 shares issued and outstanding at June 29, 2002and
June 30, 2001, respectively |  |              | 15      |   |              |  
|Stock subscription receivable                                                                                                                          |  |              | (26     | ) |              |  
|Additional paid-in-capital                                                                                                                             |  |              | 57,152  |   |              |  
|Accumulated deficit                                                                                                                                    |  |              | (99,766 | ) |              |  
|Foreign currency translation                                                                                                                           |  |              | (140    | ) |              |  
|                                                                                                                                                       |  |              |         |   |              |  
|Total shareholders equity (deficit)                                                                                                                   |  |              | 29,315  |   |              |  
|                                                                                                                                                       |  |              |         |   |              |  
|Total liabilities and shareholders equity (deficit)                                                                                                   |  | $            | 113,889 |   |              | $
|                                                                                                                                                       |  |              |         |   |              |  





SEE ACCOMPANYING NOTES.



20



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##### Table of Contents

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)



|                                                                      |  | June 29,2002 |         |   | June 30,2001 |   |         | July1, 2000 | 
|--------------------------------------------------------------------- |  | ------------ | ------- | - | ------------ | - | ------- | ----------- | 
|Revenue                                                               |  | $            | 342,727 |   |              | $ | 471,682 |             | 
|Cost of services                                                      |  |              | 264,766 |   |              |   | 377,498 |             | 
|                                                                      |  |              |         |   |              |   |         |             | 
|Gross profit                                                          |  |              | 77,961  |   |              |   | 94,184  |             | 
|Operating expenses:                                                   |  |              |         |   |              |   |         |             | 
|Occupancy                                                             |  |              | 13,071  |   |              |   | 15,570  |             | 
|Selling, general and administrative                                   |  |              | 62,969  |   |              |   | 100,855 |             | 
|Restructuring charge                                                  |  |              |        |   |              |   | 7,060   |             | 
|                                                                      |  |              |         |   |              |   |         |             | 
|Total operating expenses                                              |  |              | 76,040  |   |              |   | 123,485 |             | 
|                                                                      |  |              |         |   |              |   |         |             | 
|Income (loss) from operations                                         |  |              | 1,921   |   |              |   | (29,301 | )           | 
|Other income (expense):                                               |  |              |         |   |              |   |         |             | 
|Interest expense                                                      |  |              | (12,577 | ) |              |   | (6,334  | )           | 
|Common stock warrant charge                                           |  |              | (1,048  | ) |              |   |        |             | 
|Other                                                                 |  |              | 1,225   |   |              |   | 364     |             | 
|                                                                      |  |              |         |   |              |   |         |             | 
|Net loss                                                              |  | $            | (10,479 | ) |              | $ | (35,271 | )           | 
|                                                                      |  |              |         |   |              |   |         |             | 
|Net loss applicable to common shareholders                            |  | $            | (20,357 | ) |              | $ | (35,022 | )           | 
|                                                                      |  |              |         |   |              |   |         |             | 
|Basic and diluted net loss per share                                  |  | $            | (5.82   | ) |              | $ | (10.51  | )           | 
|                                                                      |  |              |         |   |              |   |         |             | 
|Basic and diluted weighted average numberof common shares outstanding |  |              | 3,500   |   |              |   | 3,333   |             | 
|                                                                      |  |              |         |   |              |   |         |             | 





SEE ACCOMPANYING NOTES.



21



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##### Table of Contents

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)

(Amounts in thousands)



|                                                                                                |  | Series BPreferred Stock |  | Series CPreferred Stock |        | Series DPreferred Stock |       |        | Series FPreferred Stock |        |  | Series GPreferred Stock |       
|----------------------------------------------------------------------------------------------- |  | ----------------------- |  | ----------------------- | ------ | ----------------------- | ----- | ------ | ----------------------- | ------ |  | ----------------------- | ------
|                                                                                                |  | Shares                  |  | Amount                  |        | Shares                  |       | Amount |                         | Shares |  |                         | Amount
|Balance at June 30, 1999                                                                        |  |                        |  | $                       |       |                         |      |        | $                       |       |  |                        |       
|Private placement of common stock                                                               |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Warrants related to senior subordinated note                                                    |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Value of preferred stock conversion feature                                                     |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Stock options exercised                                                                         |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Warrants exercised                                                                              |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Conversion of note payable and accrued interest                                                 |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Other                                                                                           |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Net loss                                                                                        |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Foreign currency translation                                                                    |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|                                                                                                |  |                         |  |                         |        |                         |       |        |                         |        |  |                         |       
|Comprehensive loss                                                                              |  |                         |  |                         |        |                         |       |        |                         |        |  |                         |       
|                                                                                                |  |                         |  |                         |        |                         |       |        |                         |        |  |                         |       
|Balance at July 1, 2000                                                                         |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Value of preferred stock conversion feature                                                     |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Accretion of Series B Redeemable Preferred Stock to its redemption value                        |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Adjustments to Series B redeemable preferred stock and Series B and C warrants                  |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Stock options exercised                                                                         |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Warrants exercised                                                                              |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Common Stock warrant                                                                            |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Common Stock warrants issued for services rendered                                              |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Issuance of common stock as litigation settlement                                               |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Net loss                                                                                        |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Foreign currency translation                                                                    |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|                                                                                                |  |                         |  |                         |        |                         |       |        |                         |        |  |                         |       
|Comprehensive loss                                                                              |  |                         |  |                         |        |                         |       |        |                         |        |  |                         |       
|                                                                                                |  |                         |  |                         |        |                         |       |        |                         |        |  |                         |       
|Balance at June 30, 2001                                                                        |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Beneficial conversion of Bridge Notes                                                           |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Beneficial conversion of Subscription notes                                                     |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Value of Common Warrants issued in connection with sale of Series F Preferred                   |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Accretion of Series B Redeemable Preferred Stock to its redemption value                        |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Accretion of Series D Redeemable Preferred Stock to its redemption value                        |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Adjustments to Series C and D warrants to fair value                                            |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Reclassification of Preferred instruments toShareholders Equity after redemption right waivers |  | 2,807                   |  |                         | 24,304 |                         | 2,000 |        |                         | 13,600 |  | 1,895                   |       
|Payments against stock subscription receivable                                                  |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Common Stock warrants issued for services rendered                                              |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Options issued for services rendered                                                            |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Stock option exercises                                                                          |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Warrant exercises                                                                               |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Issuance of Series G Convertible Preferred Stock                                                |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Offering costs                                                                                  |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Conversion of Series D to Common Stock                                                          |  |                        |  |                         |       |                         |      |        |                         |       |  | (65                     | )     
|Conversion of Series F to Common Stock                                                          |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Net loss                                                                                        |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Foreign currency translation                                                                    |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|                                                                                                |  |                         |  |                         |        |                         |       |        |                         |        |  |                         |       
|Comprehensive loss                                                                              |  |                         |  |                         |        |                         |       |        |                         |        |  |                         |       
|                                                                                                |  |                         |  |                         |        |                         |       |        |                         |        |  |                         |       
|Balance at June 29, 2002                                                                        |  | 2,807                   |  | $                       | 24,304 |                         | 2,000 |        | $                       | 13,600 |  | 1,830                   |       
|                                                                                                |  |                         |  |                         |        |                         |       |        |                         |        |  |                         |       



SEE ACCOMPANYING
NOTES.



