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U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON DC 20549



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FORM 10-K



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

SECURITIES EXCHANGE ACT OF 1934



For the fiscal year ended June 30, 2007



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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 jurisdiction of incorporation)                        |  | (Commission File Number) |  | (IRS Employer Identification No.)
|One Morningside Drive North, Bldg. B, Suite 300,Westport, Connecticut |  | 06880                   
|(Address of Principal Executive Offices)                              |  | (Zip Code)              



(203) 349-4160

(Registrants telephone number, including area code)



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Securities registered
pursuant to Section 12(b) of the Exchange Act:



|                                         |  |                                     
|---------------------------------------- |  | ------------------------------------
|Title of each class                      |  | Name of exchange on which registered
|Common Stock, par value $0.004 per share |  | NASDAQ Capital Market               



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



Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Act.



Yes ̈No    x



Indicate by a check mark if the registrant is
not required to file reports pursuant to Section 13 or Section 15(d) of the Act.



Yes ̈No    x



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



Yes    x      No ̈



Indicate by check mark 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



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act. (Check one):



|                         |  |                    |  |                           
|------------------------ |  | ------------------ |  | --------------------------
|Large accelerated filer ̈ |  | Accelerated filer ̈ |  | Non-accelerated filer    x



Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.).



Yes ̈No    x



The aggregate market value of voting common
equity of the registrant held by non-affiliates (for this purpose, persons and entities other than executive officers, directors, and 5% or more stockholders) of the registrant computed by reference to the price at which the registrants common
equity was last sold, as of the last business day of the registrants most recently completed second fiscal quarter (December 31, 2006), was $41,360,054.



As of October 8,, 2007, there were 41,276,675 shares of common stock of the registrant issued and outstanding.



DOCUMENTS INCORPORATED BY REFERENCE



The information for Items 11-14 of Part III is incorporated by reference from the
registrants Proxy Statement to be filed for the registrants November 2007 Annual Meeting of Stockholders



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TABLE OF CONTENTS



|                              |  |                                                                                                              |  |    
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------ |  | ---
|PART I.                       |  | 1                                                                                                           
|                              |  |                                                                                                             
|ITEM 1.                       |  | Description of Business                                                                                      |  | 1  
|ITEM 1A.                      |  | Risk Factors                                                                                                 |  | 7  
|ITEM 1B.                      |  | Unresolved Staff Comments                                                                                    |  | 16 
|ITEM 2.                       |  | Properties                                                                                                   |  | 17 
|ITEM 3.                       |  | Legal Proceedings                                                                                            |  | 18 
|ITEM 4.                       |  | Submission of Matters to a Vote of Security Holders                                                          |  | 19 
|                              | 
|PART II.                      |  | 20                                                                                                          
|                              |  |                                                                                                             
|ITEM 5.                       |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 20 
|ITEM 6.                       |  | Selected Financial Data                                                                                      |  | 22 
|ITEM 7.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operation                         |  | 24 
|ITEM 7A.                      |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 42 
|ITEM 8.                       |  | Financial Statements and Supplementary Data                                                                  |  | 43 
|ITEM 9.                       |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 96 
|ITEM 9A.                      |  | Controls and Procedures                                                                                      |  | 96 
|ITEM 9B.                      |  | Other Information                                                                                            |  | 96 
|                              | 
|PART III.                     |  | 97                                                                                                          
|                              |  |                                                                                                             
|ITEM 10.                      |  | Directors, Executive Officers and Corporate Governance                                                       |  | 97 
|ITEM 11.                      |  | Executive Compensation                                                                                       |  | 100
|ITEM 12.                      |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 100
|ITEM 13.                      |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 100
|ITEM 14.                      |  | Principal Accounting Fees and Services                                                                       |  | 100
|                              | 
|PART IV.                      |  | 101                                                                                                         
|                              |  |                                                                                                             
|ITEM 15.                      |  | Exhibits, Financial Statement Schedules                                                                      |  | 101
|                              | 
|SIGNATURES                    |  | 102                                                                                                         
|                              | 
|FINANCIAL STATEMENT SCHEDULES |  | 103                                                                                                         
|                              | 
|EXHIBIT INDEX                 |  | 104                                                                                                         



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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, we note that statements in this report that are forward-looking involve risks and uncertainties that may impact our business, financial condition, results of operations and
prospects. Forward-looking statements are statements that are not about historical facts or information. They are contained throughout this report, for example, in Risk Factors, Managements Discussion and Analysis of
Financial Condition and Results of Operations and Legal Proceedings. They include statements concerning our general expectations, plans and strategies, financing decisions, expectations for funding capital expenditures, anticipated
financial results, future operations, an assessment of our industry and competition, and an evaluation of pending litigation, among others. The words believe, plan, continue, hope,
estimate, project, intend, expect, targets 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. Many of these risks are beyond our ability to control or predict. All forward-looking statements are
qualified in their entirety by the cautionary statements contained throughout this report. Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof. Changes may
occur after that date, and we will not update that information whether as a result of new information, future events or otherwise.



|ITEM 1. | DESCRIPTION OF BUSINESS
|------- | -----------------------



Velocity Express Corporation and its subsidiaries, which we refer to as the Company, Velocity or we (unless we state
or it is otherwise implied), are engaged in the business of providing time definite ground package delivery services. Throughout this prospectus, we refer to these services as time definite logistics services. We operate primarily in the
United States with limited operations in Canada. We currently operate in a single-business segment.



We have one of the largest nationwide networks of time definite logistics solutions in the United States and are a leading provider of distribution,
scheduled and expedited logistics services. Our customers are comprised of multi-location, blue chip customers with operations in the healthcare, commercial & office products, financial, transportation & logistics, technology and
energy sectors.



Our service offerings are divided into the
following categories:



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



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



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



Customers utilizing distribution logistics
normally include pharmaceutical wholesalers, retailers, office products companies, 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.
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. Most of our expedited logistics services occur within a major metropolitan area or radius of 40 miles, and we usually offer one-hour, two- to four-hour and over four-hour
delivery services depending on the customers time requirements. These services are typically



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available 24 hours a day, seven days a week. Expedited logistics services also include critical parts management and delivery for companies. Expedited
logistics services customers include suppliers of critical repair and maintenance parts and professional service firms.



Although many of our competitors have substantial resources and extensive experience in the same-day transportation business, we believe that our national
presence, wide array of service offerings, use of sophisticated technology, driver recruitment standards, and branding strategy present a compelling competitive advantage in any market in which we currently operate.



History of the Company



Our business began as United Shipping & Technology, Inc., a Utah corporation. On August 28, 1999, United
Shipping & Technology Inc. acquired from CEX Holdings, Inc. all of the outstanding shares of common stock of Corporate Express Delivery Systems, Inc. (CEDS), a provider of same-day delivery solutions. Subsequently, CEDS changed
its name to UST Delivery Systems, Inc. and then to Velocity Express, Inc. The results of Velocity Express, Inc.s operations have been included in our consolidated financial statements since August 28, 1999. On January 4, 2002, United
Shipping & Technology, Inc. reincorporated in Delaware through a merger with and into its wholly owned Delaware subsidiary Velocity Express Corporation. Since that time, we have operated as Velocity Express Corporation.



CD&L Acquisition & Related Transactions



On July 3, 2006, we, our wholly owned subsidiary CD&L Acquisition
Corp (Merger Sub) and CD&L, Inc. (CD&L), entered into an agreement and plan of merger (the Merger Agreement) to acquire CD&L for approximately $61.2 million including closing costs. The Merger
Agreement provided that, at the closing, Merger Sub would be merged with and into CD&L (the Merger), with each outstanding share of common stock of CD&L being converted into the right to receive $3.00 per share in cash. As a
result of the Merger, which closed on August 17, 2006, CD&L became our wholly owned subsidiary.



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



| |  |  | issued 3,205 units (the Units), each of which was comprised of (a) $1,000 aggregate principal amount at maturity of 12% senior secured notes due
2010 and (b) a warrant to purchase 345 shares of our common stock at an initial exercise price of $1.45 per share, subject to adjustment from time to time;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | issued 2,465,418 shares of our common stock; and
| | - |  | ------------------------------------------------



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



In addition, on July 3, 2006, we sold:



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



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



On August 21,
2006, we sold an additional 500,000 shares of Series Q Preferred Stock. The aggregate net cash proceeds from the sale of the Units and the Series Q Preferred Stock were approximately $106.1 million. Approximately $51.6 million of these proceeds were
used to finance the CD&L acquisition, approximately $26.3 million were used to repay indebtedness owed by us to Bank of America, N.A. ($20.5 million) and BET Associates, LP ($5.8 million), approximately $1.6 million were used to repay CD&L
seller-financed debt from previous acquisitions, and approximately $9.4 million were used to repay CD&Ls line of credit facility. The



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remainder of the proceeds were used for general corporate purposes. See Managements Discussion and Analysis of Financial Condition and Results of
OperationsLiquidity and Capital Resources. In addition, we granted customary registration rights with respect to the shares of our common stock issuable upon conversion of the Series Q Preferred Stock and the warrants.



We believe the acquisition of CD&L has benefited the Company in several
ways. The combined company has increased its annual revenue, and has approximately 4,800 independent contractor drivers operating from 152 locations in leading markets across the United States and Canada. In addition, we expect the combination will
have the following strategic and financial benefits:



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



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



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



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



| |  |  | substantial costs savings through operational synergies and elimination of redundant expenses
| | - |  | ---------------------------------------------------------------------------------------------



For purposes of this discussion, except where specifically noted, we present
our business after giving effect to the CD&L acquisition.



Restructurings



Between 2005 and 2007, we
implemented several restructurings which we believe have repositioned us for greater success in the future.



In 2005, we conducted an analysis of our route profitability that indicated we were operating in a number of locations that did not have sufficient
customer density for us to profitably deliver our targeted service levels. As a result, at the end of the third quarter of fiscal 2005, we closed over 40 of our locations (primarily smaller facilities in low density areas), terminated several
unprofitable customer contracts and reduced employee headcount by approximately 200, incurring related severance costs. During the final quarter of fiscal 2005, we ceased use of most of the named facilities and recorded additional net lease contract
termination costs and fixed asset impairments, severance costs and a charge to recognize the cost of service contracts that had no future economic benefit to us.



During the third quarter of fiscal 2006, we terminated an additional 120 employees and revised our estimates of previously
recorded costs and losses associated with excess facilities. For fiscal 2006, our revenue declined largely due to lower volume experienced as a result of the restructuring implemented at the end of the third fiscal quarter of 2005, but that revenue
decline was partially offset by new customer contracts and business expansion with existing customers.



During 2007, in conjunction with the integration of CD&L, management identified operational synergies of the combines companies and executed its plan
for staff reductions of approximately 200 employees, including a retention incentive program for key individuals, and the closing of 39 redundant operating centers.



For further information regarding the effect of the restructurings on our financial condition and results of operations, see
Managements Discussion and Analysis of Financial Condition and Results of Operations.



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Industry Overview



We operate in the time definite logistics industry. The industry includes the following services: scheduled and non-scheduled, same-day transportation of
documents and packages in local markets; warehousing and facilities management; supply chain management; and cross-dock and package aggregation services.



We believe the market for time definite logistics solutions is large, growing, highly fragmented and has relatively low barriers to entry. The market is
fragmented as to geographic reach and positioning of service providers and the nature and sophistication of services offered. There are relatively low barriers to entry in this market insofar as the capital requirements to start a local courier
business are relatively small and the industry is not subject to extensive regulation. We believe there are currently as many as 6,000 same-day transportation companies in the United States. Most are privately held, operate primarily on the local
level and generally focus on operations, which we believe results in little attention given to marketing and sales. Accordingly, we believe there is little perceived service differentiation between competitors at a local level, and that customer
loyalty is generally short-term.



Currently, there are no dominant brands in the same-day time definite logistics 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 ®, Federal Express ® and DHL ®, all of which use sophisticated technology extensively.



We expect that further growth in the same-day time definite logistics market will be fueled by corporate Americas trend toward outsourcing and
third-party logistics. We believe that many businesses that outsource their distribution and logistics needs prefer to purchase such services from one source, capable of servicing multiple cities nationwide. Outsourcing on a national scale 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. We believe the growth of these time definite practices has increased the demand for more reliable and geographically diverse logistics services. We also believe 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. We expect that we are the only national same-day transportation and logistics service provider with the geographic reach and national footprint that will be able to meet these evolving needs.



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



Regulation and
Safety



Our business and operations are subject to various
federal, state, and local regulations and, in many instances, require permits and licenses from these authorities. We hold 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, hold statewide general commodities authority. We are 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 our delivery operations and other safety matters,
including insurance requirements, we are subject to regulation by



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the U.S. Department of Transportation and U.S. states. We are also subject to regulation by the Occupational Safety and Health Administration, state
occupational health and safety legislation and federal and state employment laws with respect to such matters as hours of work, driver logbooks and workers compensation. We believe that we are in material compliance with these regulations.
However, if we were ever determined to not be in material compliance with the applicable regulations, we could be subject to substantial fines or possible revocation of one or more of our operating permits. If this were to occur, it could have a
material adverse effect on our financial condition and results of operations.



From time to time, our independent contractor drivers are involved in accidents. We attempt to manage this risk by requiring our independent contractor drivers to maintain commercial motor vehicle liability
insurance of at least $300,000 with a minimal deductible and by carrying additional liability insurance in our name totaling an additional $5.0 million. In addition, we perform extensive screening of all prospective drivers to ensure that they have
acceptable driving records and pass a criminal background and drug tests, among other criteria. We believe our driver screening programs have established an important competitive advantage for us.



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



Sales and Marketing



We
have a comprehensive sales and marketing program that emphasizes our competitive position as the leading national provider of time definite logistics services. We have also realigned our national accounts and logistics team, and restructured our
field sales organization to effectively pursue growth opportunities. Sales efforts are conducted at both the local and national levels through our extensive network of local sales representatives. We currently employ 45 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.



Our 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 our 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 June 30, 2007, approximately 84 percent of our revenue came from national companies needing
multi-location logistics solutions.



Competition



We face intense competition, particularly for basic delivery services. The
industry is characterized by high fragmentation, low barriers to entry, competition based on price and competition to retain qualified drivers, among other things. Nationally, we compete with other large companies having same-day transportation
operations in multiple markets, many of which have substantial resources and experience in the same-day transportation business. Price competition could erode our margins and prevent us from increasing our prices to our customers commensurate with
cost increases.



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®, 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



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by imposing strict drop-off deadlines and rigid package dimension and weight limitations on customers. By comparison, we operate in the same-day
transportation business and handle customized delivery needs on either a scheduled, distribution or expedited basis. Accordingly, we do not believe that we are currently in direct competition with these major carriers, although we cannot assure you
that one of these entities might not enter our markets in the future.



Technology



We use technology to manage and
coordinate our dispatching, delivery, tracking, warehousing and logistics, and other back office functions in order to help us and our customers operate more efficiently and cost-effectively. To meet our customers needs for reliability,
efficiency and speed, we have implemented and plan to continue to invest in the following technologies:



| |  |  | smart package tracking, which provides a single source of aggregated delivery chain-of-custody information to national customers;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | route optimization software for delivery efficiency.
| | - |  | ----------------------------------------------------



We believe the integration of high-tech communications software within the currently low-tech same-day transportation business differentiates our services
from those of our competitors. We expect customers will be attracted to companies like ours that have the ability to offer greater efficiency, service and customer supply chain information through the use of technology.



Trademarks



We have registered Velocity Express®, Velocity®, Relentless Reliability® and currently have other applications pending for trademarks
in the United States and internationally including Velocity Real Time Delivery.



Employees



As of June 30, 2007, we had
approximately 2,075 employees, of whom approximately 622 were primarily employed in various management, sales, and other corporate positions and approximately 1,453 were employed as warehouse workers and operations personnel. We also employed 16
drivers in Canada and we had contracts with 4,758 independent contractor drivers in North America. The Company is not party to any collective bargaining agreement, and we believe that relations with our employees are good.



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ITEM 1A.    RISK FACTORS



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



Risks Related to Our Business



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



Our net losses applicable to common stockholders for the fiscal years ended June 30, 2007 and July 1, 2006, were $66.0 million and $23.6
million, respectively. The respective periods net losses were $39.5 million and $16.0 million. The increased amount of net losses applicable to common stockholders for such periods was caused by beneficial conversion charges of $21.2 million
and $5.0 million, and preferred stock dividends paid-in-kind of $5.2 million and $2.6 million for the respective periods. To achieve profitability, we will be required to pursue new revenue opportunities, effectively limit the impact of competitive
pressures on pricing and freight volumes, and fully implement our technology initiatives and other cost-saving measures. The integration process has been more expensive and taken longer to accomplish than originally expected. We cannot assure you
that we will ever achieve or sustain profitability or positive cash flow. If we cannot achieve or sustain profitability or positive cash flow, the market price of our common stock could decline significantly.



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



We have depended, and if we are unable
to execute against our business plans, are likely to continue to depend, on our ability to obtain additional financing to fund our future liquidity and capital needs. We may not be able to continue to obtain additional capital when needed, and
additional capital may not be available on satisfactory terms. Achieving our financial goals involves maximizing the effectiveness of the variable cost model, the implementation of customer-driven technology solutions and continued leverage of the
consolidated back office selling, general and administrative platform. To date, we have primarily relied upon debt and equity investments to fund these activities. We may be required to engage in additional financing activities to raise capital
required for our operations. If we issue additional equity securities or convertible debt to raise capital, the issuance may be dilutive to the holders of our common stock. In addition, any additional issuance may require us to grant rights or
preferences that adversely affect our business, including financial or operating covenants.



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



Our contracts with our commercial customers typically have a term of one to three years, but are often terminable earlier at will upon 30 or 60 days
notice. We often have significant start-up costs when we begin servicing a new customer in a new location. Additionally, upon completion of the integration of customers acquired from CD&L into our operating system, we identified contracts
originally entered into by CD&L that contain terms and conditions that are unfavorable when compared to contractual provisions of comparable customers in the same vertical markets. We are in the process and plan to continue renegotiating
these unfavorable contracts with these customers. Termination or non-renewal of these contracts, including contracts originally entered into by CD&L, could have a material adverse effect on our business, financial condition, operating results
and cash flows.



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



For the fiscal year end June 30, 2007 we had one customer that accounted for more than 12% of our revenue and our top ten customers in aggregate
account for approximately 46% of our revenue. The loss of the one large customer or some of the top ten customers or a material reduction in their purchases of our services could materially and adversely affect our business, financial condition,
results of operations and cash flows. In the second fiscal quarter of 2007, the Company lost two customers, a major office supply customer and a significant bank customer, which negatively affected the results of operations for the current year.



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



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



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



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



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



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



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



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



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



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



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



Our success depends on the skills,
experience and performance of certain key members of our management. The loss of the services of any of these key employees could have a material adverse effect on our business, financial condition, results of operations and cash flows. Our future
success and plans for growth also depend on our ability to attract and retain skilled personnel in all areas of our business. There is strong competition for skilled management personnel in the time definite logistics businesses and many of our
competitors have greater resources than we have to hire qualified personnel. Accordingly, if we are not successful in attracting or retaining qualified personnel in the future, our ability to manage our business could be materially and adversely
affected.



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



We
utilize the services of approximately 4,800 drivers and messengers. From time to time, these persons are involved in accidents or other activities that may give rise to liability claims against us. We cannot assure you that claims against us will
not exceed the applicable amount of our liability insurance coverage, that our insurer will be solvent at the time of settlement of an insured claim, that the liability insurance coverage held by our independent contractors will be sufficient or
that we will be able to obtain insurance at acceptable levels and costs in the future. If we were to experience a material increase in the frequency or severity of accidents, liability claims, workers compensation claims, unfavorable
resolutions of claims or insurance costs, our business, financial condition, results of operations and cash flows could be materially adversely affected.



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



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



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



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



We must continually evaluate and upgrade our pool
of available independent contractors to keep pace with demands for delivery services. We cannot assure you that qualified delivery personnel will continue to be available in sufficient numbers and on terms acceptable to us. The inability to attract
and retain qualified delivery personnel, could materially and adversely affect our business, financial condition, results of operations and cash flows.



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



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



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



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



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



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



We face trademark infringement and related risks.



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



We may face higher litigation and settlement costs than anticipated.



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



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Risks Related to Our Capital Structure



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



We have a significant amount of debt outstanding. At June 30, 2007, we had $78.2 million in aggregate principal amount of debt outstanding, $7.5 million of revolving credit borrowings, with $0.1 million in
available borrowings and $55.6 million of stockholders equity. The degree to which we are leveraged could have important consequences for you, including:



| |  |  | requiring us to dedicate a substantial portion of our cash flow from operations to make interest payments on our debt, $4.7 million of which was paid in fiscal year
2007 and approximately $10.2 million for each year thereafter, thereby reducing funds available for operations, future business opportunities and other purposes;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



In addition, we may incur additional indebtedness in the future, subject to
certain restrictions, exceptions and financial tests set forth in the indenture governing our senior notes. As of June 30, 2007, under certain circumstances, we would have been restricted from incurring additional debt under the terms of our
indenture other than our credit facility, subject to the terms of the indenture and our credit agreement.