22



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##### Table of Contents

|Preferred StockWarrants |  | Common Stock |       | StockSubscription Receivable |       |        | Additional Paid-in Capital |    | Accumulated Deficit |   |     | Foreign Currency Translation |  |   |        | 
|----------------------- |  | ------------ | ----- | ---------------------------- | ----- | ------ | -------------------------- | -- | ------------------- | - | --- | ---------------------------- |  | - | ------ | 
|Shares                  |  | Amount       |       | Shares                       |       | Amount |                            |    |                     |   |     | Total                        | 
|                       |  | $            |      |                              | 2,122 |        | $                          | 9  |                     | $ |    |                              |  | $ | 15,604 | 
|                       |  |              |      |                              | 580   |        |                            | 2  |                     |   |    |                              |  |   | 15,774 | 
|                       |  |              |      |                              |      |        |                            |   |                     |   |    |                              |  |   | 1,708  | 
|                       |  |              |      |                              |      |        |                            |   |                     |   |    |                              |  |   | 3,508  | 
|                       |  |              |      |                              | 73    |        |                            |   |                     |   |    |                              |  |   | 1,634  | 
|                       |  |              |      |                              | 471   |        |                            | 2  |                     |   |    |                              |  |   | 4,351  | 
|                        |  |              |       |                              |       |        |                            |    |                     |   |     |                              |  |   |        | 
|                       |  |              |      |                              | 27    |        |                            |   |                     |   |    |                              |  |   | 617    | 
|                       |  |              |      |                              | 7     |        |                            |   |                     |   |    |                              |  |   | 96     | 
|                       |  |              |      |                              |      |        |                            |   |                     |   |    |                              |  |   |       | 
|                       |  |              |      |                              |      |        |                            |   |                     |   |    |                              |  |   |       | 
|                        |  |              |       |                              |       |        |                            |    |                     |   |     |                              |  |   |        | 
|                        |  |              |       |                              |       |        |                            |    |                     |   |     |                              |  |   |        | 
|                        |  |              |       |                              |       |        |                            |    |                     |   |     |                              |  |   |        | 
|                       |  |              |      |                              | 3,280 |        |                            | 13 |                     |   |    |                              |  |   | 43,292 | 
|                       |  |              |      |                              |      |        |                            |   |                     |   |    |                              |  |   | 2,670  | 
|                        |  |              |       |                              |       |        |                            |    |                     |   |     |                              |  |   |        | 
|                       |  |              |      |                              |      |        |                            |   |                     |   |    |                              |  |   |       | 
|                        |  |              |       |                              |       |        |                            |    |                     |   |     |                              |  |   |        | 
|                       |  |              |      |                              |      |        |                            |   |                     |   |    |                              |  |   |       | 
|                       |  |              |      |                              | 7     |        |                            |   |                     |   |    |                              |  |   | 162    | 
|                       |  |              |      |                              | 22    |        |                            |   |                     |   |    |                              |  |   | 337    | 
|                       |  |              |      |                              |      |        |                            |   |                     |   |    |                              |  |   | 455    | 
|                        |  |              |       |                              |       |        |                            |    |                     |   |     |                              |  |   |        | 
|                       |  |              |      |                              |      |        |                            |   |                     |   |    |                              |  |   | 402    | 
|                        |  |              |       |                              |       |        |                            |    |                     |   |     |                              |  |   |        | 
|                       |  |              |      |                              | 120   |        |                            | 1  |                     |   |    |                              |  |   | 549    | 
|                       |  |              |      |                              |      |        |                            |   |                     |   |    |                              |  |   |       | 
|                       |  |              |      |                              |      |        |                            |   |                     |   |    |                              |  |   |       | 
|                        |  |              |       |                              |       |        |                            |    |                     |   |     |                              |  |   |        | 
|                        |  |              |       |                              |       |        |                            |    |                     |   |     |                              |  |   |        | 
|                        |  |              |       |                              |       |        |                            |    |                     |   |     |                              |  |   |        | 
|                       |  |              |      |                              | 3,429 |        |                            | 14 |                     |   |    |                              |  |   | 47,867 | 
|                       |  |              |      |                              |      |        |                            |   |                     |   |    |                              |  |   | 4,120  | 
|                       |  |              |      |                              |      |        |                            |   |                     |   |    |                              |  |   | 2,700  | 
|                        |  |              |       |                              |       |        |                            |    |                     |   |     |                              |  |   |        | 
|                       |  |              |      |                              |      |        |                            |   |                     |   |    |                              |  |   | 258    | 
|                        |  |              |       |                              |       |        |                            |    |                     |   |     |                              |  |   |        | 
|                       |  |              |      |                              |      |        |                            |   |                     |   |    |                              |  |   |       | 
|                        |  |              |       |                              |       |        |                            |    |                     |   |     |                              |  |   |        | 
|                       |  |              |      |                              |      |        |                            |   |                     |   |    |                              |  |   |       | 
|                        |  |              |       |                              |       |        |                            |    |                     |   |     |                              |  |   |        | 
|                       |  |              |      |                              |      |        |                            |   |                     |   |    |                              |  |   |       | 
|                        |  |              |       |                              |       |        |                            |    |                     |   |     |                              |  |   |        | 
|                        |  |              |       |                              |       |        |                            |    |                     |   |     |                              |  |   |        | 
|1,042                   |  |              | 7,600 |                              |      |        |                            |   |                     |   | (90 | )                            |  |   |       | 
|                        |  |              |       |                              |       |        |                            |    |                     |   |     |                              |  |   |        | 
|                       |  |              |      |                              |      |        |                            |   |                     |   | 72  |                              |  |   |       | 
|                        |  |              |       |                              |       |        |                            |    |                     |   |     |                              |  |   |        | 
|                       |  |              |      |                              |      |        |                            |   |                     |   |    |                              |  |   | 1,383  | 
|                       |  |              |      |                              |      |        |                            |   |                     |   |    |                              |  |   | 28     | 
|                       |  |              |      |                              | 54    |        |                            |   |                     |   |    |                              |  |   | 200    | 
|                       |  |              |      |                              | 2     |        |                            |   |                     |   |    |                              |  |   | 8      | 
|                        |  |              |       |                              |       |        |                            |    |                     |   |     |                              |  |   |        | 
|                       |  |              |      |                              |      |        |                            |   |                     |   | (8  | )                            |  |   |       | 
|                       |  |              |      |                              |      |        |                            |   |                     |   |    |                              |  |   |       | 
|                       |  |              |      |                              | 153   |        |                            | 1  |                     |   |    |                              |  |   | 518    | 
|                       |  |              |      |                              | 25    |        |                            |   |                     |   |    |                              |  |   | 70     | 
|                       |  |              |      |                              |      |        |                            |   |                     |   |    |                              |  |   |       | 
|                       |  |              |      |                              |      |        |                            |   |                     |   |    |                              |  |   |       | 
|                        |  |              |       |                              |       |        |                            |    |                     |   |     |                              |  |   |        | 
|                        |  |              |       |                              |       |        |                            |    |                     |   |     |                              |  |   |        | 
|                        |  |              |       |                              |       |        |                            |    |                     |   |     |                              |  |   |        | 
|1,042                   |  | $            | 7,600 |                              | 3,663 |        | $                          | 15 |                     | $ | (26 | )                            |  | $ | 57,152 | 
|                        |  |              |       |                              |       |        |                            |    |                     |   |     |                              |  |   |        | 



23



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##### Table of Contents

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)



|                                                                                  |  | Year ended   |        
|--------------------------------------------------------------------------------- |  | ------------ | -------
|                                                                                  |  | June 29,2002 |        
|OPERATING ACTIVITIES                                                              |  |              |        
|Net loss                                                                          |  | $            | (10,479
|Adjustments to reconcile net loss to net cash flows used in operating activities: |  |              |        
|Depreciation                                                                      |  |              | 3,730  
|Amortization                                                                      |  |              | 921    
|Equity instruments issued in lieu of payment for services received                |  |              | 1,217  
|Non-cash interest expense                                                         |  |              | 9,057  
|Other                                                                             |  |              | 69     
|Gain on sale of assets                                                            |  |              | (1,064 
|(Gain) loss on retirement of equipment                                            |  |              | (80    
|Non-cash portion of merger and restructuring charge                               |  |              |       
|Change in operating assets and liabilities:                                       |  |              |        
|Accounts receivable                                                               |  |              | 7,253  
|Other current assets                                                              |  |              | (27    
|Other assets                                                                      |  |              | (298   
|Accounts payable                                                                  |  |              | (3,872 
|Accrued liabilities                                                               |  |              | (16,273
|                                                                                  |  |              |        
|Cash used in operating activities                                                 |  |              | (9,846 
|INVESTING ACTIVITIES                                                              |  |              |        
|Proceeds from sale of assets                                                      |  |              | 1,198  
|Purchases of property and equipment                                               |  |              | (4,895 
|Acquisition of business, net of cash acquired                                     |  |              |       
|Notes receivable                                                                  |  |              |       
|Other                                                                             |  |              | (102   
|                                                                                  |  |              |        
|Cash used in investing activities                                                 |  |              | (3,799 
|FINANCING ACTIVITIES                                                              |  |              |        
|Borrowings under revolving credit agreement, net                                  |  |              | 1,725  
|Payments on acquisition notes                                                     |  |              | (2,000 
|Proceeds from issuance of preferred stock, net                                    |  |              | 15,236 
|Proceeds from notes payable and long-term debt                                    |  |              |       
|Proceeds from issuance of common stock, net                                       |  |              | 209    
|Debt financing costs                                                              |  |              | (1,753 
|Proceeds from stock subscription receivable                                       |  |              |       
|                                                                                  |  |              |        
|Cash provided by financing activities                                             |  |              | 13,417 
|                                                                                  |  |              |        
|Net (decrease) increase in cash and cash equivalents                              |  |              | (228   
|                                                                                  |  |              |        
|Cash and cash equivalents, beginning of year                                      |  |              | 2,932  
|                                                                                  |  |              |        
|Cash and cash equivalents, end of year                                            |  | $            | 2,704  
|                                                                                  |  |              |        
|Supplemental Disclosures of Cash Flow Information:                                |  |              |        
|Cash paid during period for interest                                              |  | $            | 6,519  
|Noncash investing and financing activities:                                       |  |              |        
|Conversion of bridge notes to Series D Preferred                                  |  | $            | 5,000  
|Conversion of subscription notes to Series D preferred                            |  |              | 5,000  
|Common stock warrants issued for services rendered                                |  |              | 1,383  
|Conversion of Series D Preferred to common stock                                  |  |              | 519    
|Conversion of Series F Preferred to common stock                                  |  |              | 70     
|Options issued for services rendered                                              |  |              | 28     
|Common stock issued as litigation settlement                                      |  |              |       
|Conversion of note payable and accrued interest into common stock                 |  |              |       



SEE ACCOMPANYING
NOTES.



24



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##### Table of Contents

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements



---



1.    DESCRIPTION OF BUSINESS



Velocity Express Corporation (formerly known as United Shipping &
Technology, Inc.) and its subsidiaries (collectively, the Company) are engaged in the business of providing same-day transportation and distribution/logistics services to individual consumers and businesses. The Company operates
primarily in the United States with limited operations in Canada. The Company currently operates in a single-business segment and thus additional disclosures under Statement of Financial Accounting Standards (SFAS) No. 131,
Disclosures About Segments of an Enterprise and Related Information, are not required.



ReincorporationOn December 18, 2001, United Shipping & Technology, Inc. reincorporated in Delaware through a merger with and into
its wholly-owned Delaware subsidiary, Velocity Express Corporation. The merger was effective as of January 4, 2002 at which time United Shipping & Technology, Inc. ceased to exist as a separate corporate entity, and all of its assets and
liabilities became the assets and liabilities of Velocity Express Corporation. The name of the Company was changed to Velocity Express Corporation.



2.    SIGNIFICANT ACCOUNTING POLICIES



Basis of Presentation



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



Fiscal Year



The Companys fiscal year ends the Saturday closest
to June 30th. Each quarter consists of a 13-week period ending on a Saturday. In fiscal years consisting of 53
weeks, the final quarter will consist of 14 weeks. Fiscal 2002, 2001 and 2000 each consisted of 52 weeks.



Use of Estimates



The
preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.



Revenue Recognition



Revenue from the same-day transportation and distribution/logistics services is recognized when services are rendered to
customers.



Concentrations of Credit Risk



The Company places its cash with federally insured financial institutions.
At times, such cash balances may be in excess of the federally insured limit. Concentrations of credit risk with respect to accounts receivable is limited due to the wide variety of customers to which the Companys services are sold and the
dispersion of those services across many industries and geographic areas. Further, the Company does not have any one customer that accounts for 10% or more of its revenues. The Company performs credit evaluation procedures on its customers and
generally does not require collateral on its accounts receivable. An allowance for doubtful accounts is reviewed periodically based on managements evaluation of collectibility, historical experiences, and other economic factors.



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Notes to Consolidated Financial Statements (continued)



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Cash Equivalents



All highly liquid investments with maturities of three months or less at the date of purchase are considered to be cash equivalents and are carried at
cost, which approximates market value.



Long-Lived Assets



The Company follows SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of. SFAS No. 121 requires that long-lived assets be reviewed for impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable. The
Company evaluates potential impairment by comparing the carrying amount of the assets with the estimated undiscounted cash flows associated with them. If an impairment exists, the Company measures the impairment utilizing discounted cash flows.



Goodwill



Goodwill represents the cost in excess of the fair value of the tangible and identifiable intangible assets of the business
acquired and, prior to July 1, 2001, was being amortized on the straight-line basis. Effective July 1, 2001, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill is no longer amortized over its
useful life, but rather, must be tested for impairment annually, or more often if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. If the carrying amount of
reporting unit goodwill, as determined pursuant to the statement, exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to that excess. The Company has one reporting unit for purposes of SFAS No.
142. The Company performed the annual impairment test, and no impairment was noted.



See Note 6, Goodwill, for effects of adoption of SFAS No. 142 in fiscal year 2002.



Deferred Financing Costs



Deferred financing costs relate to the cost incurred in the arrangement of the Companys debt agreements and are being amortized using the
straight-line method over the terms of the related debt.



Income Taxes



The Company accounts for income taxes following the
provisions of SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires that deferred income taxes be recognized for the future tax consequences associated with differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable earnings. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount more likely than not to be realized. The effect of changes in tax rates is recognized in the period in which the rate change occurs.



Foreign Currency Translation and Transactions



Foreign assets and liabilities are translated using the year-end exchange rate. Results of operations are translated using
the average exchange rates throughout the year. Translation gains or losses, net of applicable deferred taxes, are accumulated as a separate component of stockholders equity.



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Notes to Consolidated Financial Statements (continued)



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Comprehensive Income



The Company follows the provisions of SFAS No. 130, Reporting Comprehensive Income, which establishes standards for reporting and display
of comprehensive income and its components. Comprehensive income reflects the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For the Company, comprehensive
income represents net income adjusted for foreign currency translation adjustments. Comprehensive income is disclosed in the consolidated statement of shareholders equity.



Stock Plans and Awards



The Company follows Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for its employee stock
options. Pro forma net earnings and earnings per share are presented in Note 8 as if the Company had adopted SFAS No. 123, Accounting for Stock-Based Compensation.



Reverse Stock Split



On April 25, 2002, the Company effected a one-for-five reverse stock split, which resulted in the automatic conversion of five shares of issued and
outstanding Common Stock into one share of Common Stock. For Preferred Stock, options and warrants outstanding, the number of shares of Common Stock that may be purchased upon the exercise of such options, warrants and the number of shares of Common
Stock that may be issued upon the conversion of Preferred Stock, and the per share exercise or conversion prices thereof, have been adjusted appropriately to give effect to the reverse stock split.



The reverse stock split affected all stockholders equally resulting in each
shareholder owning a reduced number of shares of Common Stock but the same percentage of the outstanding shares, except for adjustments for fractional interests that resulted from the reverse stock split. Any fractional share interest resulting from
the reverse stock split was rounded upward to the nearest whole share. Following the reverse stock split, each share of Common Stock resulting from the reverse stock split entitled the holder thereof to one vote per share and was otherwise identical
to the outstanding Common Stock immediately prior to the reverse stock split.



The reverse stock split did not affect the par value of the Common Stock and had no impact on total shareholders equity. All share and per share information has been retroactively adjusted to reflect the effect
of the reverse stock split.



Reclassifications



Certain reclassifications have been made to prior years consolidated
financial statements to conform to the current year presentation.



New
Accounting Pronouncements



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



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Notes to Consolidated Financial Statements (continued)



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In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 146 requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under
previous guidance, certain exit costs were accrued upon managements commitment to an exit plan. The adoption of this statement in fiscal 2003 is not expected to have a material impact on the Companys consolidated financial position or
results of operations.



3.    ACQUISITION



Effective August 28, 1999, the Company acquired from CEX
Holdings, Inc. (CEX) all of the outstanding shares of common stock of Velocity Express, Inc. (Velocity), formerly known as Corporate Express Delivery Systems, Inc., a provider of same-day delivery solutions. The acquisition
purchase price, which was accounted for using the purchase method of accounting, was approximately $91.2 million, subject to adjustment as defined in the merger agreement. The purchase price consisted of $43 million in cash provided by an
institutional debt financier and an investment firm, and $19.5 million in a combination of short and long-term notes issued to CEX. The Company, as a result of the acquisition, received approximately $86.6 million of Velocitys assets and
assumed approximately $115.3 million of Velocitys liabilities, which resulted in the Company recognizing approximately $91.2 million in goodwill. The results of Velocitys operations have been included in the Companys consolidated
financial statements since August 28, 1999.



On August 2, 2001,
the Company completed certain purchase price adjustments to the CEX merger agreement related to the acquisition of Velocity. The purchase price adjustments provide for the discharge of certain pre-acquisition insurance liabilities, principally the
amount of the accruals necessary for workers compensation and auto insurance reserves of approximately $13.5 million as well as certain other adjustments including litigation and customer loss accruals, which had the impact of reducing
specific liabilities by approximately $12.0 million. Additionally, under the terms of the settlement regarding the purchase price, the Company was no longer liable for the convertible subordinated note to CEX in the amount of $3.6 million, the
long-term subordinated note to CEX of $6.5 million, the short-term subordinated note to CEX of $4.4 million and the accrued interest related to the notes of approximately $2.8 million. The purchase price adjustments totaling approximately $42.8
million were recorded as an offset to the goodwill in the Companys first quarter of fiscal 2002. In the second quarter of fiscal 2002, the Company finalized all purchase price adjustments associated with the amendment to the merger agreement
resulting in a reduction in the previously reported adjustment to goodwill of approximately $3.1 million. In conjunction with the agreement pertaining to the purchase price adjustments, the Company issued a five-year common stock warrant for 400,000
shares at an exercise price of $2.00 per share. The warrants were issued for services rendered by two outside consultants, one of whom subsequently was appointed Chairman of the Board of the Company. The fair value of the warrants amounted to
approximately $1.0 million and is included in other expense in the statement of operations. The fair value was determined on date of the grant using the Black-Scholes option pricing model assuming expected volatility of 121%, a risk-free interest
rate of 4%, and an expected life of five years.



The
acquisition has been accounted for using the purchase method of accounting. Accordingly, the purchase price was allocated to the net assets acquired based upon their estimated fair values.



4.    RESTRUCTURING



In connection with the acquisition of Velocity, management implemented a
plan to involuntarily terminate approximately 100 employees and to consolidate certain facilities. Approximately $3.9 million in anticipated costs relating to such items was included in the acquisition cost allocation. As of June 29, 2002,
approximately



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Notes to Consolidated Financial Statements (continued)



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$3.7 million in costs (primarily related to severance payments and lease terminations) has been charged against the reserve and no amounts related to such
plan have been included in the determination of net loss for the year.



In fiscal 2001, the Company took a restructuring charge of $7.1 million consisting of $2.2 million related to severance costs associated with a workforce reduction of 234 full-time employees, $3.3 million for rental costs associated with
the termination of building leases and location rationalization costs, and $1.6 million for the write-off of equipment. As of June 29, 2002, $7.1 million in costs have been charged against the reserve.



5.    PROPERTY AND EQUIPMENT



Property and equipment consist of the following:



|                                     |  | June 29, 2002          |         |   | June 30, 2001 |  
|------------------------------------ |  | ---------------------- | ------- | - | ------------- | -
|                                     |  | (Amounts in thousands) |        
|Land                                 |  | $                      | 194     |   |               | $
|Buildings and leasehold improvements |  |                        | 1,144   |   |               |  
|Furniture, equipment and vehicles    |  |                        | 22,248  |   |               |  
|                                     |  |                        |         |   |               |  
|                                     |  |                        | 23,586  |   |               |  
|Less accumulated depreciation        |  |                        | (12,616 | ) |               |  
|                                     |  |                        |         |   |               |  
|Total                                |  | $                      | 10,970  |   |               | $
|                                     |  |                        |         |   |               |  



6.    GOODWILL



Goodwill represents the excess of the purchase price over
the estimated fair value of the net tangible assets acquired in business combinations. Management periodically reviews goodwill for impairment and assesses whether significant events or changes in business circumstances indicate that the carrying
value of goodwill may not be recoverable. An impairment loss would be recorded in the period such determination is made. Accumulated amortization at June 29, 2002 and June 30, 2001 was $9.4 million. Effective with fiscal 2002, the Company has
adopted SFAS No. 142, Goodwill and Other Intangible Assets and therefore no longer amortizes goodwill.



A reconciliation of previously reported net loss and net loss per share to the amounts adjusted for the goodwill amortization is as follows:



|                                                        |  | June 29, 2002                                   |         |   | June 30,2001 |   |         | July 1,2000 | 
|------------------------------------------------------- |  | ----------------------------------------------- | ------- | - | ------------ | - | ------- | ----------- | 
|                                                        |  | (Amounts in thousands, except pershare amounts) |        
|Net loss applicable to common shareholders, as reported |  | $                                               | (20,357 | ) |              | $ | (35,022 | )           | 
|Add back goodwill amortization                          |  |                                                 |        |   |              |   | 6,099   |             | 
|                                                        |  |                                                 |         |   |              |   |         |             | 
|Adjusted net loss applicable to common shareholders     |  | $                                               | (20,357 | ) |              | $ | (28,923 | )           | 
|                                                        |  |                                                 |         |   |              |   |         |             | 
|Basic and diluted net loss per share:                   |  |                                                 |         |   |              |   |         |             | 
|Net loss applicable to common shareholders, as reported |  | $                                               | (5.82   | ) |              | $ | (10.51  | )           | 
|Effect of goodwill amortization                         |  |                                                 |        |   |              |   | 1.83    |             | 
|                                                        |  |                                                 |         |   |              |   |         |             | 
|Adjusted net loss applicable to common shareholders     |  | $                                               | (5.82   | ) |              | $ | (8.68   | )           | 
|                                                        |  |                                                 |         |   |              |   |         |             | 



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Notes to Consolidated Financial Statements (continued)



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7.    LONG-TERM DEBT



Long-term debt consists of the following:



|                                                                                         |  | June 29,2002          |        |   | June 30,2001 |  
|---------------------------------------------------------------------------------------- |  | --------------------- | ------ | - | ------------ | -
|                                                                                         |  | (Amounts inthousands) |       
|Revolving note                                                                           |  | $                     | 34,488 |   |              | $
|Senior subordinated note                                                                 |  |                       | 4,260  |   |              |  
|Long-term subordinated note to CEX                                                       |  |                       |       |   |              |  
|Short-term subordinated note to CEX                                                      |  |                       |       |   |              |  
|Convertible subordinated note to CEX                                                     |  |                       |       |   |              |  
|18% Bridge notes                                                                         |  |                       |       |   |              |  
|Subscription notes                                                                       |  |                       |       |   |              |  
|Other                                                                                    |  |                       | 38     |   |              |  
|                                                                                         |  |                       |        |   |              |  
|                                                                                         |  |                       | 38,786 |   |              |  
|Less current maturities                                                                  |  |                       | (30    | ) |              |  
|                                                                                         |  |                       |        |   |              |  
|Total                                                                                    |  | $                     | 38,756 |   |              | $
|                                                                                         |  |                       |        |   |              |  
|                                                                                        
|The future maturities of long-term debt consist of the following (amounts in thousands):
|Fiscal year:                                                                             |  |                       |        |   |              |  
|2003                                                                                     |  |                       |        |   |              | $
|2004                                                                                     |  |                       |        |   |              |  
|2005                                                                                     |  |                       |        |   |              |  
|                                                                                         |  |                       |        |   |              |  
|                                                                                         |  |                       |        |   |              | $
|                                                                                         |  |                       |        |   |              |  



On January 25, 2002,
the Company entered into a new revolving credit facility with Fleet Capital Corporation, which replaced the credit facility with GE Capital. Borrowings under the revolving note are limited to the lesser of $40 million or an amount based on a defined
portion of receivables. Interest for the first year is payable monthly at a rate of prime plus 1.25% (6.0% at June 29, 2002). The Company may elect the rate of LIBOR plus 3% at its discretion in which case interest is payable at the end of a LIBOR
advance period. Further, the Company has the ability to lower these margins by 0.50% over the remainder of the agreement provided it meets certain conditions as defined in the agreement. In addition, the Company is required to pay a commitment fee
of 0.375% on unused amounts of the total commitment, as defined in the agreement. The term of the new facility is two years, ending January 2004.