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



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



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



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



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



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



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



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



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



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



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



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



| |  |  | consolidate, merge, recapitalize or enter into other transactions that would affect a fundamental change on us; and
| | - |  | -------------------------------------------------------------------------------------------------------------------



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



The
indenture and revolving credit facility agreement also contain certain financial covenants under which we must maintain cash and cash equivalents at specified levels and cash, cash equivalents and qualified accounts receivable at specified levels as
well as specified financial ratios, including ratios regarding interest coverage, total leverage, senior secured leverage and fixed charge coverage and minimum EBITDA. Our ability to comply with these ratios may be affected by events beyond our
control.



A breach of any of these covenants could result in an
event of default, or possibly a cross-default or cross-acceleration of other debt that may be outstanding in the future. In that event, the holders of our then outstanding debt could allow the holders of that debt to declare all borrowings
outstanding to be due and payable. In the event of a default under the indenture or the revolving credit facility, the holders of the secured debt then outstanding could foreclose on the collateral pledged to secure our obligations under that debt,
assets and capital stock pledged to them. The senior notes and the new lenders are secured by a first-priority lien, subject to permitted liens, on collateral consisting of substantially all of our tangible and intangible assets. As of
March 31, 2007 the Company was not in compliance with the minimum EBITDA covenants in the revolving credit facility. The lender under the credit agreement granted the Company a waiver of this covenant breach. The Company and the lender entered
into an amendment, dated May 25, 2007, to the credit agreement which revised the minimum EBITDA covenant and revised reporting requirements with the lender. The Company and its subsidiaries failed to achieve its minimum EBITDA required pursuant
to the terms of the Revolving Credit Agreement for the months ending July 28, 2007 and August 25, 2007. The lender under the credit agreement granted the Company waivers. The Company negotiated (1) revised monthly minimum EBITDA
requirements and (2) agreed to an increase in the interest rate of 75 basis points in LIBOR margin (from 2.5% to 3.25%) until trailing twelve month EBITDA equals $15.0 million, dropping 25 basis points when trailing twelve month EBITDA is
greater than $15.0 million and reverts back to the original interest rate when trailing twelve month EBITDA is greater than $20.0 million with the lender with an amended agreement dated October 15, 2007. Although we believe we will be able to
satisfy the revised minimum EBITDA covenant, we cannot assure you we will be able to do so, or that we will be able to obtain or maintain additional waivers in the future if we are unable to maintain compliance with our debt covenants. We cannot
assure you that our assets would be sufficient to repay in full the money owed to these secured debt holders.



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



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



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



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



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



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



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



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



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



Our senior notes mature in 2010. We may
not be able to refinance our senior notes or renew or refinance any new credit facility we may enter into, or any renewal or refinancing may occur on less favorable terms. If we are unable to refinance or renew our senior notes or any new credit
facility, our failure to repay all amounts due on the maturity date would cause a default under the indenture or the applicable credit agreement. In addition, our interest expense may increase significantly if we refinance our senior notes, which
bear interest at 13% per year, or any new credit facility, on terms that are less favorable to us than the existing terms of our senior notes or any new credit facility.



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



Holders of our senior notes have the right to cause us to redeem, at a
redemption price of 100% of the principal amount of the notes, subject to certain exceptions (including there being any outstanding obligations under the revolving credit facility. The Company intends to continue to borrow under the terms of the
revolving credit facility):



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



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



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



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



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



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Our stock price is subject to fluctuation and volatility.



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



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



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



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



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



If we issue additional equity securities at a per share price lower than the current market price (in the case of our outstanding warrants) or the conversion price (in the case of our outstanding warrants and
preferred stock), then the exercise price of such warrants and the conversion price of such preferred stock would automatically adjust downward. Such adjustments would have a dilutive effect on our existing common stockholders and a negative effect
on our stock price.



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



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



We are
currently not in compliance with NASDAQ rules regarding minimum bid price and you may have difficulty trading our securities.



We will need to maintain certain financial and corporate governance qualifications to keep our securities listed on the NASDAQ Capital Market
(NASDAQ). At various times in the past, we have received notices from NASDAQ that we would be de-listed due to a variety of matters, including failure to maintain a minimum bid price of $1.00, failure to timely hold an annual
stockholders meeting and failure to meet the minimum levels of stockholders equity. In each instance, we have taken the actions required by NASDAQ to maintain continued listing, but we cannot assure you that we will at all times meet the
criteria for continued listing.



We received a notice on
June 29, 2007 from the NASDAQ that we are not in compliance with the Marketplace Rule 4310(c)(4) regarding the minimum bid requirement for the continued listing of our common stock on the NASDAQ. We have a period of 180 days, until
December 26, 2007, to attain compliance by



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maintaining a bid price of $1 for ten consecutive trading days. If we are unable to demonstrate bid price compliance by December 26, 2007, but are found
to meet all other initial listing requirements for the NASDAQ, we may receive an additional 180-day compliance period. If we do not meet compliance requirements within the second 180-day period, NASDAQ will notify us that our common stock will be
de-listed. Upon receiving this notice, we will file a current report on Form 8-K with the SEC disclosing that and related details. Although we may regain compliance with the NASDAQ listing requirements, the negative publicity surrounding the receipt
of this notice will likely have a material adverse effect on the price of our Common Stock, our ability to raise capital, whether debt or equity, in the future unless and until this situation is resolved and will likely cause a negative perception
of, and confidence in, us by our investors, customers, vendors, creditors and employees. Further failing to maintain our NASDAQ listing will result in our breaching covenants made to holders of our preferred stock and certain warrants. We cannot
assure you that we will be successful in regaining compliance with NASDAQ listing requirements.



In the event of delisting, trading, if any, would be conducted in the over-the-counter market in the so-called pink sheets or on the OTC
Bulletin Board. In addition, our securities could become subject to the SECs penny stock rules. These rules would impose additional requirements on broker-dealers who effect trades in our securities, other than trades with their
established customers and accredited investors. Consequently, the delisting of our securities and the applicability of the penny stock rules may adversely affect the ability of broker- dealers to sell our securities, which may adversely affect your
ability to resell our securities. If any of these events take place, you may not be able to sell as many securities as you desire, you may experience delays in the execution of your transactions and our securities may trade at a lower market price
than they otherwise would.



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



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



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



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



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



In addition, TH Lee Putnam
Ventures, L.P. beneficially owned, as of August 8, 2007, approximately 27.54% (excludes other TH Lee funds) of our outstanding common stock on a fully diluted basis, which means it can influence matters requiring stockholder approval, including
important corporate matters such as a change in control of our company.



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



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



Under Section 404 of the
Sarbanes-Oxley Act, the SEC adopted rules requiring public companies to include a report of management on internal control over financial reporting in their annual reports. In accordance with recently issued guidelines from the SEC, we are
evaluating our internal controls over financial reporting in order for our management to ascertain that such internal controls are adequate and effective.



We expect to expend significant resources during fiscal 2008 in developing the necessary documentation and testing procedures required by Section 404
of the Sarbanes-Oxley Act. There is a risk that we will not comply with all of the requirements imposed thereby. Accordingly, we cannot assure you that we will not receive an adverse report on our assessment of our internal controls over financial
reporting and/or the operating effectiveness of our internal controls over financial reporting from our independent registered public accounting firm in 2009. If we identify significant deficiencies or material weaknesses in our internal controls
over financial reporting that we cannot remediate in a timely manner or we receive an adverse report from our independent registered public accounting firm with respect to our internal controls over financial reporting, investors and others may lose
confidence in the reliability of our financial statements and our ability to obtain equity or debt financing could be adversely affected.



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



ITEM 1B.    UNRESOLVED STAFF COMMENTS



None.



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|ITEM 2. | PROPERTIES
|------- | ----------



As of June 30, 2007, we operated from 150 leased facilities in the United States and two leased facilities in Canada (not including customer-owned
facilities). These leases expire at various times between 2007 and 2017. These facilities are principally used for distribution and warehousing operations. The table below summarizes the location of our current leased facilities within the United
States:



|              |  |                             |  |                          |  |                            
|------------- |  | --------------------------- |  | ------------------------ |  | ---------------------------
|State         |  | Number of Leased Facilities |  | State                    |  | Number of Leased Facilities
|Alabama       |  | 1                           |  | Nevada                   |  | 2                          
|Arizona       |  | 3                           |  | New Hampshire            |  | 1                          
|Arkansas      |  | 4                           |  | New Jersey New Jersey    |  | 8                          
|California    |  | 15                          |  | New Mexico               |  | 1                          
|Colorado      |  | 1                           |  | New York                 |  | 21                         
|Connecticut   |  | 2                           |  | North Carolina           |  | 8                          
|Florida       |  | 13                          |  | Ohio                     |  | 2                          
|Georgia       |  | 4                           |  | Oklahoma                 |  | 4                          
|Idaho         |  | 1                           |  | Oregon                   |  | 1                          
|Illinois      |  | 1                           |  | Pennsylvania             |  | 5                          
|Indiana       |  | 1                           |  | South Carolina           |  | 3                          
|Iowa          |  | 1                           |  | Tennessee                |  | 2                          
|Louisiana     |  | 7                           |  | Texas                    |  | 11                         
|Maine         |  | 2                           |  | Utah                     |  | 1                          
|Maryland      |  | 2                           |  | Vermont                  |  | 3                          
|Massachusetts |  | 2                           |  | Virginia                 |  | 5                          
|Michigan      |  | 5                           |  | Washington               |  | 1                          
|Minnesota     |  | 4                           |  | Wisconsin                |  | 3                          
|Mississippi   |  | 1                           |  | Total facilities in U.S. |  | 152                        



Our corporate
headquarters is located at One Morningside Drive North, Bldg. B, Suite 300, Westport, Connecticut 06880 and we have additional corporate offices in Texas, Minnesota and Arizona. We believe that suitable additional or replacement space will be
available when required on terms that are not materially less favorable to us than our existing leases.



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|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------



We are a party to litigation and have claims asserted against us in the normal course of our business. Most of these claims are routine litigation that
involve workers compensation claims, claims arising out of vehicle accidents and other claims arising out of the performance of same-day transportation services. We and our subsidiaries are also named as defendants in various
employment-related lawsuits arising in the ordinary course of our business. We vigorously defend against all of the foregoing claims.



From time to time, our independent contractor drivers are involved in accidents. We attempt to manage this risk by requiring our independent
contractor drivers to maintain commercial motor vehicle liability insurance of at least $300,000 with a minimal deductible and by carrying additional liability insurance in our name totaling an additional $5.0 million. In addition, we perform
extensive screening of all prospective drivers to ensure that they have acceptable driving records and pass a criminal background and drug tests, among other criteria. We believe our driver screening programs have established an important
competitive advantage for us.



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



We review our litigation matters on a regular basis to evaluate the demands and likelihood of settlements and litigation related expenses. Based on this
review, we do not believe that any pending lawsuits, if resolved or settled unfavorably to us, would have a material adverse effect upon our financial condition or results of operations. We have established reserves for litigation, which we believe
are adequate.



In connection with the CD&L acquisition, the
Company assumed a reserve for a tentative settlement of a tax assessment against CD&L in the State of California. The assessment resulted from an audit of CD&Ls subsidiary, Clayton/National Courier Systems, Inc. by the California
Employment Development Department (the EDD). On July 13, 2007, the Company finalized the settlement with the EDD which requires the Company to make certain payments and provide certain insurance coverage for its independent
contractor drivers. The agreement does not constitute an admission or determination as to worker classification related to any of the drivers covered by the agreement.



In January 2007, two Notices of Assessment seeking payroll taxes were issued by the EDD against Velocity Express, Inc. The
first Notice of Assessment covers the period July 1, 2003 to December 31, 2004. The second Notice of Assessment covers the period of January 1, 2005 to June 30, 2006. In February 2007, the Company filed a Petition for
Reassessment disputing both assessments in their entirety and requesting that this matter be referred to an administrative law judge for resolution.



In connection with the CD&L acquisition, the Company assumed a reserve for a class action suit filed in December 2003 in the Los Angeles Superior
Court, , seeking to certify a class of California based independent contractors from December 1999 to the present. The complaint seeks unspecified damages for various employment related claims, including, but not limited to overtime, minimum wage
claims, and claims for unreimbursed business expenses. CD&L filed an Answer to the Complaint on or about January 2, 2004 denying all allegations. Plaintiffs motion for Class Certification was granted in part and denied in part on
January 28, 2007. Discovery on this matter is ongoing. In January 2007, the Company was served another summons and complaint which was pled as a wage and hour class action suit. The suit covers California drivers who had been engaged by
Clayton/National Courier Systems, Inc. between 2001 and the present. The Company believes that this second suit will be consolidated with the first suit because it covers the same group of independent contractor drivers over the same period of time.
Velocity intends to vigorously defend these cases through trial if necessary and continues to reject all allegations of the Complaint as amended.



18



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##### Table of Contents

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



On March 27, 2007 at our annual meeting of stockholders, we submitted to our stockholders three matters that were approved. The matters and voting
thereon were as follows:



1. To elect six directors for the
ensuing year and until their successors shall be elected and duly qualified.



|                    |  |            |  |                   
|------------------- |  | ---------- |  | ------------------
|Directors           |  | For        |  | Withhold Authority
|Vincent A. Wasik    |  | 24,087,827 |  | 116,538           
|James G. Brown      |  | 23,255,663 |  | 948,702           
|Alexander I. Paluch |  | 24,088,000 |  | 116,365           
|Richard A. Kassar   |  | 24,085,175 |  | 119,190           
|Leslie E. Grodd     |  | 23,258,467 |  | 945,898           
|John J. Perkins     |  | 24,085,181 |  | 119,184           



2. To ratify the
appointment of UHY LLP as our independent registered public accounting firm for the fiscal year ended June 30, 2007.



|        |  |           
|------- |  | ----------
|For     |  | 23,271,604
|Against |  | 910,827   
|Abstain |  | 21,934    



3. To amend and
restate our 2004 Stock Incentive Plan to, among other things, increase the number of shares reserved for issuance under the plan.



|        |  |           
|------- |  | ----------
|For     |  | 11,444,994
|Against |  | 3,519,752 
|Abstain |  | 20,912    



19



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##### Table of Contents

PART II.



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ------------------------------------------------------------------------------------------------------------



Our common stock currently trades under the symbol VEXP on
NASDAQ. The following table sets forth the quarterly high and low sales prices for our common stock, as reported by NASDAQ, for each full quarterly period within the two most recent fiscal years.



|               |  |      |      |     |   |     
|-------------- |  | ---- | ---- | --- | - | ----
|Period         |  | High |      | Low
|Fiscal 2006:   |  |      |      |     |   |     
|First Quarter  |  | $    | 7.01 |     | $ | 2.48
|Second Quarter |  |      | 3.79 |     |   | 2.11
|Third Quarter  |  |      | 2.87 |     |   | 1.55
|Fourth Quarter |  |      | 1.78 |     |   | 1.22
|               |  |     
|Fiscal 2007:   |  |      |      |     |   |     
|First Quarter  |  | $    | 2.00 |     | $ | 1.25
|Second Quarter |  |      | 2.14 |     |   | 1.21
|Third Quarter  |  |      | 1.63 |     |   | 0.96
|Fourth Quarter |  |      | 1.40 |     |   | 0.60
|               |  |     
|Fiscal 2008:   |  |      |      |     |   |     
|First Quarter  |  | $    | 1.29 |     | $ | 0.50



The closing price of
our common stock on October 8, 2007 was $0.632.



We
received a notice on June 29, 2007 from the Nasdaq Stock Market that we are not in compliance with the Marketplace Rule 4310(c)(4) regarding the minimum bid requirement for the continued listing of our common stock on the Nasdaq Capital Market.
We have a period of 180 days, until December 26, 2007, to attain compliance by maintaining a bid price of $1.00 for ten consecutive trading days. If it is determined that we meet all other initial listing requirements for the Nasdaq Capital
Market, we may receive an additional 180-day compliance period. See Risk Factors.



On October 8, 2007, we had 209 stockholders of record. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number
of stockholders represented by these record holders.



We have
not paid any cash dividends on our common stock and expect that for the foreseeable future we will follow a policy of retaining earnings, if any, in order to finance the continued operations of our business. The payment of dividends is within the
discretion of our Board of Directors and will depend upon our earnings, capital requirements and operating and financial condition, among other factors. Our ability to pay dividends is limited by: the terms of the indenture governing our senior
secured notes and the certificates of designation for certain of our series of convertible preferred stock. In addition, should we enter into a new credit facility in the future, we would expect that the terms of such facility would also restrict
our and our subsidiaries ability to pay cash dividends.



Equity
Compensation Plan Information



We maintain the 2000 Stock
Option Plan (the 2000 Plan) and the 2004 Stock Incentive Plan (the 2004 Plan), pursuant to which we may grant equity awards to eligible persons. We also maintain the 1995 Stock Option Plan (the 1995 Plan), although no
additional options may be granted under such plans. The 1995 Plan and all outstanding options under this plan will remain in effect until all such options have expired or been exercised. Our stockholders approved the 1995 Plan, the 2000 Plan, and
the 2004 Plan.



20



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##### Table of Contents

The following table sets forth information about our equity compensation plans as of June 30, 2007.
For more information about our stock option plans, see Note 10 to our consolidated financial statements.



|                                                               |  |                                                                                          |     |  |                                                                          |       |                                                            |           |    
|-------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------- | --- |  | ------------------------------------------------------------------------ | ----- | ---------------------------------------------------------- | --------- | ---
|                                                               |  | Number of securities to beissued upon exercise ofoutstanding options,warrants and rights |     |  | Weighted averageexercise price ofoutstanding options,warrants and rights |       | Number of securitiesremaining availablefor future issuance |          
|Equity compensation plans approved by security holders         |  | 1,260,866                                                                                | (1) |  | $                                                                        | 10.09 |                                                            | 4,228,547 | (2)
|Equity compensation plans not approved by security holders (3) |  | 1,415,617                                                                                |     |  | $                                                                        | 0.55  |                                                            | NA        |    
|                                                               |  |                                                                                          |     |  |                                                                          |       |                                                            |           |    
|Total                                                          |  | 2,676,483                                                                                |     |  | $                                                                        | 5.04  |                                                            | 4,228,547 |    
|                                                               |  |                                                                                          |     |  |                                                                          |       |                                                            |           |    



---

|(1) |  | Includes (i) 3,224 shares of common stock to be issued upon exercise of options granted under the 1995 Plan, (ii) 8,368 shares of common stock to be issued upon exercise
of options granted under the 2000 Plan, (iii) 490,931 shares of common stock to be issued upon exercise of options granted under the 2004 Plan, (iv) 100,630 shares of common stock to be issued upon the exercise of warrants granted in
connection with the sale of Series H Convertible Preferred Stock, (v) 193,552 shares of common stock to be issued upon the exercise of warrants granted to TH Lee Putnam Ventures (THLPV) in return for its agreement to extend its
obligations under the Capital Contribution Agreement, dated July 1, 2004, for a period of two years, (vi) 97,693 shares of common stock to be issued upon exercise of warrants granted in connection with the sale of Series M Convertible
Preferred Stock, (vii) 62,534 shares of common stock to be issued upon exercise of warrants granted to contractors for their service to us, (viii) 58,035 shares of common stock to be issued upon exercise of warrants granted to officers and
other employees under the 2004 Plan for incentive compensation, and (ix) 245,899 shares of common stock to be issued upon exercise of warrants granted to Vincent A. Wasik under the 2004 Plan for incentive compensation and vested on
December 8, 2006.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | 23,412 shares of common stock and 4,205,135 shares of common stock remain available for issuance under the 2000 Plan and 2004 Plan, respectively.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Includes (i) 1,900 non-qualified stock options that were issued in October and November 2000 to certain executive officers in connection with their offers of employment that
vested ratably over three years; (ii) 400 non-qualified stock options issued in October 2001 to certain executive officers that vested ratably over two years on each six-month anniversary of the date of grant; (iii) 300 non-qualified stock
options issued to a consultant in exchange for services provided in 1999 that option vested on the date of grant; (iv) 141,250 shares of common stock issuable upon exercise of warrants that were granted to employees and outside contractors for
the purpose of compensation and bonuses and have various grant dates, expiration dates and exercise prices; (v) 547,500 shares of common stock issuable upon exercise of warrants that were granted to THLPV as compensation for credit enhancement
guarantees of the Companys indebtedness; and (vi) 724,267 shares of common stock issuable upon exercise of warrants that were granted to outside contractors as compensation for services rendered in connection with the acquisition of
CD&L and have various grant dates, expiration dates and exercise prices.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



21



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##### Table of Contents

|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------



The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and related notes thereto
and Managements Discussion and Analysis of Financial Condition and Results of Operation. The selected statements of operations data as well as the selected balance sheet data presented below are derived from our consolidated
financial statements.