In exchange for a long-term guarantee to provide additional collateral support under the revolving note during the second quarter of fiscal 2002, the
Company agreed to compensate its largest investor by reducing the conversion prices of the Series B and Series C Preferred. In conjunction with the conversion price amendment, the Company recognized a $4.0 million charge, representing the fair value
of the benefit received by the investor as a result of the reduction of the conversion prices, which was recorded as non-cash interest expense.



The senior subordinated note has interest payable quarterly at 12% per annum and is due September 30, 2004. The note is subordinate to the revolving note.
The initial carrying value of the senior subordinated note was reduced by $1.7 million for the fair value of the common stock warrant issued to the senior subordinated lender. The unamortized discount was $0.7 million at June 29, 2002, and is being
amortized over the remaining term of



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the note. The warrant has an exercise price of $8.46 per share and entitles the holder to acquire, in whole or in part, 534,939 shares of the Companys
common stock, as adjusted to reflect certain anti-dilution rights as defined in the warrant purchase agreement.



In August 2001, the Company completed certain purchase price adjustments to the CEX merger agreement whereby the convertible subordinated note, the
long-term subordinated note, and the short-term subordinated note along with all accrued interest thereon, totaling approximately $14.5 million of notes and $2.8 million of accrued interest, were terminated. For additional information regarding the
settlement with CEX, see Note 3.



The Company entered into a
bridge loan agreement dated January 4, 2001, and a supplemental bridge loan agreement dated January 31, 2001 (collectively, the Bridge Loan Agreement), pursuant to which the Company received $3.5 million and $1.5 million, respectively.
The indebtedness was represented by promissory notes, payable on July 4, 2001, bearing interest at a rate of 18% per annum (the Bridge Notes), which were convertible at the option of the lender into 909,090 shares of the Companys
Series D Preferred at an exercise price of $5.50 per share pursuant to the Bridge Loan Agreement, upon shareholder approval of the conversion. In September 2001, shareholders approved the conversion, and the Bridge Notes and accrued interest thereon
were converted to Series D Preferred.



The Company entered into
note purchase agreements in connection with the issuance of promissory notes convertible into shares of Series D Preferred (the Subscription Notes). During March and April 2001, the Company sold Subscription Notes convertible into
624,906 shares of Series D Preferred to accredited investors for an aggregate $5.0 million. Each Subscription Note was converted into shares of Series D Preferred at an effective purchase price of $8.00 per share of Series D Preferred pursuant to
the Subscription Notes, upon shareholder approval, which was obtained in September 2001.



The Companys accounts receivable have been pledged to secure borrowings under the revolving note. The Company is subject to certain restrictive covenants, the more significant of which include limitations on
dividends, acquisitions, new indebtedness in excess of $0.5 million and changes in capital structure. The Company is also required to maintain financial covenants related to capital expenditures and maintaining of minimum availability levels.



8.    SHAREHOLDERS EQUITY



At June 29, 2002, the following shares of the Companys $0.004 par
value stock were authorized, issued and outstanding:



|                                     |  | AuthorizedShares |  | Issued andOutstanding atJune 29, 2002
|------------------------------------ |  | ---------------- |  | -------------------------------------
|Series G Convertible Preferred Stock |  | 9,000,000        |  | 5,865,331                            
|Series F Convertible Preferred Stock |  | 1,200,000        |  | 1,066,390                            
|Series D Convertible Preferred Stock |  | 3,000,000        |  | 1,829,944                            
|Series C Convertible Preferred Stock |  | 5,000,000        |  | 2,000,000                            
|Series B Convertible Preferred Stock |  | 10,000,000       |  | 2,806,797                            
|Preferred stockundesignated         |  | 21,800,000       |  |                                     
|Common Stock                         |  | 150,000,000      |  | 3,662,603                            



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Notes to Consolidated Financial Statements (continued)



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Redemption Rights Waivers



In December 2001, the Company reached agreements with the holders of each series of its then outstanding Preferred stock
pursuant to which such holders waived their rights to the cash redemption features of their respective series of Preferred stock. These waivers allowed the Company to reclassify the Preferred stock into shareholders equity. The Preferred
shareholders did not receive any consideration in exchange for providing these waivers.



Series G Convertible Preferred Stock



In May
2002, the Company issued 5,865,331 shares of Series G Preferred for net proceeds of $4.1 million. The initial conversion price of the Series G Preferred was $3.75, and, at the time of issuance, each share of Series G Preferred was convertible, upon
shareholder approval, into 0.2 shares of the Companys common stock. Both the conversion price and the number of common shares into which the Series G is convertible are subject to adjustment in order to prevent dilution. Series G Preferred
shareholders must wait at least 180 days from the date of the issuance of the shares before requesting registration rights.



Series F Convertible Preferred Stock



During fiscal 2002, the Company issued 1,072,752 shares of Series F Preferred for net proceeds of approximately $11.3 million. The initial conversion
price of the Series F Preferred was $2.75, and, at the time of issuance, each share of Series F Preferred was convertible into four shares of the Companys common stock. Both the conversion price and the number of common shares into which the
Series F is convertible are subject to adjustment in order to prevent dilution. The Company also issued warrants to purchase 360,128 shares of common stock with an exercise price of $3.60 per share in connection with these sales. The warrants expire
between July and November of 2006. The fair value of the warrants as determined by an outside independent appraiser was determined to be approximately $0.3 million and was charged to accumulated deficit. At June 29, 2002, 1,066,390 shares of Series
F Preferred are outstanding.



Series D Convertible Preferred Stock



During fiscal 2002 at a special shareholders
meeting, the Companys shareholders approved the conversion of the Bridge Notes and the Subscription Notes (Note 7) that the Company entered into in fiscal 2001 into shares of Series D Preferred, resulting in the issuance of 1,642,444 shares of
Series D Preferred. As a result of the conversion, the Company recorded a $4.7 million non-cash interest charge. The initial conversion price of the Series D Preferred was $4.00, and, at the time of issuance, each share of Series D Preferred was
convertible into two shares of the Companys common stock. Both the conversion price and the number of common shares into which the Series D is convertible are subject to adjustment in order to prevent dilution.



The Companys Series D Preferred that resulted from the conversion of
the subscription notes was deemed to have contained beneficial conversion features that were recognized as a deemed dividend to preferred shareholders. The value of the proceeds allocated to the beneficial conversion feature was $2.7 million and was
recognized as a return to the preferred shareholders at the date of shareholder approval since the Series D Preferred was immediately convertible.



In connection with the Bridge Loan Agreement, the Company issued warrants to purchase an aggregate 216,533 shares of Series D Preferred at a purchase
price of $0.01 per share (the Bridge Warrants). The warrants expire January 3, 2006. The fair value of the Bridge Warrants as determined by an outside independent appraiser was determined to be approximately $0.9 million and was
allocated from the value received from the Series D Bridge Notes.



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In fiscal 2001, the Company entered into securities purchase agreements in connection with the sale
of Series D Preferred. The Company sold 252,429 shares of Series D Preferred at $8.00 per share for approximately $2.0 million.



Series C Convertible Preferred Stock



In September 2000, the Company issued 2,000,000 shares of its Series C Convertible Preferred Stock (the Series C Preferred) at $6.00 per share
for total proceeds of $12.0 million and the cancellation of two warrants issued in connection with the Series B Preferred. The initial conversion price of the Series C Preferred was $30.00, and, at the time of issuance, each share of Series C
Preferred was convertible into 0.20 shares of the Companys common stock. Both the conversion price and the number of common shares into which the Series C is convertible are subject to adjustment in order to prevent dilution.



In connection with the issuance of the Series C Preferred the Company issued
warrants to purchase 825,484 shares of Series C Preferred at an exercise price of $0.01 per share (the Series C Warrants). The warrants expire September 1, 2005. The fair value of the Series C Warrants as determined by an outside
independent appraiser was determined to be approximately $3.5 million and was allocated from the value received from the Series C Preferred Stock. The $2.7 million remaining fair value received for the Series C Preferred in excess of the Series C
Preferred redemption value and the Series C Warrants was recorded as additional paid-in capital.



Series B Convertible Preferred Stock



In May 2000, the Company entered into an agreement to sell 2,806,797 shares of the Companys Series B Convertible Preferred Stock (the Series B Preferred) at a price of $9.00 per share for a total of
approximately $25.3 million. Three separate warrants were issued to the Series B Preferred shareholders subject to approval at a special meeting of shareholders in August 2000. The fair value of the warrants issued with the Series B Preferred was
allocated from the carrying amount of the Series B Preferred to the respective warrants at the August 2000 measurement date. The initial conversion price of the Series B Preferred was $45.00, and, at the time of issuance, each share of Series B
Preferred was convertible into 0.20 shares of the Companys common stock. Both the conversion price and the number of common shares into which the Series B is convertible are subject to adjustment in order to prevent dilution.



The Company agreed to issue with the preferred shares three warrants upon the
approval of the Companys shareholders. The terms of the three warrants were as follows:



| |  |  | A warrant to purchase the number of shares of Series B Preferred equal to an aggregate of $30 million divided by the 45-day average closing sales price of the Companys common
stock immediately prior to the date of exercise. The fair value of this warrant as determined by an outside independent appraiser was determined to be approximately $4.4 million at the date of shareholder approval. In exchange for the Series C
Warrants, the Company subsequently canceled this warrant.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A warrant to purchase up to an aggregate of 452,901 shares of Series B Preferred at an exercise price of $9.00 per share, subject to adjustment in order to prevent dilution. The
fair value of this preferred warrant as determined by an outside independent appraiser was determined to be approximately $0.6 million at the date of shareholder approval. In exchange for the Series C Warrants, the Company subsequently canceled this
warrant.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A warrant to purchase an aggregate of 85,000 shares of the Companys common stock. The warrant becomes exercisable on a pro rata basis in the event and to the
extent that any of the 600,000 options granted under the Companys 2000 Stock Option Plan are exercised. The exercise price is equal to the
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | lowest exercise price of the initially approved 2000 Plan options, subject to adjustment to prevent dilution. The fair value of this warrant as determined by
an outside independent appraiser was determined to be approximately $0.4 million at the date of shareholder approval. The warrant expires on May 31, 2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In September 2000, two of the warrants issued to the Series B Preferred shareholders were exchanged as partial consideration
for the Series C Preferred. The remaining outstanding warrant issued with the Series B Preferred provides for the purchase of an aggregate of 85,000 shares of the Companys common stock. The warrant becomes exercisable on a pro rata basis in
the event and to the extent that any of the 3,000,000 options granted under the Companys 2000 Stock Option Plan (2000 Plan) are exercised. The exercise price is equal to the lowest exercise price of the initially approved 2000 Plan
options, subject to adjustment to prevent dilution. The warrant expires on May 31, 2004.