|                                                                       |  |                                       |         |   |             |   |         |              |  |   |             |   |  |              |         |   |  |   |         |  
|---------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ----------- | - | ------- | ------------ |  | - | ----------- | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                                       |  | Fiscal Year Ended                     |        
|                                                                       |  | June 30,2007 (1)                      |         |   | July 1,2006 |   |         | July 2, 2005 |  |   | July 3,2004 |   |  | June 28,2003 |        
|                                                                       |  | (In thousands, except per share data) |        
|Selected Statements of Operations Data:                                |  |                                       |         |   |             |   |         |              |  |   |             |   |  |              |         |   |  |   |         |  
|Revenue                                                                |  | $                                     | 410,102 |   |             | $ | 202,430 |              |  | $ | 256,662     |   |  | $            | 287,918 |   |  | $ | 307,138 |  
|Cost of services                                                       |  |                                       | 312,058 |   |             |   | 145,571 |              |  |   | 208,342     |   |  |              | 238,320 |   |  |   | 241,136 |  
|                                                                       |  |                                       |         |   |             |   |         |              |  |   |             |   |  |              |         |   |  |   |         |  
|Gross profit                                                           |  |                                       | 98,044  |   |             |   | 56,859  |              |  |   | 48,320      |   |  |              | 49,598  |   |  |   | 66,002  |  
|Occupancy, selling, general and administrative expenses (3)            |  |                                       | 107,660 |   |             |   | 67,696  |              |  |   | 92,395      |   |  |              | 92,402  |   |  |   | 74,001  |  
|Restructuring charges and asset impairments (4)                        |  |                                       | 3,398   |   |             |   | 378     |              |  |   | 1,603       |   |  |              | 356     |   |  |   |        |  
|Transaction and integration costs (2)                                  |  |                                       | 6,565   |   |             |   |        |              |  |   |            |   |  |              |        |   |  |   |        |  
|                                                                       |  |                                       |         |   |             |   |         |              |  |   |             |   |  |              |         |   |  |   |         |  
|Operating loss (3)(4)                                                  |  |                                       | (19,579 | ) |             |   | (11,215 | )            |  |   | (45,678     | ) |  |              | (43,160 | ) |  |   | (7,999  | )
|Interest expense, net                                                  |  |                                       | (20,257 | ) |             |   | (5,118  | )            |  |   | (4,750      | ) |  |              | (4,567  | ) |  |   | (3,959  | )
|Other income (expense)                                                 |  |                                       | 708     |   |             |   | 295     |              |  |   | 584         |   |  |              | (109    | ) |  |   | (301    | )
|                                                                       |  |                                       |         |   |             |   |         |              |  |   |             |   |  |              |         |   |  |   |         |  
|Net loss before income taxes and minority interest                     |  |                                       | (39,128 | ) |             |   | (16,038 | )            |  |   | (49,844     | ) |  |              | (47,836 | ) |  |   | (12,259 | )
|Net loss (3)(4)                                                        |  | $                                     | (39,532 | ) |             | $ | (16,038 | )            |  | $ | (49,844     | ) |  | $            | (47,836 | ) |  | $ | (12,259 | )
|                                                                       |  |                                       |         |   |             |   |         |              |  |   |             |   |  |              |         |   |  |   |         |  
|Net loss applicable to commonshareholders (3)(4)                       |  | $                                     | (65,991 | ) |             | $ | (23,647 | )            |  | $ | (106,869    | ) |  | $            | (77,683 | ) |  | $ | (15,609 | )
|                                                                       |  |                                       |         |   |             |   |         |              |  |   |             |   |  |              |         |   |  |   |         |  
|Basic and diluted loss per common share (3)(4)                         |  | $                                     | (2.53   | ) |             | $ | (1.49   | )            |  | $ | (21.01      | ) |  | $            | (551.89 | ) |  | $ | (169.44 | )
|                                                                       |  |                                       |         |   |             |   |         |              |  |   |             |   |  |              |         |   |  |   |         |  
|Basic and diluted weighted average number of common shares outstanding |  |                                       | 26,085  |   |             |   | 15,907  |              |  |   | 5,087       |   |  |              | 141     |   |  |   | 92      |  
|                                                                       | 
|                                                                       |  | As Of                                 |        
|                                                                       |  | June 30,2007                          |         |   | July 1,2006 |   |         | July 2, 2005 |  |   | July 3,2004 |   |  | June 28,2003 |        
|Balance Sheet Data                                                     |  |                                       |         |   |             |   |         |              |  |   |             |   |  |              |         |   |  |   |         |  
|Working capital (deficit) (5)                                          |  | $                                     | (6,756  | ) |             | $ | (8,578  | )            |  | $ | (36,450     | ) |  | $            | (35,543 | ) |  | $ | (20,419 | )
|Total assets                                                           |  |                                       | 176,510 |   |             |   | 75,653  |              |  |   | 87,356      |   |  |              | 93,676  |   |  |   | 106,489 |  
|Long-term debt and capital leases (5)                                  |  |                                       | 55,510  |   |             |   | 26,185  |              |  |   | 2,829       |   |  |              | 5,235   |   |  |   | 4,602   |  
|Shareholders equity                                                   |  |                                       | 55,644  |   |             |   | 15,069  |              |  |   | 10,429      |   |  |              | 6,475   |   |  |   | 22,450  |  



---

The following items impact the comparability of our data from continuing operations:



|(1) |  | The fiscal year ended June 30, 2007 includes the results of CD&L which was acquired in July 2006. The acquisition was financed through the issuance of $78.2 million of
Senior Notes and 277,770 shares of Series Q Convertible Preferred Stock. $26.3 million of previously existing debt was paid.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | The fiscal year ended June 30, 2007 includes $0.5 million in bonuses paid for the successful completion of raising capital and acquiring CD&L and $6.1 million in expenses,
primarily for consulting services, incurred to integrate CD&L into Velocity.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



22



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##### Table of Contents

|(3) |  | In fiscal year ended July 1, 2006, upon consolidation of Peritas, Peritas accumulated losses of $1.1 million were recognized by the Company as expense in the fourth
quarter due to common ownership. The fiscal year ended July 2, 2005 includes an increase in the legal settlement reserve expense by $4.9 million. See Note 14 to our consolidated financial statements.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Restructuring charges and asset impairments, which included costs for severance, excess facilities and impairment of long-lived assets were $0.4 million for fiscal 2006, $1.6
million for fiscal 2005, $0.4 million for fiscal 2004, and $0 for fiscal 2003 and 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Working capital is defined as our current assets less our current liabilities. Outstanding balances under the revolving credit facility and the senior subordinated debt facility
were reclassed from short-term obligations to long-term debt on July 1, 2006 due to being refinanced subsequent to year-end.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



23



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##### Table of Contents

|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
|------- | ------------------------------------------------------------------------------------



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



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



We present below
Managements Discussion and Analysis of Financial Condition and Results of Operations of Velocity Express Corporation and its subsidiaries on a consolidated basis. The following discussion should be read in conjunction with our historical
financial statements and related notes contained elsewhere in this report.



Overview



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



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



Our 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



24



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##### Table of Contents

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



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



The Companys customers represent a
variety of industries and utilize our services across multiple service offerings. Revenue categories and percentages of total revenue for fiscal years ended 2007, 2006 and 2005 on an historical basis are as follows:



|                             |  |                    |   |  |              |   |  |              |  
|---------------------------- |  | ------------------ | - |  | ------------ | - |  | ------------ | -
|                             |  | Fiscal year ended: |  
|                             |  | June 30, 2007      |   |  | July 1, 2006 |   |  | July 2, 2005 |  
|Healthcare                   |  | 27.7               | % |  | 21.2         | % |  | 20.2         | %
|Office Products              |  | 24.8               |   |  | 32.1         |   |  | 28.4         |  
|Financial services           |  | 17.3               |   |  | 16.5         |   |  | 21.5         |  
|Commercial                   |  | 11.2               |   |  | 12.5         |   |  | 17.4         |  
|Transportation and logistics |  | 8.4                |   |  | 6.3          |   |  | 7.2          |  
|Retail and Consumer Products |  | 7.4                |   |  | 4.7          |   |  | 2.9          |  
|Energy                       |  | 2.1                |   |  | 4.9          |   |  | 1.2          |  
|Technology                   |  | 1.6                |   |  | 1.7          |   |  | 1.2          |  



The mix of revenue in
2007 reflects the combination with CD&L. CD&Ls historically greater weighting in healthcare, retail, and transportation and logistics resulted in the relative increase in those categories, whereas CD&Ls lower weighting in
office products, commercial and energy caused the relative decrease in those categories compared to the legacy Velocity business in the prior year. The companies had comparable weightings in the financial services and technology industries.



The following table shows our revenue categories and
percentages of revenues for the years ended June 30, 2007 compared to July 1, 2006 on a pro forma basis after giving effect to the CD&L acquisition on July 3, 2006:



|                             |  |                                |   |  |                                        |  
|---------------------------- |  | ------------------------------ | - |  | -------------------------------------- | -
|                             |  | Fiscal Year EndedJune 30, 2007 |   |  | Pro FormaFiscal year endedJuly 1, 2006 |  
|Healthcare                   |  | 27.7                           | % |  | 22.9                                   | %
|Office Products              |  | 24.8                           |   |  | 22.5                                   |  
|Financial services           |  | 17.3                           |   |  | 19.0                                   |  
|Commercial                   |  | 11.2                           |   |  | 11.2                                   |  
|Transportation and logistics |  | 8.4                            |   |  | 8.8                                    |  
|Retail and consumer products |  | 7.4                            |   |  | 5.6                                    |  
|Energy and other             |  | 2.1                            |   |  | 6.8                                    |  
|Technology                   |  | 1.6                            |   |  | 3.2                                    |  



The Company had one
customer that accounted for more than 12% of our net revenues in fiscal 2007 and Pro Forma 2006. Our ten largest customers accounted for approximately 46% and 43% of our net revenues in fiscal 2007 and Pro Forma 2006, respectively. The progression
towards larger customers is consistent with our business strategy.



With the enactment of the Federal law known as Check 21, on October 28, 2004, we anticipate that financial services revenue will continue to decline as financial institutions migrate to electronically scanned and processed checks,
without the need to move the physical documents to the clearing institution. Off-setting this relative decline in revenue in the financial services industry, we believe we will benefit from the growth in healthcare and retail industries (including
office supplies) within the United States, and be able to effectively leverage our broad coverage footprint to capitalize on this national growth industry.



25



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##### Table of Contents

The Company had a net loss of $39.5 million for the fiscal year ended June 30, 2007, including a net
loss of $4.3 million for the three months ended June 30, 2007, which resulted in cash used in operating activities for the year of $7.7 million. In fiscal year 2007, the Company financed this operating cash flow deficit through net proceeds of
$6.5 million from a revolving credit facility and improvements in working capital management. See Liquidity and Capital Resources.



CD&L Acquisition & Related Transactions



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



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



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



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



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



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



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



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



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



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



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



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



In
total, the aggregate net cash proceeds from the sale of the Units were approximately $63.5 million and from the sale of the Series Q Preferred Stock were approximately $42.5 million. Approximately $51.6 million of the proceeds were used to finance
the CD&L acquisition, approximately $26.3 million were used to repay indebtedness owed by us to Bank of America, N.A. ($20.5 million), BET Associates, LP ($5.8 million), approximately $1.6 million were used to repay CD&L seller-financed debt
from previous acquisitions, approximately $9.4 million were used to repay CD&Ls line of credit facility and $17.2 million was retained for general corporate purposes. See Liquidity and Capital Resources. In addition, the
Company granted customary registration rights with respect to the shares of the Companys common stock issuable upon conversion of the Series Q Preferred Stock and the warrants.



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Management believes that the acquisition of CD&L has benefited the Company in several ways. The
combined company has increased its annual revenues, and has approximately 4,800 independent contractor drivers operating from 152 locations in leading markets across the United States and Canada. In addition, the combination is proving to show the
following strategic and financial benefits:



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



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



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



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



| |  |  | substantial costs savings through operational synergies and elimination of redundant expenses.
| | - |  | ----------------------------------------------------------------------------------------------



Restructurings



In 2005, 2006, and 2007 the Company implemented several restructurings that management believes have repositioned the
Company for greater success in the future.



In 2005, the
Company conducted an analysis of its route profitability that indicated the Company was operating in a number of locations that did not have sufficient customer density for the Company to profitably deliver its targeted service levels. As a result,
at the end of the third quarter of fiscal 2005, the Company closed over 40 of its locations (primarily smaller facilities in low density areas), terminated several unprofitable customer contracts and reduced employee headcount by approximately 200.
At that time, the Company recorded a charge of $602,000 related to the restructuring, mostly reflective of severance costs. During the final quarter of fiscal 2005, the Company ceased use of most of the named facilities and recorded an additional
$550,000 in net lease contract termination costs and fixed asset impairments, recorded $100,000 in severance costs and recorded an estimated $300,000 charge to recognize the cost of service contracts that had no future economic benefit to the
Company.



During the third quarter of fiscal 2006, the Company
recorded a charge of $300,000 related to severance and benefits for the termination of approximately 120 employees and revised its estimates of previously recorded costs and losses associated with excess facilities. For fiscal 2006, the
Companys revenue declined largely due to lower volume experienced as a result of the restructuring implemented at the end of the Companys third quarter of fiscal 2005. The revenue decline was partially offset by new customer contracts
and business expansion with existing customers approximating $20.0 million. For more information, see Note 4 (Restructuring) to the Companys consolidated financial statements for the year ended June 30, 2007.



During 2007, in conjunction with the integration of CD&L, management
identified operational synergies of the combined companies and executed its plan for staff reductions of approximately 200 employees, including a retention incentive program for key individuals, and the closing of 39 redundant operating centers. In
2007, the Company recorded a charge of approximately $0.1 million associated with the reduction of workforce, $0.3 million in retention bonuses and approximately $2.4 million in lease contract termination costs associated with the integration. To
date, all 39 planned locations have been vacated as a result of facility consolidations. In addition, a charge of approximately $33,000 was recorded related to revisions in the Companys estimates of previously recorded costs and losses
associated with prior period restructurings. As a result of the integration of CD&L, the Company reduced annualized expenses in delivery operations, primarily resulting from occupancy and staff cost reductions resulting from the consolidation of
facilities in the same geographic area, and in general and administrative expenses through the elimination of duplicate management, public company expenses and insurance coverage, by a total of approximately $22.0 million.



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Factors Affecting Future Results of Operations



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



We are continually engaged in bidding for additional contract work for a
variety of new and existing customers. We believe our current pipeline of bidding activity remains robust, with potential customers that could generate annual billings of up to $221 million, although we cannot assure you that we will be successful
in obtaining these clients. The activity is consistent across all geographic regions in which we operate. Full implementation of newly awarded contracts generally takes from thirty to ninety days.



Cost of services consists of costs relating directly to performance of our
services, including driver and messenger costs, transportation services purchased from third parties, and costs to staff, equip and insure our warehouse facilities. Substantially all of the drivers we use are independent contractors who provide
their own vehicles. As of June 30, 2007, we owned no motor vehicles in the United States and only three in Canada. Drivers and messengers are compensated based on a combination of the number of stops they make, the number of packages they
deliver and/or a percentage of the delivery charge. Consequently, our driver, messenger and purchased transportation costs are variable in nature. We also employ workers in our own leased warehouse facilities and certain facilities owned by our
customers. The salary and employee benefit costs related to them, such as payroll taxes and insurance, are also included in cost of sales.



Cost of services for 2007 was $312.1 million, an increase of $166.5 million, or 114.4%, from $145.6 million for 2006. The increase was disproportionate to
the increase in revenue primarily due to the acquisition of CD&L which added approximately $171.0 million in cost reflecting lower margins on CD&L revenue. We have focused on reducing our costs through the following two initiatives:



| |  |  | implementing our proprietary route management technology to optimize routes structures at each location for the maximum number of stops per day for each driver
thereby allowing us to improve our gross margins; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the completion of the conversion of our workforce from employee drivers to independent contractors, which creates a more variable cost structure and higher gross
margins.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



These two initiatives will result
in trucks that carry larger loads on denser routes, fewer more satisfied drivers making more money, and better customer service at lower costs.



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



During fiscal 2008, we plan to
continue to invest in technologies that will increase our competitive advantage in the market by providing enhanced package tracking and increased productivity from both a frontline delivery and back office perspective. During fiscal years 2005 and
2006, we spent more than $5 million in the development and implementation of route management software solutions that have proven to have had a significant impact on reducing overall delivery cost and enhancing our ability to better manage our
variable operating cost. During fiscal year 2007, we spent $1.5 million in the development of package tracking technology.



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Critical Accounting Policies and Estimates



The preparation of our financial statements requires us 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, we evaluate our estimates, including those related to bad debts, goodwill, insurance reserves, income taxes and
contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe 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s critical accounting policies are as follows:



Revenue Recognition



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



Allowance for Doubtful Accounts



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



Financial Instruments



Financial
instruments are initially recorded at their fair values at the time of issuance. Multiple financial instruments issued in a transaction are recorded at their relative fair values using Black Scholes and other valuation techniques. Those recorded as
liabilities are remeasured at each reporting period with changes in fair value reported in operations. Financial instruments issued to settle obligations are valued at their fair value on the day of issuance. Differences between fair value and
carrying value are recognized in operations.



Goodwill
Impairment



Our goodwill is subjected to impairment
testing, which requires us to estimate the fair value of our reporting unit to its carrying value. In order to determine the fair value of Velocity Express, we employed the Implied Enterprise Value technique based on our publicly traded stock price,
an approach widely accepted in determining fair value for an enterprise. The fair value derived was in excess of the carrying amount of goodwill and, therefore, no adjustment for impairment was required in fiscal year 2007.



Insurance Reserves



During the third quarter of fiscal year 2005, we initiated an insurance
program with minimal or no deductibles. Prior to that time, we maintained an insurance program with policies that had various higher deductible levels. We reserved the estimated amounts of uninsured claims and deductibles related to such insurance
retentions for claims that had occurred in the normal course of our business. These reserves have been 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.



Following the acquisition of CD&L, the Company continued to insure workers compensation risks for the workforce
acquired from CD&L through insurance policies with substantial deductibles, and retains risk as a result of its deductibles related to such insurance policies. The Companys deductible for workers compensation



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is $500,000 per loss with an annual aggregate stop loss of approximately $1,600,000. The Company reserves the estimated amounts of uninsured claims and
deductibles 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, which include fully developed estimates of both reported claims and incurred but not reported claims, as of the balance sheet date. Actual claim settlements may differ materially from these estimated reserve amounts. In January 2007,
the Company began insuring its entire workforces workers compensation risks through these insurance policies discussed above with substantial deductibles, and retains risk as a result of its deductibles related to such insurance
policies. As of June 30, 2007, the Company has a liability of approximately $1.8 million for case reserves, development reserves, plus estimated losses incurred, but not reported.



Contingencies



We are involved in various legal proceedings and contingencies and have recorded liabilities for these matters in accordance with SFAS No. 5,
Accounting for Contingencies (SFAS No. 5). SFAS No. 5 requires a liability to be recorded based on our 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 operating results would result. Likewise, if a contingency were settled for an amount that is less than the estimate, a future credit to
operating results would result. For more information, see Note 14 to our consolidated financial statements.



Results of Operations



The Company reports its financial results on a 52-53 week fiscal year basis. Under this basis, our fiscal year ends on the Saturday closest to June 30th. Fiscal years 2007, 2006 and 2005 all contained 52 weeks.



Year Ended June 30, 2007 Compared to Year Ended July 1, 2006



Revenue for 2007 increased by $207.7 million or
102.6% to $410.1 million, from $202.4 million in 2006. The increase in revenue for 2007 compared to 2006 was the result of adding approximately $221.0 million of revenue due to the acquisition of CD&L, $4.3 million in revenue related to new
customer start-ups that will yield $13.6 million in annual revenue, and amortizing into operations $1.5 million of non-cash revenue related to unfavorable contracts purchased with the CD&L acquisition. This increase was partially offset by the
loss of approximately $18.5 million of revenue resulting from losing two customers, a major office supply customer and a significant bank customer, in the second quarter of 2007, and the continued migration of banking customers to the Check 21
scanning technology combined with the decrease of remaining residual revenue in the first quarter of fiscal year 2006 that resulted from a restructuring completed during the fourth period of fiscal year 2005. Approximately $2.5 million of revenue
was realized in 2006 from customers running out their contractual termination periods. The inclusion of results from Peritas in the current period accounted for $0.2 million of the increase in revenue.



Cost of services for 2007 increased by $166.5 million, or 114.4%, to $312.1
million, from $145.6 million in 2006. The increase was primarily due to the acquisition of CD&L which added approximately $171.0 million in cost reflecting lower margins on CD&L revenue. In addition, higher cost of services also reflects
costs associated with maintaining high customer service levels while simultaneously accomplishing our field integration objectives, with the largest variances in payments to drivers and messengers, purchased transportation, and warehouse costs. In
addition, the Company incurred expenses to convert CD&L guaranteed driver settlement practices to the Companys activity-based driver settlement model. Furthermore, the prior year insurance costs were lower than the current
period because of reductions recorded last year to insurance claim reserves. The higher cost of services was partially offset by a decrease of approximately $12.5 million of cost of services largely due to the reduced revenue from the loss of two
customers and $2.3 million of amortization of the



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liability for unfavorable contracts purchased with the CD&L acquisition. The inclusion of results from Peritas in the current period accounted for $0.3
million of the increase cost.



Gross margin, as a result of the
increase in cost of services, declined from 28.1% in 2006 to 23.9% in 2007 due to the combination of reasons stated above.



Occupancy charges for 2007 increased by $5.8 million, or 48.7%, to $17.9 million as compared to $12.0 million in 2006. Approximately $5.5 million of
the increase resulted from the acquisition of CD&L. As part of the acquisition of CD&L, the Company ended up with duplicate facilities in numerous locations. As part of the integration of those facilities, the Company has realized $1.3
million in reduced occupancy costs to date. As a percentage of revenue, occupancy costs have decreased 1.5%, from 5.9% in 2006 to 4.4% in 2007.



Selling, general and administrative expenses for 2007 increased by $31.0 million, or 59.9%, to $82.6 million or 20.1% of revenue, as compared with $51.7
million or 25.5% of revenue in 2006. The increase in SG&A resulted primarily from the acquisition of CD&L, which added approximately $31.5 million, in additional expenses. Higher legal fees also added to the increase in SG&A. The
increase was partly offset by lower legal settlements. Lower personnel costs contributed to reducing total SG&A expense as a percentage of revenue by 5.4%, from 25.5% to 20.1%.



Transaction and integration costs of $6.6 million for 2007 primarily reflected outside consultants, success bonuses and
travel costs related to the integration of the CD&L operations.



The restructuring and asset impairments expense for 2007 was $3.4 million as compared to $0.4 million in 2006. Of the expense recorded in 2007, $0.4 million was associated with severance and retention incentives as part of the integration
of CD&L, $2.4 million was the result of lease terminations as part of the CD&L integration, and $0.5 million related to the write down of Peritas vehicles classified as assets held for sale to fair value.



Depreciation and amortization expense increased by $3.2 million, or 78.7%, to
$7.2 million for 2007 as compared to $4.0 million in 2006 primarily reflecting the amortization of intangible assets recorded as part of the purchase of CD&L which contributed $3.2 million of expense to 2007.



Net interest expense for 2007 increased by $15.1 million, to $20.3 million
from $5.1 million in 2006. In the prior-year period, the interest related primarily to the Companys then existing revolving credit facility and subordinated debt. With the replacement of that debt with the Senior Notes, the Companys
interest expense for the current year was comprised of $8.3 million of interest on the Senior Notes and Revolving Credit Facility in addition to non-cash expense of $11.8 million that includes amortization of deferred financing charges and accretion
of the debt discount relating to the warrants that were issued as a part of the Senior Notes Unit offering. In addition, interest income, net of miscellaneous interest was $0.6 million for the current year.



Other income (expense) for 2007 included $0.6 million of income from a fair
market value adjustment million related to the present value of a settlement liability. Other income (expense) for 2006 included $0.8 million of other income primarily related to an insurance recovery from a prior period partly offset by a fair
market value expense adjustment of $0.5 million related to the present value of a settlement liability.



As a result of the above, the Company recorded a net loss of $39.5 million in 2007 compared to a net loss of $16.0 million in 2006.



Net loss applicable to common stockholders was $66.0 million for 2007
compared with $23.6 million for 2006. For 2007, the difference between net loss applicable to common stockholders and net loss relates to the beneficial conversion associated with the sale of the Series Q Convertible Preferred Stock, beneficial
conversion associated with the anti-dilution provisions of Series N, Series O, and Series P Convertible Preferred Stock resulting from the issuance of Series Q Convertible Preferred Stock and the issuance of additional shares of



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Common Stock to settle a lawsuit, dividends paid-in-kind on Series M, Series N, Series O, Series P and Series Q Convertible Preferred Stock, and the
beneficial conversion associated with dividends paid-in-kind on Series N, Series O, Series P and Series Q Convertible Preferred Stock. In 2006, the difference between net loss applicable to common stockholders and net loss related to the beneficial
conversion associated with the sales of the Series O and Series P Convertible Preferred Stock, dividends paid-in-kind on Series M, Series N, Series O and Series P Convertible Preferred Stock and the beneficial conversion associated with dividends
paid-in-kind on Series N, Series O and Series P Convertible Preferred Stock.



Year Ended July 1, 2006 Compared to Year Ended July 2, 2005



Revenue for 2006 decreased $54.2 million, or 21.1%, to $202.4 million from $256.7 million for 2005. The decrease in revenue is in large part attributable to lower volume experienced as a result of the restructuring
initiated at the end the third fiscal quarter of 2005 as described above. The result was a 20% reduction of weekly revenue. When annualized over the entire fiscal year, these restructuring actions accounted for approximately $50.0 million of the
$54.2 million decrease in revenue from 2005. The remaining decrease in revenue is attributable to losses associated with pricing pressures and customer freight volume fluctuations of approximately $24.0 million. The revenue decline was partially
offset by new customer contracts and business expansion with existing customers approximating $20.0 million. Greater concentration on national account business resulted in an increased proportion of revenues originating from those accounts. In
addition, approximately $0.4 million of the decrease relates to consolidation of one quarter of revenue from a consolidated variable interest entity, Peritas, LLC, during 2006 compared to the consolidation of two quarters of revenue during 2005.



Cost of services for 2006 was $145.6 million, a reduction of
$62.8 million, or 30.1%, from $208.4 million for 2005. We have focused on reducing our costs through the following three initiatives:



| |  |  | implementing our proprietary route management technology to optimize routes structures at each location for the maximum number of stops per day for each driver
thereby allowing us to improve our gross margins;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the completion of the conversion of our workforce from employee drivers to independent contractors, which creates a more variable cost structure and higher gross
margins; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the restructuring of our service network to eliminate low density, low margin locations.
| | - |  | ----------------------------------------------------------------------------------------



These three initiatives resulted in trucks that carry larger loads on denser
routes, fewer more satisfied drivers making more money, and better customer service at lower costs.



Decreased volume and closed facilities accounted for $43.4 million of the decrease, lower vehicle costs accounted for $4.7 million, lower costs for
insurance accounted for $3.7 million, primarily vehicle insurance ($3.1 million), a decrease in cargo claims together with a change in the estimate for cargo claim reserves accounted for $1.2 million, introduction of the cargo loss waiver accounted
for $0.7 million, approximately $0.4 million of the decrease related to the consolidation of one quarter of Peritas costs during 2006 compared to the consolidation of two quarters of costs during 2005, all partially offset by a $1.6 million
increase in purchased transportation, and the remaining $10.3 million of the decrease being attributable to driver pay efficiencies gained from our proprietary route management technology.



Beginning in April 2005 with the restructuring of our operations, we began to
realize significant reductions in costs relative to our redefined routes as enabled by our proprietary route management system. As a result of all the above, the gross margin on service has increased from 18.8% in 2005 to 28.1% in 2006.



Occupancy charges for 2006 were $12.3 million, a decrease of $2.7 million,
or 18.3%, from $15.0 million for 2005. The decrease was mainly due to the shut down of facilities in connection with the restructurings described above.



SG&A expenses for 2006 were $55.4 million, or 27.4% of revenue, a decrease of $22.0 million, or 28.4%, as compared with $77.4 million, or 30.2% of
revenue, for 2005. The decrease in SG&A for the year resulted



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from a decrease in bad debt expense of $7.9 million due to collections during the year exceeding expectations, a decrease in salaries and benefits of $6.8
million (excluding stock and warrant expense) accomplished from the centralization of field administrative functions and the closing of facilities, $4.2 million in reduced legal settlements (primarily because of the settlement in 2005 of a claim for
breach of contract, fees, interest and other charges arising from a contract entered into in 1997 between a predecessor of ours and Mobile Information Systems, Inc.), a decrease of $2.3 million in legal fees as our litigation was curtailed upon
execution of settlement agreements for all of our significant matters, a decrease of $1.4 million in telecommunication expense, a decrease of $1.1 million in travel and entertainment, a decrease of $0.6 million in supplies, a $1.2 million
consolidation loss from a non-controlling interest in a variable interest entity, approximately $0.2 million of which related to the consolidation of one quarter of Peritas SG&A costs during 2006 compared with the consolidation of two quarters
of costs during 2005 and $0.7 million of miscellaneous other decreases. These decreases were partially offset by an increase in stock option and warrant expense of $0.7 million, a $0.7 million increase in depreciation primarily due to commencing
depreciation on our proprietary route management technology placed in service in the fourth quarter of 2005, and $0.7 million in consulting expenses and other professional and outside services.



Restructuring charges and asset impairments for 2006 were $0.4 million, a
decrease of $1.2 million, or 76.5%, from $1.6 million for 2005. The $0.4 million charge in 2006 primarily represents severance costs associated with a reduction in force related to the restructuring of our operations. The $1.6 million charge in 2005
represents severance costs associated with a reduction in force, as well as contract termination costs and asset impairments related to the restructuring of our operations.



Interest expense for 2006 increased $0.4 million to $5.1 million from $4.8 million for 2005 due to an increase in the
amortization of our deferred financing fees. Interest expense related to our borrowings did not significantly change from the same period in the prior year as a result of stable average interest rates and outstanding amounts under the revolving
credit and senior subordinated debt facilities.



As a result of
the foregoing factors, the net loss for 2006 was $16.0 million compared with $49.8 million for 2005, an improvement of $33.8 million, or 67.8%.



Net loss applicable to common stockholders was $23.6 million for 2006 compared with $106.9 million for 2005. For 2006, the difference between net loss
applicable to common stockholders and net loss relates to the beneficial conversion associated with the sale of the Series O and Series P Convertible Preferred Stock, dividends paid-in-kind on Series M, Series N, Series O and Series P Convertible
Preferred Stock, and the beneficial conversion associated with dividends paid-in-kind on Series N, Series O and Series P Convertible Preferred Stock. In 2005, the difference between net loss applicable to common stockholders and net loss related to
the beneficial conversion associated with the sale of the Series J, K, L, M and N Convertible Preferred Stock.



Changes in Internal Controls over Financial Reporting



In connection with the preparation of our consolidated financial statements for the year ended July 1, 2006, due to resource constraints, a material weakness became evident to management regarding our inability
to simultaneously close the books on a timely basis each month and generate all the necessary disclosure for inclusion in our filings with the Securities and Exchange Commission. A material weakness is a significant deficiency in one or more of the
internal control components that alone or in the aggregate precludes our internal controls from reducing to an appropriately low level the risk that material misstatements in our financial statements will not be prevented or detected on a timely
basis. This material weakness was still present at June 30, 2007.



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



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Liquidity and Capital Resources



Overview



In 2007, the Company reported a loss from operations of approximately $19.6 million, which resulted in negative working capital of approximately $6.8
million at June 30, 2007. The reasons for the losses are described under Managements Discussion and Analysis of Financial Condition and Results of Operations - Historical Results of Operations contained in this Report, including,
in particular, the continued cost of the integration of CD&L. The CD&L integration has taken 9 months longer and cost approximately $7 million more than the Companys original estimates. As a result, the Company did not meet the minimum
EBITDA levels contained in its credit agreement for the period ending March 31, 2007. Wells, in its capacity as agent and lender under the credit agreement, granted the Company a waiver and then entered into an amendment to the credit agreement
dated May 25, 2007 that provided for lower minimum EBITDA targets and revised reporting requirements. Notwithstanding the May amendment, due to an unanticipated degree of customer losses related to the migration of financial services customers to
electronic check clearing under the Federal Check 21 initiative and unfavorable contracts the Company assumed with the CD&L acquisition, the Company again did not meet its minimum EBITDA levels contained in its credit agreement for the periods
ending July 28, 2007 and August 25, 2007. Wells, in its capacity as agent and lender under the credit agreement, granted the Company waivers and entered into another amended agreement dated October 15, 2007 which included (1) lower monthly minimum
EBITDA requirements through December 2008 and (2) an increase in the interest rate of 75 basis points in LIBOR margin (from 2.5% to 3.25%) until trailing twelve month EBITDA equals $15.0 million, dropping to a 25 basis point increase when trailing
twelve month EBITDA is greater than $15.0 million and reverting back to the original interest rate when trailing twelve month EBITDA is greater than $20.0 million.



The Company is managing to an operating plan which it expects to result in positive cash flow over the next year. Key
components of the operating plan include the following:



| |  |  | improving gross margins by using our newly integrated route information database to identify and correct a number of specific, predominately legacy CD&L routes
- fewer than 10% of all routes - where our average driver settlement has exceeded competitive market norms for the work performed;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | winding down payments related to restructuring and integration related activities from $10 million in fiscal 2007 to less than $2 million in fiscal 2008;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | lower operating and SG&A expenses by reducing headcount, restoring our historical market-based deductions from independent contractor settlements to recoup
driver support costs not recovered during fiscal 2007, and changing or eliminating services and the related costs associated with telecommunications, workforce acquisition, and miscellaneous other activities;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | further improvement in gross margins compared to prior quarters, and based on the continuing roll-out of the Companys route optimization software, which was
made possible by the completion of route data migration in fiscal 2007; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increasing profitable revenue growth from recently announced, existing and potential customers in targeted markets;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | further improving accounts receivable collections resulting from the customer database integration which was completed in fiscal 2007.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



In addition, we expect to further improve our cash position in fiscal 2008
by the following steps:



| |  |  | sale of our Canadian subsidiary in the second quarter of fiscal 2008, as negotiations with interested parties have progressed favorably;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | issuance of approximately 1,000,000 shares of common stock in connection with a private placement to management in July 2007 under which selected members of the
management team were offered the opportunity to purchase common shares. $573,000 was paid to the Company in June 2007, and an
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | additional $527,000 is being paid by payroll deductions or scheduled monthly payments during the first half of fiscal 2008; and
| | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | in connection with a consent solicitation from the holders of the Senior Notes in July 2007, approximately $3.2 million was raised from the exercise of
approximately 6.0 million warrants. (see discussion above for more details)
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company believes that, based on its operating plan, cash to be received from the pending sale of its Canadian subsidiary, cash received from a private placement of common stock and warrant exercises in July 2007,
and results to date, it will have sufficient cash flow to meet its expected cash needs and to satisfy the covenants contained in the agreements governing its debt (including the revised minimum EBITDA covenant under the credit agreement) in the next
twelve month period. The Company is factoring into its plan, among other things, the requirements under the Indenture governing the Senior Notes to maintain a minimum cash balance of $4.0 million through May 15, 2008, and $8.5 million thereafter
through June 28, 2008, which is subject to adjustment in the event that certain conditions are not met, and to make the December 2007 and June 2008 interest payments on the Senior Notes in cash of $5.1 million each. As of June 30, 2007, the Company
had $14.5 million in cash and $0.1 million in available borrowings under its revolving credit facility. Based on the current operating plan (including the related assumptions), cash to be received from the pending sale of a subsidiary, cash received
from a private placement of common stock and warrant exercises in July 2007 and results from operations and qualitative feedback from field management since June 30, 2007, the Company believes it will be in compliance with its covenants, including
those summarized above. As such, the Company believes it will continue to meet its obligations in the ordinary course of business as they become due through June 28, 2008.



As with any operating plan, there are risks associated with the Companys ability to execute it. Therefore, there can be no assurance that the Company
will be able to satisfy the revised minimum EBITDA requirement or other applicable covenants to its lenders, or achieve the operating improvements described above. If the Company is unable to execute this plan in general or if, after making the
December 30, 2007 or June 30, 2008 interest payment, the Company cannot remain in compliance with the minimum cash requirement, it will need to find additional sources of cash not contemplated by the current operating plan and/or raise additional
capital to sustain continuing operations as currently contemplated. Further, the Company will take additional actions if necessary to reduce expenses in that case, the Company would need to amend, or seek one or more further waivers of, the minimum
EBITDA covenant under the credit agreement and the minimum cash requirement under the Indenture. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying
amounts or the amounts and classification of liabilities that may result from the outcome of this uncertainty. For a discussion of these risks and related matters discussed above, see Risk Factors.



Operating Activities, Investing Activities & Financing Activities



During the year ended June 30, 2007, the net increase in
year end cash was $12.7 million compared to a net decrease of $4.1 million during the year ended July 1, 2006. As reported in our consolidated statements of cash flows, the increase (decrease) in cash during the years ended June 30, 2007
and July 1, 2006 is summarized as follows (in thousands):



|                                                                   |  |                   |         |   |      |   |        |  
|------------------------------------------------------------------ |  | ----------------- | ------- | - | ---- | - | ------ | -
|                                                                   |  | Fiscal Year Ended |        
|                                                                   |  | 2007              |         |   | 2006 |  
|Cash used for transaction, integration, and restructuring expenses |  | $                 | (8,431  | ) |      | $ | (1,177 | )
|Cash provided by ongoing operating activities                      |  |                   | 755     |   |      |   | (8,797 | )
|                                                                   |  |                   |         |   |      |   |        |  
|Cash used in operating activities                                  |  |                   | (7,676  | ) |      |   | (9,974 | )
|Cash used in investing activities                                  |  |                   | (53,207 | ) |      |   | (976   | )
|Cash provided by financing activities                              |  |                   | 73,586  |   |      |   | 6,859  |  
|                                                                   |  |                   |         |   |      |   |        |  
|Total increase (decrease) in cash                                  |  | $                 | 12,703  |   |      | $ | (4,091 | )
|                                                                   |  |                   |         |   |      |   |        |  



Cash used in
operations was $7.7 million for 2007. This use of funds was comprised of a net loss of $39.5 million offset by non-cash expenses of $20.4 million, and by net cash provided as a result of working



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capital changes of $15.3 million, partly offset by non-cash revenue and other non-cash benefits amortized into results from acquired unfavorable contracts of
$3.8 million.



Cash used in investing activities was $53.2
million for 2007 and consisted primarily of $51.6 million of net cash used for the acquisition of CD&L and $2.4 million of capital expenditures. This was partly offset by $0.8 million of cash provided from asset sales.



Cash provided from financing activities for 2007 amounted to $73.6 million.
The primary sources of cash were net proceeds of $63.5 million from the issuance of Senior Notes, $42.5 million from the issuance Series Q Convertible Preferred Stock and net proceeds of $6.5 million from the Companys new revolving credit
facility. This was offset by the $29.9 million to repay the Companys and CD&Ls then existing revolving credit facilities, $5.8 million to repay the Companys subordinated debt, $1.5 million to repay CD&L seller financed debt
and $0.9 million in note payments made by Peritas. The Company sold 75,000 Units for $70.7 million, net of a $4.3 million discount for the first semi-annual interest payment. Each Unit is comprised of (a) $1,000 in aggregate principal amount at
maturity of Senior Notes and (b) a warrant to purchase 345 shares of common stock at an initial exercise price of $1.45 per share. $7.2 million of fees associated with the placement of the Senior Notes were netted against the cash generated.
The Company sold 4,500,000 shares of Series Q Convertible Preferred Stock, each of which was initially convertible into 9.0909 shares of common stock preferred stock for $45.0 million. $2.5 million in fees associated with the placement of these
shares are netted against the cash generated. In addition, the Company incurred $0.2 million of issuance costs in June 2007 related to shares of Common Stock sold to management and shares issued upon the conversion of warrants in July 2007.



Revolving Credit Facility



On December 22, 2006, the Company and most its subsidiaries entered
into a senior secured revolving credit agreement with a syndicate of lenders led by Wells Fargo Foothill, Inc. (Wells). Wells is the administrative agent under the revolving credit agreement. The revolving credit agreement matures on the
earlier of: (i) the date that is 90 days prior to the earliest date on which the principal amount of any of the Senior Notes is scheduled to become due and payable under the Indenture (as defined below) and (ii) December 22, 2011.
Each of the Companys subsidiaries (other than CD&L, the Companys inactive subsidiaries and foreign subsidiaries) is a borrower under the revolving credit agreement, and CD&L and the Company have guaranteed the borrowers
obligations under the revolving credit agreement. The borrowers obligations are joint and several. The Company also entered into a security agreement whereby the Companys obligations under the revolving credit agreement are secured by
substantially all of the assets of each borrower and each guarantor subject to the rights of the holders of the Senior Notes. The revolving credit agreement provides for up to $25.0 million of aggregate financing, $11.0 million of which may be
in the form of letters of credit. At closing, Wells issued two letters of credit: one for $3.0 million to secure the Companys and its subsidiaries cash management obligations with respect to bank accounts maintained by the Company and
its subsidiaries with Wells Fargo Bank, N.A. and a second for $3.5 million to collateralize its participation in the captive insurance company that provides certain of its insurance coverage. In June 2007 the letter of credit with Wells Fargo Bank,
N.A. was reduced by $1.5 million and the letter of credit issued to the captive insurance company was reduced by $0.6 million. In September 2007, the letter of credit securing the Company and its subsidiaries cash management obligations was
reduced to zero as the Company moved its cash management accounts from Wells to another financial institution.



Borrowings under the revolving credit agreement bear interest at a rate equal to, at the borrowers option, either a base rate, or a LIBOR rate plus
an applicable margin of 2.50%. The base rate is the rate of interest announced from time to time by Wells Fargo Bank, N.A. as the prime rate. The Companys borrowing rate at June 30, 2007 was 8.25%. In addition to paying interest on
outstanding borrowings under the revolving credit agreement, the borrowers are also required to pay a letter of credit fee that accrues at a rate equal to 2.50% per year multiplied by the average daily balance of the undrawn amount of all
outstanding letters of credit. The borrowers are required to pay an issuance charge to the issuing lender of 0.825% per year (such rate subject to



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change). The borrowers are also required to pay customary fees of the administrative agent, as well as costs and expenses of the administrative agent and the
lenders, arising in connection with the revolving credit agreement.



The revolving credit agreement contains a number of customary covenants that, among other things, restrict the borrowers and guarantors ability, to incur additional debt, create liens on assets, sell assets, pay dividends,
engage in mergers and acquisitions, change the business conducted by the borrowers or guarantors, make capital expenditures and engage in transactions with affiliates. The revolving credit agreement also includes a specified financial covenant
requiring the borrowers to achieve a minimum EBITDA (as defined in the revolving credit agreement), measured on a month-end basis at the end of each fiscal month, and to certify compliance on a monthly basis. At June 30, 2007, in accordance
with the terms of the agreement, the Company had $0.1 million in available borrowings. In connection with the revolving credit agreement, the Company also entered into a security agreement whereby the Companys obligations under the revolving
credit agreement are secured by substantially all of the assets of each borrower and each guarantor subject to the rights of the holders of the Senior Notes.