The Companys Series B Preferred was deemed to have contained beneficial conversion features that were recognized as a deemed dividend to preferred shareholders. The value of the proceeds allocated to the
beneficial conversion feature was approximately $3.5 million and was recognized in fiscal 2000 as a return to the preferred shareholders at the date of issuance since the Series B Preferred is immediately convertible.



Preferred Warrants



In connection with the redemption rights waivers that the Company obtained from the preferred shareholders in December 2001,
the Series C and Series D warrants were adjusted to their market values at December 14, 2001. The adjustments amounted to $3.6 million and $2.0 million, respectively, for the Series C and Series D warrants, representing the change in fair value of
the warrants as determined by an outside independent appraiser from September 29, 2001 to December 14, 2001, and were recorded as charges to accumulated deficit. The charges resulted in carrying amounts of $4.1 million and $3.5 million,
respectively, at June 29, 2002.



In fiscal 2001, in accordance
with EITF 00-19, prior to their reclassification to permanent equity, the Series B and Series C warrants were adjusted to their market values as of the year-end reporting date. The adjustments, $(2.3) million and $3.2 million, respectively,
represent the changes in the fair values of the warrants as determined by an outside independent appraiser from the measurement dates to the reporting date. The net change was recorded as an increase in the carrying values of the warrants and a
reduction to accumulated deficit.



All the Companys
convertible preferred stock and the related warrants are subject to adjustments to prevent dilution.



Common stock



During
fiscal 2002, the Company issued 25,448 shares of common stock as a result of shareholder conversions of Series F Preferred and 152,787 shares of common stock as a result of shareholder conversions of Series D Preferred.



In May 2001 pursuant to a settlement agreement dated June 20, 2000 between
the Company and a former employee, the Company issued 100,000 shares of its common stock in connection with the settlement of certain litigation. Previously, in August 2000, the Company issued 20,000 shares of its common stock in connection with
this settlement. Shares issued pursuant to the settlement agreement were issued at their fair value at the time of issuance.



In January 2000, an accredited investor purchased 133,334 shares of the Companys common stock at $37.50 per share for a total purchase price of $5.0
million.



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Notes to Consolidated Financial Statements (continued)



---



In December 1999, the Company issued to a director 4,417 shares of common stock in payment for
consulting fees performed on behalf of the Company. Also in January 2000, the Company sold to five accredited investors an aggregate of 5,000 shares of common stock at a purchase price of $25.125 per share, together with warrants to purchase an
aggregate of 500 shares of common stock at an exercise price of $62.50 per share for a period of five years.



In December 1999, the Company sold to an accredited investor 10,000 shares of common stock at a purchase price of $31.875 per share, together with a
warrant to purchase 1,000 shares of common stock at an exercise price of $31.875 per share for a period of five years. In December 1999, the Company also sold to seven institutional investors an aggregate of 358,209 shares of common stock at a
purchase price of $25.125 per share, together with warrants to purchase an aggregate of 35,821 shares of common stock at an exercise price of $62.50 per share for a period of five years.



In September 1999, the Company sold to five accredited investors 24,800 shares of common stock at a purchase price of $22.50
per share, together with warrants to purchase an aggregate of 8,267 shares of common stock at an exercise price of $22.50 per share for a period of one year.



Between July 26, 1999 and August 12, 1999 the Company sold to four accredited investors an aggregate of 47,400 shares of common stock at prices ranging
from $14.35 to $17.50 per share, for an aggregate of $750,000. In connection with the sales, the Company issued to two of the purchasers one-year warrants to purchase an aggregate of 3,334 shares of common stock at an exercise price of $11.25 per
share.



In July 1999, the Company sold to certain of its
employees an aggregate of 1,523 shares of its common stock at a purchase price of $15.00 per share.



Stock Options and Warrants



The Company currently sponsors the 1995 Stock Option Plan, the 2000 Stock Option Plan and the 1996 Director Stock Option Plan. These plans provide for the issuance of up to 2,310,000 shares. Options may be granted to employees, directors
and consultants. With the exception of the 2000 Stock Option Plan, option prices are not less than the fair market value of the Companys common stock on the date of grant. In the case of the 2000 Stock Option Plan, non-statutory options may be
granted at not less than 85% of the fair market value of the Companys common stock on the date of grant. The majority of the options vest annually in equal amounts over a three-year period. The 2000 Stock Option Plan also allows for the
issuance of performance shares or restricted stock. No performance shares or restricted stock are outstanding at June 29, 2002, June 30, 2001 or July 1, 2000.



The Company has 983,559 shares available for grants under the option plans at June 29, 2002.



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VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements (continued)



---



A summary of the status of the Companys stock option plans as of June 29, 2002 and activity
during the three fiscal years then ended is presented below:



|                         |  | Options OutstandingUnder the Plan |   |  | Weighted- AverageExercisePrice
|------------------------ |  | --------------------------------- | - |  | ------------------------------
|                         |  | ISO                               |   |  | Non-ISO                       
|Balance at June 30, 1999 |  | 46,950                            |   |  | 154,403                       
|Granted                  |  | 394,552                           |   |  | 350,182                       
|Exercised                |  | (1,200                            | ) |  | (72,000                       
|                         |  |                                   |   |  |                               
|Balance at July 1, 2000  |  | 440,302                           |   |  | 432,585                       
|Granted                  |  | 127,505                           |   |  | 39,000                        
|Exercised                |  | (7,193                            | ) |  |                              
|Forfeited                |  | (199,627                          | ) |  |                              
|                         |  |                                   |   |  |                               
|Balance at June 30, 2001 |  | 360,987                           |   |  | 471,585                       
|Granted                  |  | 497,849                           |   |  | 220,032                       
|Exercised                |  | (28,637                           | ) |  | (25,001                       
|Forfeited                |  | (217,605                          | ) |  | (111,000                      
|                         |  |                                   |   |  |                               
|Balance at June 29, 2002 |  | 612,594                           |   |  | 555,616                       
|                         |  |                                   |   |  |                               



|Options Outstanding     |  | Options Exercisable
|----------------------- |  | -------------------
|Range ofExercise Prices |  | Number             
|$  1.88  4.02          |  | 128,102            
|5.15  9.85             |  | 746,909            
|10.0017.50             |  | 70,732             
|22.5034.38             |  | 73,513             
|53.7574.30             |  | 148,954            
|                        |  |                    
|                        |  | 1,168,210          
|                        |  |                    



A summary of the
common stock warrants outstanding at June 29, 2002 is as follows:



|Common Stock Warrants Outstanding
|---------------------------------
|Range of Exercise Prices         
|$  2.00  3.00                   
|3.44  3.60                      
|4.25  9.35                      
|10.0019.38                      
|25.1364.63                      
|                                 
|                                 
|                                 



In fiscal 2002, the
Company issued four non-qualified stock options outside of the Companys 2000 Stock Option Plan to four employees for the purchase of 20,000 shares of common stock at a purchase price of $6.25 per share.



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VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements (continued)



---



In fiscal 2001, the Company issued three non-qualified stock options outside of the Companys
2000 Stock Option Plan to three employees for the purchase of 95,000 shares of common stock at purchase prices ranging from $17.66 to $19.78 per share.



In fiscal 2000, the Company issued two non-qualified stock options outside of the Companys 2000 Stock Option Plan to an employee for the purchase of
65,000 shares of common stock at purchase prices ranging from $24.75 to $54.38 per share.



In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the Company continues to elect to utilize APB Opinion No. 25 and related interpretations in accounting for its stock option plans. If
the Company had elected to recognize compensation cost based on the fair value of the options granted and shares sold pursuant to the purchase plan as prescribed by SFAS No. 123, net income and earnings per share would have been reduced to the pro
forma amounts indicated in the table below for fiscal years 2002, 2001 and 2000:



|                                            |  | 2002                                     |         |   | 2001 |   |         | 2000 | 
|------------------------------------------- |  | ---------------------------------------- | ------- | - | ---- | - | ------- | ---- | 
|                                            |  | (In thousands, except per share amounts) |        
|Net loss applicable to common shareholders: |  |                                          |         |   |      |   |         |      | 
|As reported                                 |  | $                                        | (20,357 | ) |      | $ | (35,022 | )    | 
|                                            |  |                                          |         |   |      |   |         |      | 
|Pro forma                                   |  | $                                        | (20,766 | ) |      | $ | (43,248 | )    | 
|                                            |  |                                          |         |   |      |   |         |      | 
|Basic and diluted loss per common share:    |  |                                          |         |   |      |   |         |      | 
|As reported                                 |  | $                                        | (5.82   | ) |      | $ | (10.51  | )    | 
|                                            |  |                                          |         |   |      |   |         |      | 
|Pro forma                                   |  | $                                        | (5.93   | ) |      | $ | (12.98  | )    | 
|                                            |  |                                          |         |   |      |   |         |      | 



The fair value of
each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions for the fiscal years shown:



|                          |  | 2002 |   |  | 2001 |   |  | 2000 |  
|------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|Expected dividend yield   |  | 0    | % |  | 0    | % |  | 0    | %
|Expected stock volatility |  | 115  | % |  | 121  | % |  | 134  | %
|Risk-free interest rate   |  | 2.5  | % |  | 4.0  | % |  | 6.2  | %
|Expected life of options  |  | 3    |   |  | 5    |   |  | 5    |  



The Black-Scholes
option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions. Because
the Companys employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion,
the existing models may not necessarily provide a reliable single measure of the fair value of its employee stock options. Under the forgoing assumptions, the weighted-average fair value of each option granted during fiscal year 2002, 2001 and 2000
was $3.95, $7.95 and $41.35, respectively.



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,



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VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements (continued)



---



were exercised or converted into common stock that then shared in the earnings of the Company. For all periods presented, diluted net loss per share is equal
to basic net loss per share because the effect of including such securities or obligations would have been antidilutive.