The Company did not meet its minimum EBITDA levels contained in its credit agreement for the period ending March 31, 2007. Wells, in its capacity as
agent and lender under the credit agreement granted the Company a waiver. The Company negotiated revised minimum EBITDA targets and revised reporting requirements with Wells, in its capacity as agent and lender, pursuant to an amendment dated
May 25, 2007. The Company did not meet its minimum EBITDA levels contained in its credit agreement for the period ending July 28, 2007 and August 25, 2007. Wells, in its capacity as agent and lender, under the credit agreement granted
the Company waivers. The Company negotiated (1) revised monthly minimum EBITDA requirements and (2) agreed to an increase in the interest rate of 75 basis points in LIBOR margin (from 2.5% to 3.25%) until trailing twelve month EBITDA
equals $15.0 million, dropping 25 basis points when trailing twelve month EBITDA is greater than $15.0 million and reverts back to the original interest rate when trailing twelve month EBITDA is greater than $20.0 million with the lender with an
amended agreement dated October 15, 2007.



As a condition
to and in connection with executing the Supplemental Indenture to the Senior Notes described below, the Company entered into an amendment, effective as of July 13, 2007, to the revolving credit agreement. The Amendment: (i) permits the
sale of the Canadian subsidiary (or the assets thereof), (ii) provides that the Company need not apply to repay borrowings under the Credit Agreement proceeds of the sale of the Canadian subsidiary or certain treasury stock or offerings of
equity, (iii) increases the interest rate on the Senior Notes from 12.0% to 13.0% and (iv) establishes a borrowing base reserve of $400,000, which reserve shall be reduced to zero when the Company delivers to Wells, in its capacity as
agent under the revolving credit agreement, its financial statements for its fiscal quarter ending December 31, 2007, provided no event of default under the Credit Agreement then exists.



CD&L Transactions



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



Senior Notes



The Senior Notes were issued pursuant to the Indenture (the
Indenture) dated as of July 3, 2006 between the Company and Wells Fargo Bank, N.A., as trustee. The Senior Notes bear interest at an annual rate of 12% at June 30, 2007. As discussed below, the annual interest rate increased to
13% in July 2007. The Senior Notes were issued at a discount of 5.66% of face value. The net proceeds from the sale of the Senior Notes, after deducting the discount and estimated offering expenses payable by the Company, were approximately
$63.4 million. The Senior Notes were issued in units comprised of (a) $1,000 in aggregate principal amount at



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maturity of Senior Notes and (b) a warrant to purchase 345 shares of the Companys common stock exercisable at $1.45 per share.



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



Subject to a second supplemental indenture dated as of
December 22, 2006, which prohibits mandatory redemption of Senior Notes if there are outstanding obligations under the revolving credit facility, holders of Senior Notes have the right to cause the Company to redeem, at par, up to 25% of the
original principal amount of Senior Notes if the Companys consolidated cash flow, for the period of four consecutive fiscal quarters preceding the second anniversary of the issue date, is less than $20 million. The holders of the Senior Notes
also have the right to cause the Company, subject to the December 22, 2006 amendment, to redeem at par, up to an additional 25% of the original principal amount of Senior Notes if the Companys consolidated cash flow, for the period of
four consecutive fiscal quarters preceding the third anniversary of the issue date, is less than $25 million. The holders right to cause the Company to redeem Senior Notes will terminate under certain circumstances, if at or prior to such
second or third anniversary date the volume-weighted average trading price for the Companys common stock exceeds $2.75 per share for any 20 trading days within any consecutive 30-trading-day period from the issue date through such anniversary
date. Upon a change of control, holders of the Senior Notes will also have the right to require the Company to repurchase all or any part of their Senior Notes at a price equal to 101% of the aggregate principal amount thereof.



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



The Senior Notes are guaranteed by the Companys domestic
subsidiaries and were originally secured by a first-priority lien on collateral consisting of substantially all of the Companys and its domestic subsidiaries tangible and intangible assets. On December 22, 2006, the Indenture was
amended to permit the Company to enter into the new revolving credit facility and to modify certain other provisions of the Senior Notes, including, but not limited to, a limitation on the ability of holders of the Senior Notes to cause the Company
to redeem the Senior Notes based on the Companys consolidated cash flow if there are then outstanding any obligations under the revolving credit facility. In addition, the trustee subordinated the lien securing the Senior Notes to the lien
securing the revolving credit facility, as required by the Indenture. The Company received consents from a majority of the Senior Note holders pursuant to a consent solicitation.



On July 25, 2007, the Company entered into a third supplemental indenture modifying the Indenture governing the 12.0%
Senior Notes. The Supplemental Indenture (1) temporarily reduces the requirement that the Company maintain at all times cash and cash equivalents subject to specified liens under the minimum cash covenant to $4.0 million, which becomes a
permanent reduction upon satisfaction of certain conditions; (2) waives the requirement in the debt incurrence covenant regarding the reduction of the credit facility basket with respect to the possible sale of the Companys Canadian
subsidiary and (3) waives the requirement in the asset sales covenant that requires a permanent reduction in credit facilities from the net proceeds of asset sales



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with respect to the possible sale of the Companys Canadian subsidiary. An allonge to the existing Senior Notes also raises the interest rate payable on
the Notes from 12.0% to 13.0%. The Company received consents from a majority of the Senior Note holders pursuant to a consent solicitation.



Warrants



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



In
addition to issuing warrants as part of the Units, the Company also issued warrants on July 3, 2006 to purchase 250,000 shares of its common stock to affiliates of THLPV in consideration of services provided by one or more of these parties, at
an exercise price of $.01 per share. The warrants issued to affiliates of THLPV have terms similar to the warrants issued as part of the Units except that they do not provide for automatic exercise to affiliates of THLPV. Mr. James G.
Brown, founder and Managing Director of THLPV, is one of the Companys directors.



Series Q Convertible Preferred Stock



Each share of the Companys Series Q Preferred Stock is initially convertible into 9.0909 shares of the Companys common stock, representing an initial conversion price of $1.10 per share, subject to
adjustment and other customary terms for similar offerings. The Company may force holders of Series Q Preferred Stock to convert their shares if the daily weighted average market price of our common stock is equal to or greater than 200 percent of
the then applicable Series Q Preferred Stock conversion price for a specified period of time, subject to specified conditions. In addition, for so long as any of these shares are outstanding, the Company may not enter into any equity line of credit,
variable or future-priced resetting, self-liquidating, adjusting or conditional fund raising, or similar financing arrangements.



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



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



Use of Proceeds



In total, the aggregate net cash proceeds from the sale of the Units were approximately $63.5 million and from the sale of the Series Q Preferred Stock
were approximately $42.5 million. Approximately $51.6 million of the proceeds were used to finance the CD&L acquisition, approximately $26.3 million were used to repay indebtedness owed by us to Bank of America, N.A. ($20.5 million), BET
Associates, LP ($5.8 million), approximately $1.6 million were used to repay CD&L seller-financed debt from previous acquisitions, approximately $9.4 million were used to repay CD&Ls line of credit facility and $17.2 million was
retained for general corporate purposes. See Liquidity and Capital Resources. In addition, the Company granted customary registration rights with respect to the shares of the Companys common stock issuable upon conversion of
the Series Q Preferred Stock and the warrants.



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Exchange Rates & Inflation



Exchange rates and inflation have not had a significant impact on our operations or cash flows.



Commitments and Significant Contractual Obligations



As of June 30, 2007, we had outstanding operating lease commitments of
$34.5 million, payable over multiple years. Some of these commitments were for space that was no longer being used, which resulted in restructuring charges of $2.4 million and $0.5 million during 2007 and 2005, respectively. There were no
restructuring charges for lease commitments in fiscal year 2006. We have entered into subleases for some of this excess space and are in the process of attempting to sublease such space, but it is considered unlikely that any sublease income
generated will offset the entire future commitment.



As of
June 30, 2007, our significant future contractual obligations and their payments by fiscal year were as follows (in thousands):



|                         |  |                        |        |      |   |        |  |      |        |      |   |            |  |       |       |  |   |       |  |   |        
|------------------------ |  | ---------------------- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ---------- |  | ----- | ----- |  | - | ----- |  | - | -------
|Contractual Obligations  |  | Payments Due By Period
|                         |  | 2008                   |        | 2009 |   | 2010   |  | 2011 |        | 2012 |   | Thereafter |  | Total
|Operating leases         |  | $                      | 10,316 |      | $ | 6,962  |  | $    | 5,308  |      | $ | 3,366      |  | $     | 2,288 |  | $ | 6,269 |  | $ | 34,509 
|Capital leases           |  |                        | 267    |      |   | 260    |  |      | 251    |      |   | 235        |  |       | 108   |  |   |      |  |   | 1,121  
|Debt                     |  |                        | 558    |      |   | 15     |  |      | 11     |      |   | 78,992     |  |       |      |  |   |      |  |   | 79,576 
|Interest on Senior Notes |  |                        | 9,710  |      |   | 10,167 |  |      | 15,250 |      |   |           |  |       |      |  |   |      |  |   | 35,127 
|Legal settlements        |  |                        | 1,740  |      |   | 215    |  |      |       |      |   |           |  |       |      |  |   |      |  |   | 1,955  
|                         |  |                        |        |      |   |        |  |      |        |      |   |            |  |       |       |  |   |       |  |   |        
|Total                    |  | $                      | 22,591 |      | $ | 17,619 |  | $    | 20,820 |      | $ | 82,593     |  | $     | 2,396 |  | $ | 6,269 |  | $ | 152,288
|                         |  |                        |        |      |   |        |  |      |        |      |   |            |  |       |       |  |   |       |  |   |        



For more information
regarding operating leases, long-term debt and the line of credit, see Notes 14 and 8, respectively, of our consolidated financial statements.



Off-Balance Sheet Arrangements



As of June 30, 2007, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term off-balance sheet arrangement generally means
any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have: (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or
(ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.



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



In 2004, Peritas was purchased from MCG by THLPV. In 2005, Peritas entered into a $3.0 million Loan and Security Agreement with Comerica, of which 35% of
the outstanding amounts due under the line were guaranteed by THLPV. As a result of borrowings under the agreement, Comericas outstanding debt, net of the 35% guarantee from THLPV, exceeded our variable interest in Peritas, and Comerica became
the primary beneficiary to absorb a majority of Peritas expected losses. We no longer had a variable interest in Peritas that was at risk of disproportionate loss relative to its voting rights. Accordingly, Peritas was deconsolidated from our
financial statements upon the completion of these transactions during fiscal year 2005. As Peritas periodically paid down the borrowings under the line with Comerica, our receivable with Peritas continued to increase. In March 2006, our variable
interest in Peritas increased to an amount that exceeded the outstanding balance of



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outstanding under the line with Comerica, net of the 35% guarantee from THLPV, and we once again became the primary beneficiary to absorb a majority of
Peritas expected losses.



Peritas was consolidated with our
financial statements at July 1, 2006 and for the three months then ended as required by FIN 46 (revised December 2003), Consolidation of Variable Interest Entities. Peritas remains consolidated with our financial ststements as of
and for the year ended June 30, 2007.



New Accounting Pronouncements



In May 2005, the FASB issued SFAS No. 154,Accounting Changes and Error Corrections (SFAS 154). SFAS 154 is a replacement for APB Opinion No. 20,Accounting Changes, and FASB Statement No. 3,Reporting Accounting Changes in Interim Financial
Statements. SFAS 154 applies to all voluntary changes in accounting principle and changes the accounting for and reporting of changes for and reporting of a change in accounting principle. SFAS 154 requires retrospective application of prior
periods financial statements of a voluntary change in accounting principle unless it is impracticable. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of
the change the cumulative effort effect of changing to the new accounting principle. SFAS 154 requires that a change in method of depreciation, amortization, or depletion for long-lived non-financial assets be accounted for as a change in accounting
estimate that is affected by a change in accounting principle. Opinion 20 previously required that such a change be reported as a change in accounting principle. This Statement is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. Statement 154 did not have a material effect on the Companys financial statements.



In June 2006 the FASB issued Financial Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes.FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with SFAS 109, Accounting for Income Taxes.FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006, which means that it will be effective for our fiscal year beginning July 1, 2007. We are in the process of evaluating this guidance and
therefore have not yet determined the effect that the adoption of FIN 48 will have on our financial statements.



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



In February 2007 the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities.SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair
value at specific election dates. SFAS 159s objective is to improve financial reporting by reducing both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities
differently. SFAS 159 requires companies to provide additional information that will help users of financial statements to more easily understand the effect of the Companys choice to use fair value on its earnings. SFAS 159 also requires
companies to display the fair value of those assets and liabilities for which the



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company has chosen to use fair value on the face of the balance sheet. The new standard does not eliminate disclosure requirements included in other
accounting standards, including requirements for disclosures about fair value measurements included in SFAS 157, Fair Value Measurements,and SFAS 107, Disclosures about Fair Value of Financial Instruments.SFAS
159 is effective for fiscal years beginning after November 15, 2007, which means that it will be effective for the Companys fiscal year beginning June 29, 2008. The Company is in the process of evaluating SFAS 159 and therefore has
not yet determined the effect that the adoption will have on its financial statements.



ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



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



As of September 28,
2007, we had $78.2 million in aggregate principal amount of fixed rate long-term debt obligations with an estimated fair market value of $70.4 million, based on current asking prices for trades at 90% of face value, with an overall weighted average
interest rate of 13.0% and an overall weighted maturity of 2.75, years, compared to rates and maturities currently available in long-term debt markets. Market risk is estimated as the potential loss in fair value of our fixed rate long-term debt
resulting from a hypothetical increase of 10.0% in interest rates. Such an increase in interest rates would have resulted in a decrease of $1.6 million in the fair market value of our fixed-rate long-term debt.



The Company has revolving debt of $7.5 million at June 30, 2007 that is
subject to variable interest rates. A 1% change in the interest would result in an impact of $0.1 million in interest expense. Except as described above, we are not currently subject to material market risks for interest rates, foreign currency
rates or other market price risks.



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|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------



VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Consolidated Financial Statements



|                                                                           |  |     
|-------------------------------------------------------------------------- |  | ----
|CONTENTS                                                                   |  | PAGE
|Report of UHY LLP, Independent Registered Public Accounting Firm           |  | 44  
|                                                                           | 
|Report of Ernst & Young LLP, Independent Registered Public Accounting Firm |  | 45  
|                                                                           | 
|Consolidated Financial Statements                                          |  |     
|                                                                           | 
|Consolidated Balance Sheets                                                |  | 46  
|                                                                           | 
|Consolidated Statements of Operations                                      |  | 47  
|                                                                           | 
|Consolidated Statement of Shareholders Equity and Comprehensive Loss      |  | 48  
|                                                                           | 
|Consolidated Statements of Cash Flows                                      |  | 54  
|                                                                           | 
|Notes to Consolidated Financial Statements                                 |  | 55  



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Report of UHY LLP, Independent Registered Public Accounting Firm



To the Board of Directors and Shareholders of

Velocity Express Corporation and Subsidiaries



We have audited the accompanying consolidated balance sheets of Velocity Express Corporation
and subsidiaries (the Company) as of June 30, 2007 and July 1, 2006, and the related consolidated statements of operations, shareholders equity and comprehensive loss, and cash flows for each of the two years in the
period ended June 30, 2007. Our audits also included the financial statement schedule for 2007 and 2006 listed in the Index at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, 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.



In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of the Company as of June 30, 2007 and July 1, 2006, and the consolidated results of its operations and its cash flows for each of the two years in the period ended June 30, 2007 in
conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule for 2007 and 2006, when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information set forth therein.



As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for share-based compensation as of July 3, 2005.



/s/    UHY LLP



Hartford, Connecticut

October 15, 2007



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Report of Ernst & Young LLP, Independent Registered Public Accounting Firm



The Board of Directors and Shareholders of

Velocity Express Corporation and
Subsidiaries



We have audited the accompanying consolidated statements of
operations, shareholders equity and comprehensive loss, and cash flows of Velocity Express Corporation and Subsidiaries for the year ended July 2, 2005. Our audit also included the financial statement schedule listed in the Index at
Item 15. 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 audit.



We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (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. We were not engaged to perform an audit of the
Companys internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but are not for the purpose
of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for
our opinion.



In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated results of Velocity Express Corporation and Subsidiaries operations and their cash flows for the year ended July 2, 2005 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.



/s/    Ernst & Young LLP



Stamford,
Connecticut

October 17, 2005



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##### Table of Contents

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except par value)



|                                                                                                                                                             |  |               |          |   |              |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | -------- | - | ------------ | - | -------- | -
|                                                                                                                                                             |  | June 30, 2007 |          |   | July 1, 2006 |  
|ASSETS                                                                                                                                                       |  |               |          |   |              |   |          |  
|Current assets:                                                                                                                                              |  |               |          |   |              |   |          |  
|Cash                                                                                                                                                         |  | $             | 14,418   |   |              | $ | 1,715    |  
|Accounts receivable, net of allowance of $3,277 and $3,273 at June 30, 2007 and July 1, 2006, respectively                                                   |  |               | 32,597   |   |              |   | 14,789   |  
|Accounts receivable - other                                                                                                                                  |  |               | 1,250    |   |              |   | 1,031    |  
|Prepaid workers compensation and auto liability insurance                                                                                                   |  |               | 3,404    |   |              |   | 1,932    |  
|Other prepaid expenses and other current assets                                                                                                              |  |               | 1,031    |   |              |   | 1,167    |  
|                                                                                                                                                             |  |               |          |   |              |   |          |  
|Total current assets                                                                                                                                         |  |               | 52,700   |   |              |   | 20,634   |  
|                                                                                                                                                             |  |              
|Property and equipment, net                                                                                                                                  |  |               | 8,457    |   |              |   | 6,581    |  
|Assets held for sale                                                                                                                                         |  |               | 101      |   |              |   | 973      |  
|Goodwill                                                                                                                                                     |  |               | 81,791   |   |              |   | 42,830   |  
|Intangible assets, net                                                                                                                                       |  |               | 24,327   |   |              |   |         |  
|Deferred financing costs, net                                                                                                                                |  |               | 6,246    |   |              |   | 1,763    |  
|Other assets                                                                                                                                                 |  |               | 2,888    |   |              |   | 2,872    |  
|                                                                                                                                                             |  |               |          |   |              |   |          |  
|Total assets                                                                                                                                                 |  | $             | 176,510  |   |              | $ | 75,653   |  
|                                                                                                                                                             |  |               |          |   |              |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                         |  |               |          |   |              |   |          |  
|                                                                                                                                                             |  |              
|Current liabilities:                                                                                                                                         |  |               |          |   |              |   |          |  
|Trade accounts payable                                                                                                                                       |  | $             | 28,413   |   |              | $ | 16,900   |  
|Accrued wages and benefits                                                                                                                                   |  |               | 3,643    |   |              |   | 2,755    |  
|Accrued legal and claims                                                                                                                                     |  |               | 5,854    |   |              |   | 4,688    |  
|Accrued insurance and claims                                                                                                                                 |  |               | 3,697    |   |              |   | 1,802    |  
|Accrued interest                                                                                                                                             |  |               | 5,867    |   |              |   | 270      |  
|Related party liabilities                                                                                                                                    |  |               | 574      |   |              |   | 1,430    |  
|Other accrued liabilities                                                                                                                                    |  |               | 3,383    |   |              |   | 977      |  
|Revolving line of credit                                                                                                                                     |  |               | 7,467    |   |              |   |         |  
|Current portion of long-term debt                                                                                                                            |  |               | 558      |   |              |   | 1,363    |  
|                                                                                                                                                             |  |               |          |   |              |   |          |  
|Total current liabilities                                                                                                                                    |  |               | 59,456   |   |              |   | 30,185   |  
|Long-term debt, less current portion                                                                                                                         |  |               | 55,510   |   |              |   | 26,185   |  
|Accrued insurance and claims                                                                                                                                 |  |               | 1,882    |   |              |   | 2,540    |  
|Restructuring liabilities                                                                                                                                    |  |               |         |   |              |   | 111      |  
|Other long-term liabilities                                                                                                                                  |  |               | 4,018    |   |              |   | 1,563    |  
|Commitments and contingencies                                                                                                                                |  |               |          |   |              |   |          |  
|Shareholders equity:                                                                                                                                        |  |               |          |   |              |   |          |  
|Preferred stock, $0.004 par value, 299,515 shares authorized 12,239 and 10,231 shares issued and outstanding at June 30, 2007 and July 1,
2006, respectively |  |               | 68,902   |   |              |   | 33,243   |  
|Common stock, $0.004 par value, 700,000 shares authorized 32,820 and 16,965 shares issued and outstanding at June 30, 2007 and July 1, 2006,
respectively    |  |               | 131      |   |              |   | 68       |  
|Stock subscription receivable                                                                                                                                |  |               |         |   |              |   | (7,543   | )
|Additional paid-in-capital                                                                                                                                   |  |               | 376,041  |   |              |   | 313,489  |  
|Accumulated deficit                                                                                                                                          |  |               | (389,497 | ) |              |   | (324,200 | )
|Accumulated other comprehensive income                                                                                                                       |  |               | 67       |   |              |   | 12       |  
|                                                                                                                                                             |  |               |          |   |              |   |          |  
|Total shareholders equity                                                                                                                                   |  |               | 55,644   |   |              |   | 15,069   |  
|                                                                                                                                                             |  |               |          |   |              |   |          |  
|Total liabilities and shareholders equity                                                                                                                   |  | $             | 176,510  |   |              | $ | 75,653   |  
|                                                                                                                                                             |  |               |          |   |              |   |          |  



SEE ACCOMPANYING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



46



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##### Table of Contents

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)



|                                                                                                              |  |               |         |   |              |   |         |              |  |   |          |  
|------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ------------ | - | ------- | ------------ |  | - | -------- | -
|                                                                                                              |  | June 30, 2007 |         |   | July 1, 2006 |   |         | July 2, 2005 | 
|Revenue                                                                                                       |  | $             | 410,102 |   |              | $ | 202,430 |              |  | $ | 256,662  |  
|Cost of services                                                                                              |  |               | 311,820 |   |              |   | 145,346 |              |  |   | 208,156  |  
|Depreciation                                                                                                  |  |               | 238     |   |              |   | 225     |              |  |   | 186      |  
|                                                                                                              |  |               |         |   |              |   |         |              |  |   |          |  
|Gross profit                                                                                                  |  |               | 98,044  |   |              |   | 56,859  |              |  |   | 48,320   |  
|                                                                                                              |  |               |        
|Operating expenses:                                                                                           |  |               |         |   |              |   |         |              |  |   |          |  
|Occupancy                                                                                                     |  |               | 17,855  |   |              |   | 12,010  |              |  |   | 14,800   |  
|Selling, general and administrative                                                                           |  |               | 82,614  |   |              |   | 51,661  |              |  |   | 74,264   |  
|                                                                                                              |  |               |         |   |              |   |         |              |  |   |          |  
|                                                                                                              |  |               | 100,469 |   |              |   | 63,671  |              |  |   | 89,064   |  
|Transaction and integration costs                                                                             |  |               | 6,565   |   |              |   |        |              |  |   |         |  
|Restructuring charges and asset impairments                                                                   |  |               | 3,398   |   |              |   | 378     |              |  |   | 1,603    |  
|Depreciation and amortization                                                                                 |  |               | 7,191   |   |              |   | 4,025   |              |  |   | 3,331    |  
|                                                                                                              |  |               |         |   |              |   |         |              |  |   |          |  
|Total operating expenses                                                                                      |  |               | 117,623 |   |              |   | 68,074  |              |  |   | 93,998   |  
|                                                                                                              |  |               |         |   |              |   |         |              |  |   |          |  
|Loss from operations                                                                                          |  |               | (19,579 | ) |              |   | (11,215 | )            |  |   | (45,678  | )
|Other income (expense):                                                                                       |  |               |         |   |              |   |         |              |  |   |          |  
|Interest expense, net                                                                                         |  |               | (20,257 | ) |              |   | (5,118  | )            |  |   | (4,750   | )
|Other                                                                                                         |  |               | 708     |   |              |   | 295     |              |  |   | 584      |  
|                                                                                                              |  |               |         |   |              |   |         |              |  |   |          |  
|Loss before income taxes and minority interest                                                                |  |               | (39,128 | ) |              |   | (16,038 | )            |  |   | (49,844  | )
|Income taxes                                                                                                  |  |               | 37      |   |              |   |        |              |  |   |         |  
|Minority interest                                                                                             |  |               | 367     |   |              |   |        |              |  |   |         |  
|                                                                                                              |  |               |         |   |              |   |         |              |  |   |          |  
|Net loss                                                                                                      |  | $             | (39,532 | ) |              | $ | (16,038 | )            |  | $ | (49,844  | )
|                                                                                                              |  |               |         |   |              |   |         |              |  |   |          |  
|Net loss applicable to common shareholders                                                                    |  | $             | (65,991 | ) |              | $ | (23,647 | )            |  | $ | (106,869 | )
|                                                                                                              |  |               |         |   |              |   |         |              |  |   |          |  
|Basic and diluted net loss per share                                                                          |  | $             | (2.53   | ) |              | $ | (1.49   | )            |  | $ | (21.01   | )
|                                                                                                              |  |               |         |   |              |   |         |              |  |   |          |  
|Weighted average common stock shares outstanding used in the basic and diluted net loss per share calculation |  |               | 26,085  |   |              |   | 15,907  |              |  |   | 5,087    |  
|                                                                                                              |  |               |         |   |              |   |         |              |  |   |          |  





SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



47



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##### Table of Contents

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY AND
COMPREHENSIVE LOSS

Unaudited

(Amounts in thousands)



|                                                      |  |                          |   |  |                          |         |   |                          |        |   |                          |   |         |                          |  |        |                          |  |   |        |   |  |        |   |  |        |        |   |        |        |   |        |   |        |        |  |      |   |  |   |        |  
|----------------------------------------------------- |  | ------------------------ | - |  | ------------------------ | ------- | - | ------------------------ | ------ | - | ------------------------ | - | ------- | ------------------------ |  | ------ | ------------------------ |  | - | ------ | - |  | ------ | - |  | ------ | ------ | - | ------ | ------ | - | ------ | - | ------ | ------ |  | ---- | - |  | - | ------ | -
|                                                      |  | Series B Preferred Stock |   |  | Series C Preferred Stock |         |   | Series D Preferred Stock |        |   | Series F Preferred Stock |   |         | Series G Preferred Stock |  |        | Series H Preferred Stock | 
|                                                      |  | Shares                   |   |  | Amount                   |         |   | Shares                   |        |   | Amount                   |   |         | Shares                   |  |        | Amount                   |  |   | Shares |   |  | Amount |   |  | Shares |        |   | Amount |        |   | Shares |   |        | Amount | 
|Balance at July 3, 2004                               |  | 2,807                    |   |  | $                        | 24,304  |   |                          | 2,000  |   |                          | $ | 13,600  |                          |  | 1,517  |                          |  | $ | 8,308  |   |  | 740    |   |  | $      | 7,802  |   |        | 5,478  |   |        | $ | 4,087  |        |  | 478  |   |  | $ | 3,761  |  
|Stock option expense                                  |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Issuance of restricted stock                          |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Warrants issued to contractors for services           |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Warrant exercisesCommon Stock                        |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Warrant exercisesPreferred Stock                     |  |                         |   |  |                          |        |   |                          | 825    |   |                          |   | 4,953   |                          |  | 217    |                          |  |   | 1,191  |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Offering costs                                        |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Payments against stock subscription receivable        |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Additional subscription receivable                    |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Issuance of Series J Preferred Stock                  |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Issuance of Series K Preferred Stock                  |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Issuance of Series L Preferred Stock                  |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Issuance of Series M Preferred Stock                  |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Series M Preferred Stock issued for services rendered |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Series M Preferred Stock issued for interest PIK      |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Issuance of Series N Preferred Stock                  |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Series n Preferred Stock issued for interest PIK      |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Beneficial conversion of Series J Preferred Stock     |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Beneficial conversion of Series K Preferred Stock     |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Beneficial conversion of Series L Preferred Stock     |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Beneficial conversion of Series M Preferred Stock     |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Beneficial conversion of Series N Preferred Stock     |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Conversion of Series B to Common Stock                |  | (2,807                   | ) |  |                          | (24,304 | ) |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Conversion of Series C to Common Stock                |  |                         |   |  |                          |        |   |                          | (2,825 | ) |                          |   | (18,553 | )                        |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Conversion of Series D to Common Stock                |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  | (1,734 | )                        |  |   | (9,499 | ) |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Conversion of Series F to Common Stock                |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  | (740   | ) |  |        | (7,802 | ) |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Conversion of Series G to Common Stock                |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        | (5,478 | ) |        |   | (4,087 | )      |  |     |   |  |   |       |  
|Conversion of Series H to Common Stock                |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  | (478 | ) |  |   | (3,761 | )
|Conversion of Series I to Common Stock                |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Conversion of Series J to Common Stock                |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Conversion of Series K to Common Stock                |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Conversion of Series L to Common Stock                |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Reverse Common Stock Split1 for 50                   |  |                          |   |  |                          |         |   |                          |        |   |                          |   |         |                          |  |        |                          |  |   |        |   |  |        |   |  |        |        |   |        |        |   |        |   |        |        |  |      |   |  |   |        |  
|Net loss                                              |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Foreign currency translation                          |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Comprehensive loss                                    |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|                                                      |  |                          |   |  |                          |         |   |                          |        |   |                          |   |         |                          |  |        |                          |  |   |        |   |  |        |   |  |        |        |   |        |        |   |        |   |        |        |  |      |   |  |   |        |  
|Balance at July 2, 2005                               |  |                         |   |  | $                        |        |   |                          |       |   |                          | $ |        |                          |  |       |                          |  | $ |       |   |  |       |   |  | $      |       |   |        |       |   |        | $ |       |        |  |     |   |  | $ |       |  
|                                                      |  |                          |   |  |                          |         |   |                          |        |   |                          |   |         |                          |  |        |                          |  |   |        |   |  |        |   |  |        |        |   |        |        |   |        |   |        |        |  |      |   |  |   |        |  
|Stock option and warrant expense                      |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Warrants conversion                                   |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Warrants issued                                       |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Preferred Stock PIK Dividends                         |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Offering costs                                        |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Issuance of Common Stock                              |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Issuance of Series M Preferred Stock                  |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Issuance of Series O Preferred Stock                  |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Issuance of Series P Preferred Stock                  |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Issuance of Series P Preferred Stock for services     |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Conversion of Series M Preferred to Common Stock      |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Conversion of Series N Preferred to Common Stock      |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Conversion of Series O Preferred to Common Stock      |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Beneficial conversion of Series N Preferred Stock     |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Beneficial conversion of Series O Preferred Stock     |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Beneficial conversion of Series P Preferred Stock     |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Minority interest in variable interest entity         |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Net loss                                              |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Foreign currency translation                          |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|Comprehensive loss                                    |  |                         |   |  |                          |        |   |                          |       |   |                          |   |        |                          |  |       |                          |  |   |       |   |  |       |   |  |        |       |   |        |       |   |        |   |       |        |  |     |   |  |   |       |  
|                                                      |  |                          |   |  |                          |         |   |                          |        |   |                          |   |         |                          |  |        |                          |  |   |        |   |  |        |   |  |        |        |   |        |        |   |        |   |        |        |  |      |   |  |   |        |  
|Balance at July 1, 2006                               |  |                         |   |  | $                        |        |   |                          |       |   |                          | $ |        |                          |  |       |                          |  | $ |       |   |  |       |   |  | $      |       |   |        |       |   |        | $ |       |        |  |     |   |  | $ |       |  
|                                                      |  |                          |   |  |                          |         |   |                          |        |   |                          |   |         |                          |  |        |                          |  |   |        |   |  |        |   |  |        |        |   |        |        |   |        |   |        |        |  |      |   |  |   |        |  



SEE ACCOMPANYING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



48



---

##### Table of Contents











|                         |  |        |                          |   |        |                          |   |        |                         |         |        |                         |        |        |                          |   |         |                          |  |        |                         |  |        |                          |   |                         |        |   |        |   |        |        |  |        |        |  |   |        |   |  |        |   |        |   |        |        |  |        |  |        |       |   |        |   |  |   |   |  |        |   |  |   |        |  
|------------------------ |  | ------ | ------------------------ | - | ------ | ------------------------ | - | ------ | ----------------------- | ------- | ------ | ----------------------- | ------ | ------ | ------------------------ | - | ------- | ------------------------ |  | ------ | ----------------------- |  | ------ | ------------------------ | - | ----------------------- | ------ | - | ------ | - | ------ | ------ |  | ------ | ------ |  | - | ------ | - |  | ------ | - | ------ | - | ------ | ------ |  | ------ |  | ------ | ----- | - | ------ | - |  | - | - |  | ------ | - |  | - | ------ | -
|Series I Preferred Stock |  |        | Series J Preferred Stock |   |        | Series K Preferred Stock |   |        | Series LPreferred Stock |         |        | Series MPreferred Stock |        |        | Series N Preferred Stock |   |         | Series O Preferred Stock |  |        | Series PPreferred Stock |  |        | Series Q Preferred Stock |   | Preferred StockWarrants |       
|Shares                   |  | Amount |                          |   | Shares |                          |   | Amount |                         |         | Shares |                         |        | Amount |                          |   | Shares  |                          |  | Amount |                         |  | Shares |                          |   | Amount                  |        |   | Shares |   |        | Amount |  |        | Shares |  |   | Amount |   |  | Shares |   | Amount |   |        | Shares |  | Amount |  | Shares |       |   | Amount |  
|16,810                   |  | $      | 24,558                   |   |        | 3,088                    |   |        | $                       | 4,631   |        |                         |       |        |                          |   |        |                          |  |       |                         |  |        |                         |   |                         |       |   |        |   |       |        |  |       |        |  |   |       |   |  |       |   |        |   |       |        |  |       |  |        |      |   |        |  |  |   |  |  | 1,042  |   |  | $ | 7,600  |  
|                        |  |        |                         |   |        |                         |   |        |                         |        |        |                         |       |        |                          |   |        |                          |  |       |                         |  |        |                         |   |                         |       |   |        |   |       |        |  |       |        |  |   |       |   |  |       |   |        |   |       |        |  |       |  |        |      |   |        |  |  |   |  |  |       |   |  |   |       |  
|                        |  |        |                         |   |        |                         |   |        |                         |        |        |                         |       |        |                          |   |        |                          |  |       |                         |  |        |                         |   |                         |       |   |        |   |       |        |  |       |        |  |   |       |   |  |       |   |        |   |       |        |  |       |  |        |      |   |        |  |  |   |  |  |       |   |  |   |       |  
|                        |  |        |                         |   |        |                         |   |        |                         |        |        |                         |       |        |                          |   |        |                          |  |       |                         |  |        |                         |   |                         |       |   |        |   |       |        |  |       |        |  |   |       |   |  |       |   |        |   |       |        |  |       |  |        |      |   |        |  |  |   |  |  |       |   |  |   |       |  
|                        |  |        |                         |   |        |                         |   |        |                         |        |        |                         |       |        |                          |   |        |                          |  |       |                         |  |        |                         |   |                         |       |   |        |   |       |        |  |       |        |  |   |       |   |  |       |   |        |   |       |        |  |       |  |        |      |   |        |  |  |   |  |  |       |   |  |   |       |  
|                        |  |        |                         |   |        |                         |   |        |                         |        |        |                         |       |        |                          |   |        |                          |  |       |                         |  |        |                         |   |                         |       |   |        |   |       |        |  |       |        |  |   |       |   |  |       |   |        |   |       |        |  |       |  |        |      |   |        |  |  |   |  |  | (1,042 | ) |  |   | (7,600 | )
|                        |  |        |                         |   |        |                         |   |        |                         |        |        |                         |       |        |                          |   |        |                          |  |       |                         |  |        |                         |   |                         |       |   |        |   | (1,043 | )      |  |       |        |  |   | (418   | ) |  |       |   |        |   |       |        |  |       |  |        |      |   |        |  |  |   |  |  |       |   |  |   |       |  
|                        |  |        |                         |   |        |                         |   |        |                         |        |        |                         |       |        |                          |   |        |                          |  |       |                         |  |        |                         |   |                         |       |   |        |   |       |        |  |       |        |  |   |       |   |  |       |   |        |   |       |        |  |       |  |        |      |   |        |  |  |   |  |  |       |   |  |   |       |  
|                        |  |        |                         |   |        |                         |   |        |                         |        |        |                         |       |        |                          |   |        |                          |  |       |                         |  |        |                         |   |                         |       |   |        |   |       |        |  |       |        |  |   |       |   |  |       |   |        |   |       |        |  |       |  |        |      |   |        |  |  |   |  |  |       |   |  |   |       |  
|                        |  |        |                         |   |        | 4,912                    |   |        |                         | 7,368   |        |                         |       |        |                          |   |        |                          |  |       |                         |  |        |                         |   |                         |       |   |        |   |       |        |  |       |        |  |   |       |   |  |       |   |        |   |       |        |  |       |  |        |      |   |        |  |  |   |  |  |       |   |  |   |       |  
|                        |  |        |                         |   |        |                         |   |        |                         |        |        |                         | 9,852  |        |                          |   | 14,777  |                          |  |       |                         |  |        |                         |   |                         |       |   |        |   |       |        |  |       |        |  |   |       |   |  |       |   |        |   |       |        |  |       |  |        |      |   |        |  |  |   |  |  |       |   |  |   |       |  
|                        |  |        |                         |   |        |                         |   |        |                         |        |        |                         |       |        |                          |   |        |                          |  | 7,000  |                         |  |        | 7,000                    |   |                         |       |   |        |   |       |        |  |       |        |  |   |       |   |  |       |   |        |   |       |        |  |       |  |        |      |   |        |  |  |   |  |  |       |   |  |   |       |  
|                        |  |        |                         |   |        |                         |   |        |                         |        |        |                         |       |        |                          |   |        |                          |  |       |                         |  |        |                         |   |                         | 6,120  |   |        |   | 22,550 |        |  |       |        |  |   |       |   |  |       |   |        |   |       |        |  |       |  |        |      |   |        |  |  |   |  |  |       |   |  |   |       |  
|                        |  |        |                         |   |        |                         |   |        |                         |        |        |                         |       |        |                          |   |        |                          |  |       |                         |  |        |                         |   |                         | 98     |   |        |   | 360    |        |  |       |        |  |   |       |   |  |       |   |        |   |       |        |  |       |  |        |      |   |        |  |  |   |  |  |       |   |  |   |       |  
|                        |  |        |                         |   |        |                         |   |        |                         |        |        |                         |       |        |                          |   |        |                          |  |       |                         |  |        |                         |   |                         | 196    |   |        |   | 724    |        |  |       |        |  |   |       |   |  |       |   |        |   |       |        |  |       |  |        |      |   |        |  |  |   |  |  |       |   |  |   |       |  
|                        |  |        |                         |   |        |                         |   |        |                         |        |        |                         |       |        |                          |   |        |                          |  |       |                         |  |        |                         |   |                         |       |   |        |   |       |        |  | 2,544  |        |  |   | 9,375  |   |  |       |   |        |   |       |        |  |       |  |        |      |   |        |  |  |   |  |  |       |   |  |   |       |  
|                        |  |        |                         |   |        |                         |   |        |                         |        |        |                         |       |        |                          |   |        |                          |  |       |                         |  |        |                         |   |                         |       |   |        |   |       |        |  |       |        |  |   |       |   |  |       |   |        |   |       |        |  |       |  |        |      |   |        |  |  |   |  |  |       |   |  |   |       |  
|                        |  |        |                         |   |        |                         |   |        |                         |        |        |                         |       |        |                          |   |        |                          |  |       |                         |  |        |                         |   |                         |       |   |        |   |       |        |  |       |        |  |   |       |   |  |       |   |        |   |       |        |  |       |  |        |      |   |        |  |  |   |  |  |       |   |  |   |       |  
|                        |  |        |                         |   |        |                         |   |        |                         |        |        |                         |       |        |                          |   |        |                          |  |       |                         |  |        |                         |   |                         |       |   |        |   |       |        |  |       |        |  |   |       |   |  |       |   |        |   |       |        |  |       |  |        |      |   |        |  |  |   |  |  |       |   |  |   |       |  
|                        |  |        |                         |   |        |                         |   |        |                         |        |        |                         |       |        |                          |   |        |                          |  |       |                         |  |        |                         |   |                         |       |   |        |   |       |        |  |       |        |  |   |       |   |  |       |   |        |   |       |        |  |       |  |        |      |   |        |  |  |   |  |  |       |   |  |   |       |  
|                        |  |        |                         |   |        |                         |   |        |                         |        |        |                         |       |        |                          |   |        |                          |  |       |                         |  |        |                         |   |                         |       |   |        |   |       |        |  |       |        |  |   |       |   |  |       |   |        |   |       |        |  |       |  |        |      |   |        |  |  |   |  |  |       |   |  |   |       |  
|                        |  |        |                         |   |        |                         |   |        |                         |        |        |                         |       |        |                          |   |        |                          |  |       |                         |  |        |                         |   |                         |       |   |        |   |       |        |  |       |        |  |   |       |   |  |       |   |        |   |       |        |  |       |  |        |      |   |        |  |  |   |  |  |       |   |  |   |       |  
|                        |  |        |                         |   |        |                         |   |        |                         |        |        |                         |       |        |                          |   |        |                          |  |       |                         |  |        |                         |   |                         |       |   |        |   |       |        |  |       |        |  |   |       |   |  |       |   |        |   |       |        |  |       |  |        |      |   |        |  |  |   |  |  |       |   |  |   |       |  
|                        |  |        |                         |   |        |                         |   |        |                         |        |        |                         |       |        |                          |   |        |                          |  |       |                         |  |        |                         |   |                         |       |   |        |   |       |        |  |       |        |  |   |       |   |  |       |   |        |   |       |        |  |       |  |        |      |   |        |  |  |   |  |  |       |   |  |   |       |  
|                        |  |        |                         |   |        |                         |   |        |                         |        |        |                         |       |        |                          |   |        |                          |  |       |                         |  |        |                         |   |                         |       |   |        |   |       |        |  |       |        |  |   |       |   |  |       |   |        |   |       |        |  |       |  |        |      |   |        |  |  |   |  |  |       |   |  |   |       |  
|                        |  |        |                         |   |        |                         |   |        |                         |        |        |                         |       |        |                          |   |        |                          |  |       |                         |  |        |                         |   |                         |       |   |        |   |       |        |  |       |        |  |   |       |   |  |       |   |        |   |       |        |  |       |  |        |      |   |        |  |  |   |  |  |       |   |  |   |       |  
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|                        |  |        |                         |   |        |                         |   |        |                         |        |        |                         | (9,852 | )      |                          |   | (14,777 | )                        |  |       |                         |  |        |                         |   |                         |       |   |        |   |       |        |  |       |        |  |   |       |   |  |       |   |        |   |       |        |  |       |  |        |      |   |        |  |  |   |  |  |       |   |  |   |       |  
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|                        |  | $      |                         |   |        |                         |   |        | $                       |        |        |                         |       |        |                          | $ |        |                          |  |       |                         |  | $      |                         |   |                         | 6,414  |   |        | $ | 22,591 |        |  | 2,544  |        |  | $ | 8,957  |   |  |       |   |        | $ |       |        |  |       |  | $      |      |   |        |  |  | $ |  |  |       |   |  | $ |       |  
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|                         |  |        |                          |   |        |                          |   |        |                         |         |        |                         |        |        |                          |   |         |                          |  |        |                         |  |        |                          |   |                         |        |   |        |   |        |        |  |        |        |  |   |        |   |  |        |   |        |   |        |        |  |        |  |        |       |   |        |   |  |   |   |  |        |   |  |   |        |  
|                        |  | $      |                         |   |        |                         |   |        | $                       |        |        |                         |       |        |                          | $ |        |                          |  |       |                         |  | $      |                         |   |                         | 5,372  |   |        | $ | 18,618 |        |  | 1,375  |        |  | $ | 4,547  |   |  | 474    |   |        | $ | 1,680  |        |  | 3,100  |  | $      | 8,398 |   |        |  |  | $ |  |  |       |   |  | $ |       |  
|                         |  |        |                          |   |        |                          |   |        |                         |         |        |                         |        |        |                          |   |         |                          |  |        |                         |  |        |                          |   |                         |        |   |        |   |        |        |  |        |        |  |   |        |   |  |        |   |        |   |        |        |  |        |  |        |       |   |        |   |  |   |   |  |        |   |  |   |        |  