The following table presents a reconciliation of the numerators and denominators of basic and diluted earnings per share for fiscal 2002, 2001 and 2000:



|                                                                                                  |  | Year Ended                                   |        
|------------------------------------------------------------------------------------------------- |  | -------------------------------------------- | -------
|                                                                                                  |  | June 29,2002                                 |        
|                                                                                                  |  | (Amounts in thousands, except pershare data) |        
|Numerator                                                                                         |  |                                              |        
|Net loss                                                                                          |  | $                                            | (10,479
|Beneficial conversion feature                                                                     |  |                                              | (2,700 
|Adjustment of Common Warrants issued in connection with sale ofSeries F Preferred to market value |  |                                              | (258   
|Accretion of Series B Redeemable Preferred Stock to its redemption value                          |  |                                              | (348   
|Accretion of Series D Redeemable Preferred Stock to its redemption value                          |  |                                              | (182   
|Adjustment of Preferred Series B Warrants to market value                                         |  |                                              |       
|Adjustment of Preferred Series C Warrants to market value                                         |  |                                              | (3,770 
|Adjustment of Preferred Series D Warrants to market value                                         |  |                                              | (2,620 
|                                                                                                  |  |                                              |        
|Net loss applicable to common shareholders                                                        |  | $                                            | (20,357
|                                                                                                  |  |                                              |        
|Denominator for basic and diluted loss per share                                                  |  |                                              |        
|Weighted average shares                                                                           |  |                                              | 3,500  
|                                                                                                  |  |                                              |        
|Basic and Diluted Loss Per Share                                                                  |  | $                                            | (5.82  
|                                                                                                  |  |                                              |        



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



|                               |  | Year Ended            
|------------------------------ |  | ----------------------
|                               |  | June 29,2002          
|                               |  | (Amounts in thousands)
|Stock options                  |  | 224                   
|Common warrants                |  | 487                   
|Preferred warrants:            |  |                       
|Series C Convertible Preferred |  | 735                   
|Series D Convertible Preferred |  | 461                   
|Convertible preferred stock:   |  |                       
|Series B Convertible Preferred |  | 3,721                 
|Series C Convertible Preferred |  | 1,785                 
|Series D Convertible Preferred |  | 4,224                 
|Series F Convertible Preferred |  | 4,235                 
|Series G Convertible Preferred |  | 187                   
|                               |  |                       
|                               |  | 16,059                
|                               |  |                       



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VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements (continued)



---



9.    INCOME TAXES



The significant components of deferred income tax assets and liabilities, primarily long-term, were as follows:



|                                  |  | June 29,2002           |         |   | June 30,2001 |  
|--------------------------------- |  | ---------------------- | ------- | - | ------------ | -
|                                  |  | (Amounts in thousands) |        
|Deferred tax assets:              |  |                        |         |   |              |  
|Net operating loss carry forwards |  | $                      | 33,984  |   |              | $
|Reserves, allowances and accruals |  |                        | 7,285   |   |              |  
|                                  |  |                        |         |   |              |  
|                                  |  |                        | 41,269  |   |              |  
|Deferred tax liabilities:         |  |                        | (1,323  | ) |              |  
|                                  |  |                        |         |   |              |  
|                                  |  |                        | 39,946  |   |              |  
|Valuation allowance               |  |                        | (39,946 | ) |              |  
|                                  |  |                        |         |   |              |  
|                                  |  | $                      |        |   |              | $
|                                  |  |                        |         |   |              |  



At June 29, 2002, the
Company had net operating loss carry forwards for income tax purposes of approximately $89.4 million, which expire 2005 through 2022. Usage of a portion of the losses may be limited pursuant to Internal Revenue Code Section 382.



The change in the valuation allowance was an increase of $5.3 million, $17.8
million and $12.4 million in fiscal years 2002, 2001 and 2000, respectively, and resulted principally from net operating loss carry forwards.



10.    COMMITMENTS AND CONTINGENCIES



Lease Commitments



The Company leases equipment, vehicles, and buildings under non-cancelable leases. Future minimum lease commitments under non-cancelable leases as of June
29, 2002 were as follows (amounts in thousands):



|Fiscal year: |  |        
|------------ |  | -------
|2003         |  | $12,900
|2004         |  | 10,045 
|2005         |  | 4,363  
|2006         |  | 2,119  
|2007         |  | 901    
|Thereafter   |  | 536    
|             |  |        
|             |  | $30,864
|             |  |        



Rent expense was $16.5
million, $23.1 million and $29.4 million during the years ended June 29, 2002, June 30, 2001 and July 1, 2000, respectively.



Automobile and Workers Compensation Liabilities



The Company is partially self-insured for automobile, workers compensation and cargo claims. The Company has elected to retain a portion of expected
losses through the use of deductibles. Provisions for losses expected under these programs are recorded based upon the Companys estimates of the aggregate liability for



39



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VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements (continued)



---



claims incurred. These estimates include the Companys actual experience based on information received from the Companys insurance carriers and
historical assumptions of development of unpaid liabilities over time. The Company pre-funds this estimated liability on a monthly basis based upon actuarial loss projections. As of June 29, 2002 and June 30, 2001, the Company has deposits recorded
of $11.9 million and $13.0 million, respectively.



The Company
has established reserves for automobile and workers compensation liabilities, which it believes, are adequate. The Company reviews these matters, internally and with outside brokers, on a regular basis to evaluate the likelihood of losses,
settlements and litigation related expenses. The Company has managed to fund settlements and expenses through cash flow and believes that it will be able to do so going forward. There have not been any losses that have differed materially from the
accrued estimated amounts.



Litigation



The Company is subject to legal proceedings and claims that arise in the
ordinary course of their business. The Company determined the size of its legal reserve with respect to these matters in accordance with generally accepted accounting principles based on managements estimate of the most likely liability. In
the opinion of management, none of these legal proceedings or claims is expected to have a material effect upon the Companys financial position or results of operations. However, the impact on cash flows might be material in the periods such
claims are settled and paid.



11.    EMPLOYEE BENEFIT
PLANS



The Company has defined contribution retirement
plans (the Plans) in accordance with Section 401(k) of the Internal Revenue Code. All full-time employees of the Company and its subsidiaries are eligible to participate in the Plans. Company contributions to these plans are
discretionary. The Company made no matching contribution for fiscal 2002, and contributed $1.2 million and $1.6 million for the fiscal years 2001 and 2000, respectively.



12.    RELATED PARTY TRANSACTIONS



The Company has entered into service agreements with MCG Global, LLC and its related entities (MCG). Vincent A.
Wasik, currently a shareholder and Chairman of the Board of the Company, is an owner and principal of MCG, although he was neither a shareholder nor Chairman of the Board at the time the initial service agreement was entered into. Under the
agreements, MCG has provided services in connection with the Companys business that include the following matters: (1) management and consulting assistance with operations, debt structure, vendors and contractual obligations; (2) negotiation
and settlement of the Companys rights and obligations under the September 24, 1999 Merger Agreement under which the Company acquired Velocity; (3) assistance with all aspects of the Companys replacement of its Senior Revolving Credit
Facility held by GE Capital Corporation and mezzanine debt facility held by Bayview Capital Partners LP; and (4) services in connection with the Companys centralization of data platforms, cash and lock-box management, consolidation of back
office functions, technology initiatives and strategic planning. The Company granted a total of 245,000 warrants to purchase common stock. 200,000 of the warrants are five-year common stock warrants with an exercise price of $2.00 per share. The
fair value of the warrants was determined on the date of grant using the Black-Scholes option pricing model, assuming expected volatility of 121%, a risk-free interest rate of 4%, and expected life of five years. The remaining 45,000 warrants are
five-year warrants, having an exercise price of $8.10 per share, and were priced at fair market value on the date of grant based on the closing price of the Companys common stock as quoted on the Nasdaq system. Cash and warrant-based
compensation for these services amounted to $1.8 million in fiscal 2002.





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VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements (continued)



---



One of the Companys former board members is a partner in the senior subordinated note lender.
During fiscal 2000, in addition to the lender providing debt financing of $5.0 million for the Velocity acquisition, the former board member and other partners in the senior subordinated note lender collectively purchased 4,731 shares of the
Companys common stock and received 475 warrants at an exercise price of $62.50 per share. Proceeds from the sale of common stock were approximately $0.1 million. These transactions were valued at the fair value of the Companys warrants
and stock at the time of the transactions.



During fiscal 2000,
the Company sold its Midnite Express operations to an employee of the Company. The employee resigned from the Company at the time of the sale. The Company received proceeds from the sale of approximately $1.6 million, which consisted of
approximately $1.4 million in notes receivable and $0.2 million in cash, the fair value allocated as a result of purchase accounting for the Velocity acquisition. At June 30, 2001, the balance of the receivable was $0.2 million and was included with
Other Assets.



13.    CASH REQUIREMENTS



The Company has experienced negative cash flow from operations amounting
to approximately $3.3 million for the nine months ended March 29, 2003. At the same time, the Company has continued to execute on its operating plan to improve the operating c performance by expanding the variable cost model using independent
contractors and employee owner-operators rather than employee drivers, by the use of technology to improve utilization of resources to meet customer-driven demands and the continued leveraging of personnel to eliminate SG&A expenses. These
efforts have resulted in a net loss applicable to common shareholders of $3.4 million for the nine months ended March 29, 2003, as compared to a net loss of $21.3 million for the prior year comparable period.



In the past, the Company has been successful in obtaining additional funding
through the issuance of additional equity; however, its continued ability to meet future cash requirements is dependent in part on its success in renewing the revolving credit facility with Fleet Capital Corporation which expires in January 2004 or
negotiating a new replacement facility with other sources. In anticipation of the expiration date of the facility, the Company is currently engaged in activities to extend the facility beyond January 2004 as well as the pursuit of other sources of
additional financing from lenders or additional issuances of equity; however, there can be no assurance that such extension of the current facility or alternative sources of funding can be arranged.





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VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements (continued)



---



14.    QUARTERLY FINANCIAL INFORMATION (unaudited)



Unaudited summarized financial data by quarter for fiscal years 2002 and
2001 is as follows (in thousands, except per share data):



|                                                    |  | Three Months Ended
|--------------------------------------------------- |  | ------------------
|                                                    |  | September 29,2001 
|Revenue                                             |  | $                 
|Gross profit                                        |  |                   
|(Loss) income from operations                       |  |                   
|Net (loss) income applicable to common shareholders |  |                   
|Basic net (loss) income per share                   |  | $                 
|                                                    |  |                   
|Diluted net (loss) income per share                 |  | $                 
|                                                    |  |                   



|                                           |  | Three Months Ended |        
|------------------------------------------ |  | ------------------ | -------
|                                           |  | September 30,2000  |        
|Revenue                                    |  | $                  | 133,091
|Gross profit                               |  |                    | 28,291 
|Loss from operations                       |  |                    | (5,535 
|Net loss applicable to common shareholders |  |                    | (9,575 
|Basic and diluted net loss per share       |  | $                  | (2.90  
|                                           |  |                    |        

---

|(1). |  | The net loss applicable to common shareholders in the third and fourth quarters of fiscal 2001 includes $4.4 million and $2.7 million, respectively, for restructuring charges (see
Note 4).
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

SIGNATURES



In accordance with
Section 13 or 15(d) 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 city of Minneapolis, state of Minnesota on July 28, 2003.