SEE ACCOMPANYING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



49



---

##### Table of Contents

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY AND COMPREHENSIVE LOSS

Unaudited

(Amounts in thousands)



|                                                      |  |              |   |  |                             |        |   |                          |   |        |                    |  |   |                                            |   |  |       |          |   |  |   |      |   |  |   |         |  
|----------------------------------------------------- |  | ------------ | - |  | --------------------------- | ------ | - | ------------------------ | - | ------ | ------------------ |  | - | ------------------------------------------ | - |  | ----- | -------- | - |  | - | ---- | - |  | - | ------- | -
|                                                      |  | Common Stock |   |  | StockSubscriptionReceivable |        |   | AdditionalPaid-inCapital |   |        | AccumulatedDeficit |  |   | AccumulatedOtherComprehensiveIncome (loss) |   |  | Total |         
|                                                      |  | Shares       |   |  | Amount                      |        |   |                          |   |        |                   
|Balance at July 3, 2004                               |  | 10,415       |   |  | $                           | 42     |   |                          | $ | (100   | )                  |  | $ | 101,120                                    |   |  | $     | (193,058 | ) |  | $ | (179 | ) |  | $ | 6,476   |  
|Stock option expense                                  |  |             |   |  |                             |       |   |                          |   |       |                    |  |   | 156                                        |   |  |       |         |   |  |   |     |   |  |   | 156     |  
|Issuance of restricted stock                          |  |             |   |  |                             |       |   |                          |   |       |                    |  |   |                                           |   |  |       |         |   |  |   |     |   |  |   |        |  
|Warrants issued to contractors for services           |  |             |   |  |                             |       |   |                          |   |       |                    |  |   | 787                                        |   |  |       |         |   |  |   |     |   |  |   | 787     |  
|Warrant exercisesCommon Stock                        |  | 1,094        |   |  |                             | 4      |   |                          |   |       |                    |  |   | 7                                          |   |  |       |         |   |  |   |     |   |  |   | 11      |  
|Warrant exercisesPreferred Stock                     |  |             |   |  |                             |       |   |                          |   |       |                    |  |   | 1,466                                      |   |  |       |         |   |  |   |     |   |  |   | 10      |  
|Offering costs                                        |  |             |   |  |                             |       |   |                          |   |       |                    |  |   |                                           |   |  |       |         |   |  |   |     |   |  |   | (1,461  | )
|Payments against stock subscription receivable        |  |             |   |  |                             |       |   |                          |   | 57     |                    |  |   |                                           |   |  |       |         |   |  |   |     |   |  |   | 57      |  
|Additional subscription receivable                    |  |             |   |  |                             |       |   |                          |   | (7,500 | )                  |  |   |                                           |   |  |       |         |   |  |   |     |   |  |   | (7,500  | )
|Issuance of Series J Preferred Stock                  |  |             |   |  |                             |       |   |                          |   |       |                    |  |   |                                           |   |  |       |         |   |  |   |     |   |  |   | 7,368   |  
|Issuance of Series K Preferred Stock                  |  |             |   |  |                             |       |   |                          |   |       |                    |  |   |                                           |   |  |       |         |   |  |   |     |   |  |   | 14,777  |  
|Issuance of Series L Preferred Stock                  |  |             |   |  |                             |       |   |                          |   |       |                    |  |   |                                           |   |  |       |         |   |  |   |     |   |  |   | 7,000   |  
|Issuance of Series M Preferred Stock                  |  |             |   |  |                             |       |   |                          |   |       |                    |  |   |                                           |   |  |       |         |   |  |   |     |   |  |   | 22,550  |  
|Series M Preferred Stock issued for services rendered |  |             |   |  |                             |       |   |                          |   |       |                    |  |   |                                           |   |  |       |         |   |  |   |     |   |  |   | 360     |  
|Series M Preferred Stock issued for interest PIK      |  |             |   |  |                             |       |   |                          |   |       |                    |  |   |                                           |   |  |       | (523     | ) |  |   |     |   |  |   | 201     |  
|Issuance of Series N Preferred Stock                  |  |             |   |  |                             |       |   |                          |   |       |                    |  |   |                                           |   |  |       |         |   |  |   |     |   |  |   | 9,375   |  
|Series n Preferred Stock issued for interest PIK      |  |             |   |  |                             |       |   |                          |   |       |                    |  |   |                                           |   |  |       | (102     | ) |  |   |     |   |  |   | (102    | )
|Beneficial conversion of Series J Preferred Stock     |  |             |   |  |                             |       |   |                          |   |       |                    |  |   | 7,368                                      |   |  |       | (7,368   | ) |  |   |     |   |  |   |        |  
|Beneficial conversion of Series K Preferred Stock     |  |             |   |  |                             |       |   |                          |   |       |                    |  |   | 14,777                                     |   |  |       | (14,777  | ) |  |   |     |   |  |   |        |  
|Beneficial conversion of Series L Preferred Stock     |  |             |   |  |                             |       |   |                          |   |       |                    |  |   | 7,000                                      |   |  |       | (7,000   | ) |  |   |     |   |  |   |        |  
|Beneficial conversion of Series M Preferred Stock     |  |             |   |  |                             |       |   |                          |   |       |                    |  |   | 23,111                                     |   |  |       | (23,111  | ) |  |   |     |   |  |   |        |  
|Beneficial conversion of Series N Preferred Stock     |  |             |   |  |                             |       |   |                          |   |       |                    |  |   | 4,770                                      |   |  |       | (4,770   | ) |  |   |     |   |  |   |        |  
|Conversion of Series B to Common Stock                |  | 24,120       |   |  |                             | 96     |   |                          |   |       |                    |  |   | 24,208                                     |   |  |       |         |   |  |   |     |   |  |   |        |  
|Conversion of Series C to Common Stock                |  | 16,898       |   |  |                             | 68     |   |                          |   |       |                    |  |   | 18,485                                     |   |  |       |         |   |  |   |     |   |  |   |        |  
|Conversion of Series D to Common Stock                |  | 25,518       |   |  |                             | 102    |   |                          |   |       |                    |  |   | 9,397                                      |   |  |       |         |   |  |   |     |   |  |   |        |  
|Conversion of Series F to Common Stock                |  | 21,806       |   |  |                             | 87     |   |                          |   |       |                    |  |   | 7,715                                      |   |  |       |         |   |  |   |     |   |  |   |        |  
|Conversion of Series G to Common Stock                |  | 6,724        |   |  |                             | 27     |   |                          |   |       |                    |  |   | 4,060                                      |   |  |       |         |   |  |   |     |   |  |   |        |  
|Conversion of Series H to Common Stock                |  | 23,967       |   |  |                             | 96     |   |                          |   |       |                    |  |   | 3,665                                      |   |  |       |         |   |  |   |     |   |  |   |        |  
|Conversion of Series I to Common Stock                |  | 249,160      |   |  |                             | 997    |   |                          |   |       |                    |  |   | 23,561                                     |   |  |       |         |   |  |   |     |   |  |   |        |  
|Conversion of Series J to Common Stock                |  | 97,561       |   |  |                             | 390    |   |                          |   |       |                    |  |   | 11,609                                     |   |  |       |         |   |  |   |     |   |  |   |        |  
|Conversion of Series K to Common Stock                |  | 106,006      |   |  |                             | 424    |   |                          |   |       |                    |  |   | 14,353                                     |   |  |       |         |   |  |   |     |   |  |   |        |  
|Conversion of Series L to Common Stock                |  | 70,000       |   |  |                             | 280    |   |                          |   |       |                    |  |   | 6,720                                      |   |  |       |         |   |  |   |     |   |  |   |        |  
|Reverse Common Stock Split1 for 50                   |  | (640,204     | ) |  |                             | (2,561 | ) |                          |   |       |                    |  |   | 2,561                                      |   |  |       |         |   |  |   |     |   |  |   |        |  
|Net loss                                              |  |             |   |  |                             |       |   |                          |   |       |                    |  |   |                                           |   |  |       | (49,844  | ) |  |   |     |   |  |   | (49,844 | )
|Foreign currency translation                          |  |             |   |  |                             |       |   |                          |   |       |                    |  |   |                                           |   |  |       |         |   |  |   | 208  |   |  |   | 208     |  
|Comprehensive loss                                    |  |             |   |  |                             |       |   |                          |   |       |                    |  |   |                                           |   |  |       |         |   |  |   |     |   |  | $ | (49,636 | )
|                                                      |  |              |   |  |                             |        |   |                          |   |        |                    |  |   |                                            |   |  |       |          |   |  |   |      |   |  |   |         |  
|Balance at July 2, 2005                               |  | 13,065       |   |  | $                           | 52     |   |                          | $ | (7,543 | )                  |  | $ | 286,896                                    |   |  | $     | (300,553 | ) |  | $ | 29   |   |  | $ | 10,429  |  
|                                                      |  |              |   |  |                             |        |   |                          |   |        |                    |  |   |                                            |   |  |       |          |   |  |   |      |   |  |   |         |  
|Stock option and warrant expense                      |  |             |   |  |                             |       |   |                          |   |       |                    |  |   | 860                                        |   |  |       |         |   |  |   |     |   |  |   | 860     |  
|Warrants conversion                                   |  | 19           |   |  |                             |       |   |                          |   |       |                    |  |   | 4                                          |   |  |       |         |   |  |   |     |   |  |   | 4       |  
|Warrants issued                                       |  |             |   |  |                             |       |   |                          |   |       |                    |  |   | 4,891                                      |   |  |       |         |   |  |   |     |   |  |   | 4,891   |  
|Preferred Stock PIK Dividends                         |  |             |   |  |                             |       |   |                          |   |       |                    |  |   | 2,728                                      |   |  |       | (2,626   | ) |  |   |     |   |  |   | 102     |  
|Offering costs                                        |  |             |   |  |                             |       |   |                          |   |       |                    |  |   |                                           |   |  |       |         |   |  |   |     |   |  |   | (1,164  | )
|Issuance of Common Stock                              |  | 500          |   |  |                             | 2      |   |                          |   |       |                    |  |   | 1,228                                      |   |  |       |         |   |  |   |     |   |  |   | 1,230   |  
|Issuance of Series M Preferred Stock                  |  |             |   |  |                             |       |   |                          |   |       |                    |  |   | (841                                       | ) |  |       |         |   |  |   |     |   |  |   |        |  
|Issuance of Series O Preferred Stock                  |  |             |   |  |                             |       |   |                          |   |       |                    |  |   |                                           |   |  |       |         |   |  |   |     |   |  |   | 5,600   |  
|Issuance of Series P Preferred Stock                  |  |             |   |  |                             |       |   |                          |   |       |                    |  |   |                                           |   |  |       |         |   |  |   |     |   |  |   | 9,152   |  
|Issuance of Series P Preferred Stock for services     |  |             |   |  |                             |       |   |                          |   |       |                    |  |   |                                           |   |  |       |         |   |  |   |     |   |  |   | 20      |  
|Conversion of Series M Preferred to Common Stock      |  | 1,270        |   |  |                             | 5      |   |                          |   |       |                    |  |   | 4,677                                      |   |  |       |         |   |  |   |     |   |  |   |        |  
|Conversion of Series N Preferred to Common Stock      |  | 1,185        |   |  |                             | 5      |   |                          |   |       |                    |  |   | 4,362                                      |   |  |       |         |   |  |   |     |   |  |   |        |  
|Conversion of Series O Preferred to Common Stock      |  | 926          |   |  |                             | 4      |   |                          |   |       |                    |  |   | 3,701                                      |   |  |       |         |   |  |   |     |   |  |   |        |  
|Beneficial conversion of Series N Preferred Stock     |  |             |   |  |                             |       |   |                          |   |       |                    |  |   | 471                                        |   |  |       | (471     | ) |  |   |     |   |  |   |        |  
|Beneficial conversion of Series O Preferred Stock     |  |             |   |  |                             |       |   |                          |   |       |                    |  |   | 3,262                                      |   |  |       | (3,262   | ) |  |   |     |   |  |   |        |  
|Beneficial conversion of Series P Preferred Stock     |  |             |   |  |                             |       |   |                          |   |       |                    |  |   | 1,250                                      |   |  |       | (1,250   | ) |  |   |     |   |  |   |        |  
|Minority interest in variable interest entity         |  |             |   |  |                             |       |   |                          |   |       |                    |  |   |                                           |   |  |       |         |   |  |   |     |   |  |   |        |  
|Net loss                                              |  |             |   |  |                             |       |   |                          |   |       |                    |  |   |                                           |   |  |       | (16,038  | ) |  |   |     |   |  |   | (16,038 | )
|Foreign currency translation                          |  |             |   |  |                             |       |   |                          |   |       |                    |  |   |                                           |   |  |       |         |   |  |   | (17  | ) |  |   | (17     | )
|Comprehensive loss                                    |  |             |   |  |                             |       |   |                          |   |       |                    |  |   |                                           |   |  |       |         |   |  |   |     |   |  |   | (16,055 | )
|                                                      |  |              |   |  |                             |        |   |                          |   |        |                    |  |   |                                            |   |  |       |          |   |  |   |      |   |  |   |         |  
|Balance at July 1, 2006                               |  | 16,965       |   |  | $                           | 68     |   |                          | $ | (7,543 | )                  |  | $ | 313,489                                    |   |  | $     | (324,200 | ) |  | $ | 12   |   |  | $ | 15,069  |  
|                                                      |  |              |   |  |                             |        |   |                          |   |        |                    |  |   |                                            |   |  |       |          |   |  |   |      |   |  |   |         |  



SEE ACCOMPANYING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



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VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY AND COMPREHENSIVE LOSS (Amounts in thousands)



|                                                                        |  |                          |  |                          |   |                          |   |                          |   |                          |  |                          |  |        |   |        |   |        |   |        |  |        |  |        |   |  |   |  |   |  
|----------------------------------------------------------------------- |  | ------------------------ |  | ------------------------ | - | ------------------------ | - | ------------------------ | - | ------------------------ |  | ------------------------ |  | ------ | - | ------ | - | ------ | - | ------ |  | ------ |  | ------ | - |  | - |  | - | -
|                                                                        |  | Series B Preferred Stock |  | Series C Preferred Stock |   | Series D Preferred Stock |   | Series F Preferred Stock |   | Series G Preferred Stock |  | Series H Preferred Stock
|                                                                        |  | Shares                   |  | Amount                   |   | Shares                   |   | Amount                   |   | Shares                   |  | Amount                   |  | Shares |   | Amount |   | Shares |   | Amount |  | Shares |  | Amount
|Balance at July 1, 2006                                                 |  |                         |  | $                        |  |                          |  |                          | $ |                         |  |                         |  | $      |  |        |  |        | $ |       |  |       |  | $      |  |  |  |  | $ | 
|                                                                        |  |                          |  |                          |   |                          |   |                          |   |                          |  |                          |  |        |   |        |   |        |   |        |  |        |  |        |   |  |   |  |   |  
|Stock option and warrant expense                                        |  |                         |  |                          |  |                          |  |                          |   |                         |  |                         |  |        |  |        |  |        |   |       |  |       |  |        |  |  |  |  |   | 
|Warrants issued                                                         |  |                         |  |                          |  |                          |  |                          |   |                         |  |                         |  |        |  |        |  |        |   |       |  |       |  |        |  |  |  |  |   | 
|Bond warrants                                                           |  |                          |  |                          |   |                          |   |                          |   |                          |  |                          |  |        |   |        |   |        |   |        |  |        |  |        |   |  |   |  |   |  
|Capital distribution                                                    |  |                         |  |                          |  |                          |  |                          |   |                         |  |                         |  |        |  |        |  |        |   |       |  |       |  |        |  |  |  |  |   | 
|Preferred Stock PIK Dividends                                           |  |                         |  |                          |  |                          |  |                          |   |                         |  |                         |  |        |  |        |  |        |   |       |  |       |  |        |  |  |  |  |   | 
|Offering costs                                                          |  |                         |  |                          |  |                          |  |                          |   |                         |  |                         |  |        |  |        |  |        |   |       |  |       |  |        |  |  |  |  |   | 
|Issuance of Common Stock                                                |  |                         |  |                          |  |                          |  |                          |   |                         |  |                         |  |        |  |        |  |        |   |       |  |       |  |        |  |  |  |  |   | 
|Issuance of Common Stock as consideration in acquisition of CD&L        |  |                          |  |                          |   |                          |   |                          |   |                          |  |                          |  |        |   |        |   |        |   |        |  |        |  |        |   |  |   |  |   |  
|Issuance of Series M Preferred Stock                                    |  |                         |  |                          |  |                          |  |                          |   |                         |  |                         |  |        |  |        |  |        |   |       |  |       |  |        |  |  |  |  |   | 
|Issuance of Series N Preferred Stock                                    |  |                         |  |                          |  |                          |  |                          |   |                         |  |                         |  |        |  |        |  |        |   |       |  |       |  |        |  |  |  |  |   | 
|Issuance of Series O Preferred Stock                                    |  |                         |  |                          |  |                          |  |                          |   |                         |  |                         |  |        |  |        |  |        |   |       |  |       |  |        |  |  |  |  |   | 
|Issuance of Series P Preferred Stock                                    |  |                         |  |                          |  |                          |  |                          |   |                         |  |                         |  |        |  |        |  |        |   |       |  |       |  |        |  |  |  |  |   | 
|Issuance of Series Q Preferred Stock for cash and interest paid-in-kind |  |                          |  |                          |   |                          |   |                          |   |                          |  |                          |  |        |   |        |   |        |   |        |  |        |  |        |   |  |   |  |   |  
|Issuance of Series Q Preferred Stock for services                       |  |                         |  |                          |  |                          |  |                          |   |                         |  |                         |  |        |  |        |  |        |   |       |  |       |  |        |  |  |  |  |   | 
|Conversion of Series M Preferred to Common Stock                        |  |                         |  |                          |  |                          |  |                          |   |                         |  |                         |  |        |  |        |  |        |   |       |  |       |  |        |  |  |  |  |   | 
|Conversion of Series N Preferred to Common Stock                        |  |                          |  |                          |   |                          |   |                          |   |                          |  |                          |  |        |   |        |   |        |   |        |  |        |  |        |   |  |   |  |   |  
|Conversion of Series O Preferred to Common Stock                        |  |                         |  |                          |  |                          |  |                          |   |                         |  |                         |  |        |  |        |  |        |   |       |  |       |  |        |  |  |  |  |   | 
|Conversion of Series P Preferred to Common Stock                        |  |                         |  |                          |  |                          |  |                          |   |                         |  |                         |  |        |  |        |  |        |   |       |  |       |  |        |  |  |  |  |   | 
|Conversion of Series Q Preferred to Common Stock                        |  |                          |  |                          |   |                          |   |                          |   |                          |  |                          |  |        |   |        |   |        |   |        |  |        |  |        |   |  |   |  |   |  
|Beneficial conversion of Series N Preferred Stock                       |  |                         |  |                          |  |                          |  |                          |   |                         |  |                         |  |        |  |        |  |        |   |       |  |       |  |        |  |  |  |  |   | 
|Beneficial conversion of Series O Preferred Stock                       |  |                         |  |                          |  |                          |  |                          |   |                         |  |                         |  |        |  |        |  |        |   |       |  |       |  |        |  |  |  |  |   | 
|Beneficial conversion of Series P Preferred Stock                       |  |                         |  |                          |  |                          |  |                          |   |                         |  |                         |  |        |  |        |  |        |   |       |  |       |  |        |  |  |  |  |   | 
|Beneficial conversion of Series Q Preferred Stock                       |  |                         |  |                          |  |                          |  |                          |   |                         |  |                         |  |        |  |        |  |        |   |       |  |       |  |        |  |  |  |  |   | 
|Adjustment to stock subscription                                        |  |                         |  |                          |  |                          |  |                          |   |                         |  |                         |  |        |  |        |  |        |   |       |  |       |  |        |  |  |  |  |   | 
|Net loss                                                                |  |                         |  |                          |  |                          |  |                          |   |                         |  |                         |  |        |  |        |  |        |   |       |  |       |  |        |  |  |  |  |   | 
|Foreign currency translation                                            |  |                         |  |                          |  |                          |  |                          |   |                         |  |                         |  |        |  |        |  |        |   |       |  |       |  |        |  |  |  |  |   | 
|Comprehensive loss                                                      |  |                         |  |                          |  |                          |  |                          |   |                         |  |                         |  |        |  |        |  |        |   |       |  |       |  |        |  |  |  |  |   | 
|                                                                        |  |                          |  |                          |   |                          |   |                          |   |                          |  |                          |  |        |   |        |   |        |   |        |  |        |  |        |   |  |   |  |   |  
|Balance at June 30, 2007                                                |  |                         |  | $                        |  |                          |  |                          | $ |                         |  |                         |  | $      |  |        |  |        | $ |       |  |       |  | $      |  |  |  |  | $ | 
|                                                                        |  |                          |  |                          |   |                          |   |                          |   |                          |  |                          |  |        |   |        |   |        |   |        |  |        |  |        |   |  |   |  |   |  