VELOCITY EXPRESS CORPORATIONBy:

/S/    JEFFRY J.
PARELLJeffry J. Parell Chief Executive OfficerBy:

/S/    MARK E.
TIESMark E. Ties Chief Financial Officer (Principal Accounting and Financial Officer)




POWER OF ATTORNEY



KNOW ALL PERSONS
BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Wesley C. Fredenburg and Mark E. Ties, or either of them, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to
sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or substitute or substitutes may do or cause to be done by virtue hereof.



In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|Signature |  |  |  | Title |  |  |  | Date
|--------- |  |  |  | ----- |  |  |  | ----

|                   |  |                                     
|------------------ |  | ------------------------------------
|*Vincent A. Wasik  |  | Chairman                            
|                   |  |                                     
|*Jeffry J. Parell  |  | Chief Executive Officer and Director
|                   |  |                                     
|*James Brown       |  | Director                            
|                   |  |                                     
|*Douglas Hsieh     |  | Director                            
|                   |  |                                     
|*Alex Paluch       |  | Director                            
|                   |  |                                     
|*Jack Kemp         |  | Director                            
|                   |  |                                     
|*Richard A. Kassar |  | Director                            

---

|* |  | By: Wesley C. Fredenburg, Attorney-in-Fact
|- |  | ------------------------------------------



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##### Table of Contents

EXHIBIT INDEX



|ExhibitNumber |   |  | Description                                                                                                                                                                                                                                                                                                                                                                       
|------------- | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              |  
|2.1           |   |  | Merger Agreement by and among CEX Holdings, Inc., Corporate Express Delivery Systems, Inc., United Shipping & Technology, Inc. and United Shipping & Technology Acquisition
Corp., dated as of September 8, 1999 (incorporated by reference to the Companys Form 8-K, filed October 8, 1999).                                                                                    
|              |  
|2.2           |   |  | Amendment No. 1 to Merger Agreement by and among CEX Holdings, Inc., Corporate Express Delivery Systems, Inc., United Shipping & Technology, Inc. and United Shipping &
Technology Acquisition Corp., dated as of September 22, 1999 (incorporated by reference to the Companys 8-K, filed October 8, 1999).                                                                     
|              |  
|2.3           |   |  | Securities Purchase Agreement among United Shipping & Technology, Inc., TH Lee.Putnam Internet Partners, L.P. and TH Lee. Putnam Internet Parallel Partners, L.P., dated as of
May 15, 2000 (incorporated by reference to the Companys Form 8-K, filed June 2, 2000).                                                                                                            
|              |  
|2.4           |   |  | Securities Purchase Agreement among United Shipping & Technology, Inc., TH Lee.Putnam Internet Partners, L.P., TH Lee.Putnam Internet Parallel Partners, L.P., THLi
Coinvestment Partners LLC and Blue Star I, LLC, dated as of September 1, 2000 (incorporated by reference to the Companys Form 8-K, filed September 8, 2000).                                                 
|              |  
|2.5           |   |  | Amendment No. 2 to Merger Agreement, Settlement and General Release Agreement 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. dated August 2, 2001 (incorporated by reference to the Companys Form 10-Q, filed November 13, 2001).
|              |  
|2.6           |   |  | Agreement and Plan of Merger by and between United Shipping & Technology, Inc., a Utah corporation, and Velocity Express Corporation, a Delaware corporation, dated as of
December 6, 2001 (incorporated by reference to the Companys Form 8-K, filed January 9, 2002).                                                                                                          
|              |  
|2.7           | * |  | Certificate of Merger of United Shipping & Technology, Inc. (a Utah corporation) into Velocity Express Corporation (a Delaware corporation).                                                                                                                                                                                                                                      
|              |  
|3.1           |   |  | Articles of Incorporation of United Shipping & Technology, Inc., as amended (incorporated by reference to the Companys Form 8-K, filed June 2, 2000).                                                                                                                                                                                                                            
|              |  
|3.2           |   |  | Certificate of Designation of Preferences and Rights of Series C Convertible Preferred Stock and Articles of Amendment to the Restated Articles of Incorporation (incorporated by
reference to the Companys Form 8-K, filed September 8, 2000).                                                                                                                                  
|              |  
|3.3           |   |  | Certificate of Designation of Preferences and Rights of Series D Convertible Preferred Stock and Articles of Amendment to the Restated Articles of Incorporation (incorporated by
reference to the Companys Form 8-K, filed May 21, 2001).                                                                                                                                       
|              |  
|3.4           |   |  | The Companys Articles of Incorporation, as amended and restated (incorporated by reference to the Companys Form 10-KSB for the year ended June 30,
2001).                                                                                                                                                                                                                       
|              |  
|3.5           |   |  | The Companys Bylaws, as amended (incorporated by reference to the Companys Form 10-KSB for the year ended June 30, 2001).                                                                                                                                                                                                                                                       
|              |  
|3.6           |   |  | Certificate of Designation of Preferences and Rights of Series F Convertible Preferred Stock and Articles of Amendment to the Restated Articles of Incorporation (incorporated by
reference to the Companys Form 8-K, filed July 20, 2001).                                                                                                                                      
|              |  
|3.7           |   |  | The Companys Bylaws, as amended (incorporated by reference to the Companys Registration Statement on Form SB-2, File No. 333-01652C).                                                                                                                                                                                                                                           
|              |  
|3.8           |   |  | Certificate of Incorporation of Velocity Express Corporation dated as of December 5, 2001 (incorporated by reference to the Companys Form 8-K, filed January 9,
2002).                                                                                                                                                                                                           



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##### Table of Contents

|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                     
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              | 
|3.9           |  | Bylaws of Velocity Express Corporation (incorporated by reference to the Companys Form 8-K, filed January 9, 2002).                                                                                                                                                                                            
|              | 
|3.10          |  | Certificate of Amendment to Amended and Restated Certificate of Incorporation of Velocity Express Corporation (incorporated by reference to the Companys Form S-3/A, File No.
333-88568, filed June 3, 2002).                                                                                                  
|              | 
|3.11*         |  | Certificate of Designation of Preferences and Rights of Series G Convertible Preferred Stock                                                                                                                                                                                                                    
|              | 
|4.1           |  | Specimen form of the Companys Common Stock certificate (incorporated by reference to the Companys Statement on Form SB-2, File No. 333-01652C).                                                                                                                                                               
|              | 
|4.2           |  | Specimen form of Velocity Express Corporation Common Stock Certificate (incorporated by reference to the Companys Form 8-K filed April 5, 2002).                                                                                                                                                               
|              | 
|4.3*          |  | Specimen form of Velocity Express Corporation Common Stock Certificate                                                                                                                                                                                                                                          
|              | 
|10.1          |  | Form of warrant issued pursuant to bridge loan financing completed by the Company in December 1995 (incorporated by reference to the Companys Statement on Form SB-2, File
No. 333-01652C).                                                                                                                    
|              | 
|10.2          |  | 1996 Director Stock Option Plan, as amended (incorporated by reference to the Companys Form 10-QSB for the fiscal quarter ended January 1, 2000).                                                                                                                                                              
|              | 
|10.3          |  | 2000 Stock Option Plan (incorporated by reference to the Companys Definitive Schedule 14A filed on May 8, 2000).                                                                                                                                                                                               
|              | 
|10.4          |  | Exchange Agreement by and among United Shipping & Technology, Inc., UST Delivery Systems, Inc. and CEX Holdings, Inc., dated as of September 24, 1999 (incorporated by
reference to the Companys Form 8-K, filed October 8, 1999).                                                                             
|              | 
|10.5          |  | Note and Warrant Purchase Agreement by and among United Shipping & Technology, Inc., UST Delivery Systems, Inc. and Bayview Capital Partners LP, dated as of September 24, 1999
(incorporated by reference to the Companys Form 8-K, filed October 8, 1999).                                                   
|              | 
|10.6          |  | Senior Subordinated Note by and among United Shipping & Technology, Inc., UST Delivery Systems, Inc. and Bayview Capital Partners LP, dated September 24, 1999 (incorporated by
reference to the Companys Form 8-K, filed October 8, 1999).                                                                    
|              | 
|10.7          |  | Warrant to Purchase Common Stock of United Shipping & Technology, Inc. issued to Bayview Capital Partners LP, dated September 24, 1999 (incorporated by reference to the
Companys Form 8-K, filed October 8, 1999.                                                                                             
|              | 
|10.8          |  | Stock Purchase Warrant to Acquire Common Stock, issued May 31, 2000, granted by United Shipping & Technology, Inc. to TH Lee.Putnam Internet Partners, L.P. for up to 228,469
shares of Common Stock (incorporated by reference to the Companys Form 8-K, filed June 2, 2000).                                 
|              | 
|10.9          |  | Stock Purchase Warrant to Acquire Common Stock, issued May 31, 2000, granted by United Shipping & Technology, Inc. to TH Lee.Putnam Internet Parallel Partners, L.P. for up to
196,531 shares of Common Stock (incorporated by reference to the Companys Form 8-K, filed June 2, 2000).                        
|              | 
|10.10         |  | Stock Purchase Warrant to Acquire Series B Preferred Stock, issued May 31, 2000, granted by United Shipping & Technology, Inc. to TH Lee.Putnam Internet Partners, L.P. for up
to 243,468 shares of Series B Preferred Stock (incorporated by reference to the Companys Form 8-K, filedJune 2, 2000).          
|              | 
|10.11         |  | Stock Purchase Warrant to Acquire Series B Preferred Stock, issued May 31, 2000, granted by United Shipping & Technology, Inc. to TH Lee Putnam Internet Parallel Partners,
L.P. for up to 209,433 shares of Series B Preferred Stock (incorporated by reference to the Companys Form 8-K, filed June 2, 2000).



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##### Table of Contents

|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                          
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              | 
|10.12         |  | Stock Purchase Warrant to Acquire Series C Preferred Stock, issued September 1, 2000 by United Shipping & Technology, Inc. to TH Lee.Putnam Internet Partners, L.P. for 187,290
shares of Series C Preferred Stock at a price per share equal to $0.01 (incorporated by reference to the Companys Form 8-K, filed September 8, 2000).                               
|              | 
|10.13         |  | Stock Purchase Warrant to Acquire Series C Preferred Stock, issued September 1, 2000 by United Shipping & Technology, Inc. to TH Lee.Putnam Internet Partners, L.P. for 142,042
shares of Series C Preferred Stock at a price per share equal to $0.01 (incorporated by reference to the Companys Form 8-K, filed September 8, 2000).                               
|              | 
|10.14         |  | Stock Purchase Warrant to Acquire Series C Preferred Stock, issued September 1, 2000 by United Shipping & Technology, Inc. to THLi Coinvestment Partners, LLC for 10,598 shares
of Series C Preferred Stock at a price per share equal to $0.01 (incorporated by reference to the Companys Form 8-K, filed September 8, 2000).                                      
|              | 
|10.15         |  | Stock Purchase Warrant to Acquire Series C Preferred Stock, issued September 1, 2000 by United Shipping & Technology, Inc. to Blue Star I, LLC for 4,024 shares of Series C
Preferred Stock at a price per share equal to $0.01 (incorporated by reference to the Companys Form 8-K, filed September 8, 2000).                                                      
|              | 
|10.16         |  | Stock Purchase Warrant to Acquire Series C Preferred Stock, to be issued at the time of the Second Closing by United Shipping & Technology, Inc. to TH Lee.Putnam Internet
Partners, L.P. for 262,204 shares of Series C Preferred Stock at a price per share equal to $0.01 (incorporated by reference to the Companys Form 8-K, filed September 8, 2000).         
|              | 
|10.17         |  | Stock Purchase Warrant to Acquire Series C Preferred Stock, to be issued at the time of the Second Closing by United Shipping & Technology, Inc. to TH Lee.Putnam Internet
Parallel Partners, L.P. for 198,855 shares of Series C Preferred Stock at a price per share equal to $0.01 (incorporated by reference to the Companys Form 8-K, filed September 8, 2000).
|              | 
|10.18         |  | Stock Purchase Warrant to Acquire Series C Preferred Stock, to be issued at the time of the Second Closing by United Shipping & Technology, Inc. to THLi Coinvestment Partners
LLC for 14,837 shares of Series C Preferred Stock at a price per share equal to $0.01 (incorporated by reference to the Companys Form 8-K, filed September 8, 2000).                 
|              | 
|10.19         |  | Stock Purchase Warrant to Acquire Series C Preferred Stock, to be issued at the time of the Second Closing by United Shipping & Technology, Inc. to Blue Star I, LLC for 5,634
shares of Series C Preferred Stock at a price per share equal to $0.01 (incorporated by reference to the Companys Form 8-K, filed September 8, 2000).                                
|              | 
|10.20         |  | Form of Warrant issued to Bayview Capital Partners LP as of May 2000 (incorporated by reference to the Companys Statement on Form 10-KSB for the fiscal year ended July 1,
2000).                                                                                                                                                                                   
|              | 
|10.21         |  | Form of Warrant issued to Bayview Capital Partners LP as of July 2000 (incorporated by reference to the Companys Statement on Form 10-KSB for the fiscal year ended July 1,
2000).                                                                                                                                                                                  
|              | 
|10.22         |  | Form of non-qualified stock option issued to employees as of June 2000 (incorporated by reference to the Companys Statement on Form 10-KSB for the fiscal year ended July 1,
2000).                                                                                                                                                                                 
|              | 
|10.23         |  | Bridge Loan Agreement dated as of January 4, 2001, by and between the Company, TH Lee.Putnam Internet Partners, L.P., TH Lee.Putnam Internet Parallel Partners, L.P., THLi
Coinvestment Partners LLC and Blue Star I, LLC (incorporated by reference to the Companys Current Report on Form 8-K, filed January 9, 2001).                                            
|              | 
|10.24         |  | Convertible Bridge Note for $3,500,000 dated January 4, 2001, issued by the Company to TH Lee.Putnam Internet Partners, L.P., TH Lee.Putnam Internet Parallel Partners, L.P., THLi
Coinvestment Partners LLC and Blue Star I, LLC (incorporated by reference to the Companys Current Report on Form 8-K, filed January 9, 2001).                                    



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##### Table of Contents

|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              | 
|10.25         |  | Form of Stock Purchase Warrant to Acquire Preferred Stock dated January 4, 2001, issued by the Company to TH Lee.Putnam Internet Partners, L.P., TH Lee.Putnam Internet Parallel
Partners, L.P., THLi Coinvestment Partners LLC and Blue Star I, LLC (incorporated by reference to the Companys Current Report on Form 8-K, filed January 9, 2001).                                                                                                                                                                                                       
|              | 
|10.26         |  | Supplemental Bridge Loan Agreement dated as of January 31, 2001, by and between the Company, TH Lee.Putnam Internet Partners, L.P., TH Lee.Putnam Internet Parallel Partners, L.P.,
THLi Coinvestment Partners LLC and Blue Star I, LLC (incorporated by reference to the Companys Form 10-QSB for the fiscal quarter ended December 30, 2000).                                                                                                                                                                                                           
|              | 
|10.27         |  | Securities Purchase Agreement dated as of March 1, 2001 among the Company and RS Investment Management, Inc. (incorporated by reference to the Companys Form 8-K, filed May
21, 2001).                                                                                                                                                                                                                                                                                                                                                                    
|              | 
|10.28         |  | Form of Stock Purchase Agreement to acquire Subscription Notes presently convertible into an aggregate 624,906 shares of Series D Preferred entered into during March 2001 between
the Company and TenX Venture Partners, LLC, HomePoint Corporation, Salah Al-Qahtani and AL-MAL Islamic Company (incorporated by reference to the Companys Form 8-K, filed May 21, 2001).                                                                                                                                                                               
|              | 
|10.29         |  | Form of Subscription Notes presently convertible into an aggregate 624,906 shares of Series D Preferred issued to TenX Venture Partners, LLC, HomePoint Corporation, Salah
Al-Qahtani and AL-MAL Islamic Company pursuant to Stock Purchase Agreements entered into during March 2001 (incorporated by reference to the Companys Form 8-K, filed May 21, 2001).                                                                                                                                                                                           
|              | 
|10.30         |  | Form of Warrant to purchase shares of Series D Preferred issued to entities affiliated with TH Lee.Putnam Internet Parallel Partners, L.P. on January 4, 2001 (incorporated by
reference to the Companys Form 8-K, filed May 21, 2001).                                                                                                                                                                                                                                                                                                                   
|              | 
|10.31         |  | Form of Subscription Note Purchase Agreement to purchase Series F Convertible Preferred Stock entered into between the Company and certain investors in July of 2001. (incorporated
by reference to the Companys Form 10-KSB for the year ended June 30, 2001).                                                                                                                                                                                                                                                                                           
|              | 
|10.32         |  | Form of Subscription Note issued in connection with the Companys Series F Convertible Preferred Stock financing in July of 2001. (incorporated by reference to the
Companys Form 10-KSB for the year ended June 30, 2001).                                                                                                                                                                                                                                                                                                                               
|              | 
|10.33         |  | Form of Warrant to purchase shares of Common Stock used in connection with the Companys Series F Convertible Preferred Stock financing in July of 2001. (incorporated by
reference to the Companys Form 10-KSB for the year ended June 30, 2001).                                                                                                                                                                                                                                                                                                        
|              | 
|10.34         |  | Third Amended and Restated Registration Rights Agreement dated as of July 2001, among the Company, TH Lee.Putnam Internet Partners, L.P., TH Lee.Putnam Internet Parallel Partners,
L.P., THLi Coinvestment Partners LLC, Blue Star I, LLC, RS Investment Management, Inc., Marshall T. Masko, Home Point Corporation, TenX Venture Partners, LLC, Al-Mal Islamic Company, Sheikh Salah A.H. Al-Qahtani and each Series F Convertible
Preferred Stock purchaser. (incorporated by reference to the Companys Form 10-KSB for the year ended June 30, 2001).
|              | 
|10.35         |  | Employment Agreement between Velocity Express, Inc. and Jeffry J. Parell dated October 16, 2000. (incorporated by reference to the Companys Form 10-KSB/A for the year ended
June 30, 2001).                                                                                                                                                                                                                                                                                                                                                              
|              | 
|10.36         |  | Employment Agreement between United Shipping & Technology, Inc. and Mark E. Ties dated June 2001. (incorporated by reference to the Companys Form 10-KSB/A for the year
ended June 30, 2001).                                                                                                                                                                                                                                                                                                                                                             
|              | 
|10.37         |  | Employment Agreement between United Shipping & Technology, Inc. and Wesley C. Fredenburg dated December 4, 2000. (incorporated by reference to the Companys Form 10-KSB/A
for the year ended June 30, 2001).                                                                                                                                                                                                                                                                                                                                              



47



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##### Table of Contents

|ExhibitNumber |  | Description                                                                                                                                                                                                                              
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              | 
|10.38         |  | Contractor Services Agreement between United Shipping & Technology, Inc. and MCG Global, LLC dated May 15, 2001 (incorporated by reference to the Companys Form 10-Q
filed November 13, 2001).                                          
|              | 
|10.39         |  | Warrant to purchase up to 1,000,000 shares of Common Stock at a price of $0.40 per share issued by the Company to MCG Global, LLC dated May 15, 2001 (incorporated by reference to
the Companys Form 10-Q filed November 13, 2001).     
|              | 
|10.40         |  | Warrant to purchase up to 1,000,000 shares of Common Stock at a price of $0.40 per share issued by the Company to BLG Ventures, LLC dated August 23, 2001 (incorporated by
reference to the Companys Form 10-Q filed November 13, 2001).
|              | 
|10.41         |  | Loan and Security Agreement by and among Velocity Express, Inc. and related borrowers, and Fleet Capital Corporation dated as of January 25, 2002. (incorporated by reference to
the Companys Form 10-Q filed May 3, 2002).             
|              | 
|10.42         |  | Form of Incentive Stock Option Agreement between United Shipping & Technology, Inc., and management, dated October 29, 2001. (incorporated by reference to the Companys
Form 10-Q filed May 3, 2002).                                   
|              | 
|10.43         |  | Form of Stock Purchase Agreement to purchase Series G Convertible Preferred Stock entered into between the Company and certain investors on May 3, 2002.                                                                                 
|              | 
|21.1*         |  | Subsidiaries                                                                                                                                                                                                                             
|              | 
|23.1          |  | Consent of Ernst & Young LLP                                                                                                                                                                                                             
|              | 
|31.1          |  | Section 302 certification of CEO                                                                                                                                                                                                         
|              | 
|31.2          |  | Section 302 certification of CFO                                                                                                                                                                                                         
|              | 
|32.1          |  | CEO Certification pursuant to 18 U.S.C §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                       
|              | 
|32.2          |  | CFO Certification pursuant to 18 U.S.C §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                       

---

|* |  | Filed with initial filing of this Annual Report on Form 10-K for the year ended June 29, 2002.
|- |  | ----------------------------------------------------------------------------------------------



48