SEE ACCOMPANYING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



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|                         |  |                          |   |                          |   |                          |   |                          |  |        |                          |        |   |                          |   |        |                          |   |        |                          |   |        |   |        |        |  |       |        |  |   |        |   |  |        |   |  |        |       |   |        |        |   |        |   |        |   |  |       |   |  |   |        |  
|------------------------ |  | ------------------------ | - | ------------------------ | - | ------------------------ | - | ------------------------ |  | ------ | ------------------------ | ------ | - | ------------------------ | - | ------ | ------------------------ | - | ------ | ------------------------ | - | ------ | - | ------ | ------ |  | ----- | ------ |  | - | ------ | - |  | ------ | - |  | ------ | ----- | - | ------ | ------ | - | ------ | - | ------ | - |  | ----- | - |  | - | ------ | -
|Series I Preferred Stock |  | Series J Preferred Stock |   | Series K Preferred Stock |   | Series L Preferred Stock |   | Series M Preferred Stock |  |        | Series N Preferred Stock |        |   | Series O Preferred Stock |   |        | Series P Preferred Stock |   |        | Series Q Preferred Stock |  
|Shares                   |  | Amount                   |   | Shares                   |   | Amount                   |   | Shares                   |  | Amount |                          | Shares |   | Amount                   |   | Shares |                          |   | Amount |                          |   | Shares |   |        | Amount |  |       | Shares |  |   | Amount |   |  | Shares |   |  | Amount |       |   | Shares |        |   | Amount |  
|                        |  | $                        |  |                          |  |                          | $ |                         |  |       |                          | $      |  |                          |  |        | $                        |  |        | 5,372                    |   |        | $ | 18,618 |        |  | 1,375 |        |  | $ | 4,547  |   |  | 474    |   |  | $      | 1,680 |   |        | 3,100  |   |        | $ | 8,398  |   |  |      |   |  | $ |       |  
|                         |  |                          |   |                          |   |                          |   |                          |  |        |                          |        |   |                          |   |        |                          |   |        |                          |   |        |   |        |        |  |       |        |  |   |        |   |  |        |   |  |        |       |   |        |        |   |        |   |        |   |  |       |   |  |   |        |  
|                        |  |                          |  |                          |  |                          |   |                         |  |       |                          |        |  |                          |  |        |                          |  |        |                         |   |        |   |       |        |  |      |        |  |   |       |   |  |       |   |  |        |      |   |        |       |   |        |   |       |   |  |      |   |  |   |       |  
|                        |  |                          |  |                          |  |                          |   |                         |  |       |                          |        |  |                          |  |        |                          |  |        |                         |   |        |   |       |        |  |      |        |  |   |       |   |  |       |   |  |        |      |   |        |       |   |        |   |       |   |  |      |   |  |   |       |  
|                         |  |                          |   |                          |   |                          |   |                          |  |        |                          |        |   |                          |   |        |                          |   |        |                         |   |        |   |       |        |  |      |        |  |   |       |   |  |       |   |  |        |      |   |        |       |   |        |   |       |   |  |      |   |  |   |       |  
|                        |  |                          |  |                          |  |                          |   |                         |  |       |                          |        |  |                          |  |        |                          |  |        |                         |   |        |   |       |        |  |      |        |  |   |       |   |  |       |   |  |        |      |   |        |       |   |        |   |       |   |  |      |   |  |   |       |  
|                        |  |                          |  |                          |  |                          |   |                         |  |       |                          |        |  |                          |  |        |                          |  |        |                         |   |        |   |       |        |  |      |        |  |   |       |   |  |       |   |  |        |      |   |        |       |   |        |   |       |   |  |      |   |  |   |       |  
|                        |  |                          |  |                          |  |                          |   |                         |  |       |                          |        |  |                          |  |        |                          |  |        |                         |   |        |   | (47    | )      |  |      |        |  |   |       |   |  |       |   |  |        | 133   |   |        |       |   |        |   |       |   |  |      |   |  |   | (2,434 | )
|                        |  |                          |  |                          |  |                          |   |                         |  |       |                          |        |  |                          |  |        |                          |  |        |                         |   |        |   |       |        |  |      |        |  |   |       |   |  |       |   |  |        |      |   |        |       |   |        |   |       |   |  |      |   |  |   |       |  
|                         |  |                          |   |                          |   |                          |   |                          |  |        |                          |        |   |                          |   |        |                          |   |        |                         |   |        |   |       |        |  |      |        |  |   |       |   |  |       |   |  |        |      |   |        |       |   |        |   |       |   |  |      |   |  |   |       |  
|                        |  |                          |  |                          |  |                          |   |                         |  |       |                          |        |  |                          |  |        |                          |  |        | 375                      |   |        |   | 1,382  |        |  |      |        |  |   |       |   |  |       |   |  |        |      |   |        |       |   |        |   |       |   |  |      |   |  |   |       |  
|                        |  |                          |  |                          |  |                          |   |                         |  |       |                          |        |  |                          |  |        |                          |  |        |                         |   |        |   |       |        |  | 98    |        |  |   | 361    |   |  |       |   |  |        |      |   |        |       |   |        |   |       |   |  |      |   |  |   |       |  
|                        |  |                          |  |                          |  |                          |   |                         |  |       |                          |        |  |                          |  |        |                          |  |        |                         |   |        |   |       |        |  |      |        |  |   |       |   |  | 35     |   |  |        | 146   |   |        |       |   |        |   |       |   |  |      |   |  |   |       |  
|                        |  |                          |  |                          |  |                          |   |                         |  |       |                          |        |  |                          |  |        |                          |  |        |                         |   |        |   |       |        |  |      |        |  |   |       |   |  |       |   |  |        |      |   |        | 166    |   |        |   | 554    |   |  |      |   |  |   |       |  
|                         |  |                          |   |                          |   |                          |   |                          |  |        |                          |        |   |                          |   |        |                          |   |        |                         |   |        |   |       |        |  |      |        |  |   |       |   |  |       |   |  |        |      |   |        |       |   |        |   |       |   |  | 4,711 |   |  |   | 47,112 |  
|                        |  |                          |  |                          |  |                          |   |                         |  |       |                          |        |  |                          |  |        |                          |  |        |                         |   |        |   |       |        |  |      |        |  |   |       |   |  |       |   |  |        |      |   |        |       |   |        |   |       |   |  | 323   |   |  |   | 3,232  |  
|                        |  |                          |  |                          |  |                          |   |                         |  |       |                          |        |  |                          |  |        |                          |  |        | (1,538                   | ) |        |   | (5,221 | )      |  |      |        |  |   |       |   |  |       |   |  |        |      |   |        |       |   |        |   |       |   |  |      |   |  |   |       |  
|                         |  |                          |   |                          |   |                          |   |                          |  |        |                          |        |   |                          |   |        |                          |   |        |                         |   |        |   |       |        |  | (481  | )      |  |   | (1,486 | ) |  |       |   |  |        |      |   |        |       |   |        |   |       |   |  |      |   |  |   |       |  
|                        |  |                          |  |                          |  |                          |   |                         |  |       |                          |        |  |                          |  |        |                          |  |        |                         |   |        |   |       |        |  |      |        |  |   |       |   |  | (5     | ) |  |        | (20   | ) |        |       |   |        |   |       |   |  |      |   |  |   |       |  
|                        |  |                          |  |                          |  |                          |   |                         |  |       |                          |        |  |                          |  |        |                          |  |        |                         |   |        |   |       |        |  |      |        |  |   |       |   |  |       |   |  |        |      |   |        | (1,394 | ) |        |   | (4,380 | ) |  |      |   |  |   |       |  
|                         |  |                          |   |                          |   |                          |   |                          |  |        |                          |        |   |                          |   |        |                          |   |        |                         |   |        |   |       |        |  |      |        |  |   |       |   |  |       |   |  |        |      |   |        |       |   |        |   |       |   |  | (372  | ) |  |   | (3,673 | )
|                        |  |                          |  |                          |  |                          |   |                         |  |       |                          |        |  |                          |  |        |                          |  |        |                         |   |        |   |       |        |  |      |        |  |   |       |   |  |       |   |  |        |      |   |        |       |   |        |   |       |   |  |      |   |  |   |       |  
|                        |  |                          |  |                          |  |                          |   |                         |  |       |                          |        |  |                          |  |        |                          |  |        |                         |   |        |   |       |        |  |      |        |  |   |       |   |  |       |   |  |        |      |   |        |       |   |        |   |       |   |  |      |   |  |   |       |  
|                        |  |                          |  |                          |  |                          |   |                         |  |       |                          |        |  |                          |  |        |                          |  |        |                         |   |        |   |       |        |  |      |        |  |   |       |   |  |       |   |  |        |      |   |        |       |   |        |   |       |   |  |      |   |  |   |       |  
|                        |  |                          |  |                          |  |                          |   |                         |  |       |                          |        |  |                          |  |        |                          |  |        |                         |   |        |   |       |        |  |      |        |  |   |       |   |  |       |   |  |        |      |   |        |       |   |        |   |       |   |  |      |   |  |   |       |  
|                        |  |                          |  |                          |  |                          |   |                         |  |       |                          |        |  |                          |  |        |                          |  |        |                         |   |        |   |       |        |  |      |        |  |   |       |   |  |       |   |  |        |      |   |        |       |   |        |   |       |   |  |      |   |  |   |       |  
|                        |  |                          |  |                          |  |                          |   |                         |  |       |                          |        |  |                          |  |        |                          |  |        |                         |   |        |   |       |        |  |      |        |  |   |       |   |  |       |   |  |        |      |   |        |       |   |        |   |       |   |  |      |   |  |   |       |  
|                        |  |                          |  |                          |  |                          |   |                         |  |       |                          |        |  |                          |  |        |                          |  |        |                         |   |        |   |       |        |  |      |        |  |   |       |   |  |       |   |  |        |      |   |        |       |   |        |   |       |   |  |      |   |  |   |       |  
|                        |  |                          |  |                          |  |                          |   |                         |  |       |                          |        |  |                          |  |        |                          |  |        |                         |   |        |   |       |        |  |      |        |  |   |       |   |  |       |   |  |        |      |   |        |       |   |        |   |       |   |  |      |   |  |   |       |  
|                         |  |                          |   |                          |   |                          |   |                          |  |        |                          |        |   |                          |   |        |                          |   |        |                          |   |        |   |        |        |  |       |        |  |   |        |   |  |        |   |  |        |       |   |        |        |   |        |   |        |   |  |       |   |  |   |        |  
|                        |  | $                        |  |                          |  |                          | $ |                         |  |       |                          | $      |  |                          |  |        | $                        |  |        | 4,209                    |   |        | $ | 14,732 |        |  | 992   |        |  | $ | 3,422  |   |  | 504    |   |  | $      | 1,939 |   |        | 1,872  |   |        | $ | 4,572  |   |  | 4,662 |   |  | $ | 44,237 |  
|                         |  |                          |   |                          |   |                          |   |                          |  |        |                          |        |   |                          |   |        |                          |   |        |                          |   |        |   |        |        |  |       |        |  |   |        |   |  |        |   |  |        |       |   |        |        |   |        |   |        |   |  |       |   |  |   |        |  



SEE ACCOMPANYING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



52



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VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY AND COMPREHENSIVE LOSS (Amounts in thousands)



|                                                                        |  |              |  |                              |     |  |                           |        |   |                     |   |         |                                              |  |       |          |   |  |   |    |  |   |         |  
|----------------------------------------------------------------------- |  | ------------ |  | ---------------------------- | --- |  | ------------------------- | ------ | - | ------------------- | - | ------- | -------------------------------------------- |  | ----- | -------- | - |  | - | -- |  | - | ------- | -
|                                                                        |  | Common Stock |  | Stock SubscriptionReceivable |     |  | Additional Paid-inCapital |        |   | Accumulated Deficit |   |         | AccumulatedOther Comprehensive Income (loss) |  | Total |         
|                                                                        |  | Shares       |  | Amount                       |     |  |                           |        |  
|Balance at July 1, 2006                                                 |  | 16,965       |  | $                            | 68  |  | $                         | (7,543 | ) |                     | $ | 313,489 |                                              |  | $     | (324,200 | ) |  | $ | 12 |  | $ | 15,069  |  
|                                                                        |  |              |  |                              |     |  |                           |        |   |                     |   |         |                                              |  |       |          |   |  |   |    |  |   |         |  
|Stock option and warrant expense                                        |  |             |  |                              |    |  |                           |       |   |                     |   | 461     |                                              |  |       |         |   |  |   |   |  |   | 461     |  
|Warrants issued                                                         |  |             |  |                              |    |  |                           |       |   |                     |   | 1,585   |                                              |  |       |         |   |  |   |   |  |   | 1,585   |  
|Bond warrants                                                           |  |             |  |                              |    |  |                           |       |   |                     |   | 26,915  |                                              |  |       |         |   |  |   |   |  |   | 26,915  |  
|Capital distribution                                                    |  |             |  |                              |    |  |                           | 7,500  |   |                     |   | (7,500  | )                                            |  |       |         |   |  |   |   |  |   |        |  
|Preferred Stock PIK Dividends                                           |  |             |  |                              |    |  |                           |       |   |                     |   | 703     |                                              |  |       | (703     | ) |  |   |   |  |   |        |  
|Offering costs                                                          |  |             |  |                              |    |  |                           |       |   |                     |   | (321    | )                                            |  |       |         |   |  |   |   |  |   | (2,669  | )
|Issuance of Common Stock                                                |  | 2,668        |  |                              | 10  |  |                           |       |   |                     |   | 2,320   |                                              |  |       |         |   |  |   |   |  |   | 2,330   |  
|Issuance of Common Stock as consideration in acquisition of CD&L        |  | 2,465        |  |                              | 10  |  |                           |       |   |                     |   | 3,195   |                                              |  |       |         |   |  |   |   |  |   | 3,205   |  
|Issuance of Series M Preferred Stock                                    |  |             |  |                              |    |  |                           |       |   |                     |   | (369    | )                                            |  |       | (1,013   | ) |  |   |   |  |   |        |  
|Issuance of Series N Preferred Stock                                    |  |             |  |                              |    |  |                           |       |   |                     |   | (136    | )                                            |  |       | (225     | ) |  |   |   |  |   |        |  
|Issuance of Series O Preferred Stock                                    |  |             |  |                              |    |  |                           |       |   |                     |   | (32     | )                                            |  |       | (114     | ) |  |   |   |  |   |        |  
|Issuance of Series P Preferred Stock                                    |  |             |  |                              |    |  |                           |       |   |                     |   | (199    | )                                            |  |       | (355     | ) |  |   |   |  |   |        |  
|Issuance of Series Q Preferred Stock for cash and interest paid-in-kind |  |             |  |                              |    |  |                           |       |   |                     |   | (42     | )                                            |  |       | (2,077   | ) |  |   |   |  |   | 44,993  |  
|Issuance of Series Q Preferred Stock for services                       |  |             |  |                              |    |  |                           |       |   |                     |   |        |                                              |  |       |         |   |  |   |   |  |   | 3,232   |  
|Conversion of Series M Preferred to Common Stock                        |  | 2,700        |  |                              | 11  |  |                           |       |   |                     |   | 5,210   |                                              |  |       |         |   |  |   |   |  |   |        |  
|Conversion of Series N Preferred to Common Stock                        |  | 850          |  |                              | 3   |  |                           |       |   |                     |   | 1,483   |                                              |  |       |         |   |  |   |   |  |   |        |  
|Conversion of Series O Preferred to Common Stock                        |  | 10           |  |                              |    |  |                           |       |   |                     |   | 20      |                                              |  |       |         |   |  |   |   |  |   |        |  
|Conversion of Series P Preferred to Common Stock                        |  | 3,783        |  |                              | 15  |  |                           |       |   |                     |   | 4,365   |                                              |  |       |         |   |  |   |   |  |   |        |  
|Conversion of Series Q Preferred to Common Stock                        |  | 3,379        |  |                              | 14  |  |                           |       |   |                     |   | 3,659   |                                              |  |       |         |   |  |   |   |  |   |        |  
|Beneficial conversion of Series N Preferred Stock                       |  |             |  |                              |    |  |                           |       |   |                     |   | 2,528   |                                              |  |       | (2,528   | ) |  |   |   |  |   |        |  
|Beneficial conversion of Series O Preferred Stock                       |  |             |  |                              |    |  |                           |       |   |                     |   | 1,048   |                                              |  |       | (1,048   | ) |  |   |   |  |   |        |  
|Beneficial conversion of Series P Preferred Stock                       |  |             |  |                              |    |  |                           |       |   |                     |   | 2,448   |                                              |  |       | (2,448   | ) |  |   |   |  |   |        |  
|Beneficial conversion of Series Q Preferred Stock                       |  |             |  |                              |    |  |                           |       |   |                     |   | 15,211  |                                              |  |       | (15,211  | ) |  |   |   |  |   |        |  
|Adjustment to stock subscription                                        |  |             |  |                              |    |  |                           | 43     |   |                     |   |        |                                              |  |       | (43      | ) |  |   |   |  |   |        |  
|Net loss                                                                |  |             |  |                              |    |  |                           |       |   |                     |   |        |                                              |  |       | (39,532  | ) |  |   |   |  |   | (39,532 | )
|Foreign currency translation                                            |  |             |  |                              |    |  |                           |       |   |                     |   |        |                                              |  |       |         |   |  |   | 55 |  |   | 55      |  
|Comprehensive loss                                                      |  |             |  |                              |    |  |                           |       |   |                     |   |        |                                              |  |       |         |   |  |   |   |  |   | (39,477 | )
|                                                                        |  |              |  |                              |     |  |                           |        |   |                     |   |         |                                              |  |       |          |   |  |   |    |  |   |         |  
|Balance at June 30, 2007                                                |  | 32,820       |  | $                            | 131 |  | $                         |       |   |                     | $ | 376,041 |                                              |  | $     | (389,497 | ) |  | $ | 67 |  | $ | 55,644  |  
|                                                                        |  |              |  |                              |     |  |                           |        |   |                     |   |         |                                              |  |       |          |   |  |   |    |  |   |         |  





SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



53



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##### Table of Contents

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)



|                                                                                  |  |              |         |   |             |   |         |             |  |   |         |  
|--------------------------------------------------------------------------------- |  | ------------ | ------- | - | ----------- | - | ------- | ----------- |  | - | ------- | -
|                                                                                  |  | Year ended   |        
|                                                                                  |  | June 30,2007 |         |   | July 1,2006 |   |         | July 2,2005 | 
|OPERATING ACTIVITIES                                                              |  |              |         |   |             |   |         |             |  |   |         |  
|Net loss                                                                          |  | $            | (39,532 | ) |             | $ | (16,038 | )           |  | $ | (49,844 | )
|Adjustments to reconcile net loss to net cash flows used in operating activities: |  |              |         |   |             |   |         |             |  |   |         |  
|Depreciation and amortization of intangibles                                      |  |              | 7,429   |   |             |   | 5,993   |             |  |   | 5,105   |  
|Accretion of interest and amortization of debt issue costs                        |  |              | 11,759  |   |             |   | 160     |             |  |   | 359     |  
|Stock option and warrant expense                                                  |  |              | 461     |   |             |   | 860     |             |  |   | 155     |  
|Loss on non-controlling interest in a variable interest entity                    |  |              |        |   |             |   | 1,061   |             |  |   |        |  
|Change in fair value of settlement liability                                      |  |              | (627    | ) |             |   | 525     |             |  |   |        |  
|Provision for doubtful accounts, trade                                            |  |              | 479     |   |             |   | 177     |             |  |   | 8,028   |  
|Provision for doubtful accounts, non-trade                                        |  |              | 125     |   |             |   |        |             |  |   |        |  
|Asset impairments                                                                 |  |              | 591     |   |             |   | 74      |             |  |   | 41      |  
|Loss (gain) on the sale of assets                                                 |  |              | 161     |   |             |   | (146    | )           |  |   | (185    | )
|Amortization of unfavorable contracts acquired with CD&L                          |  |              | (3,831  | ) |             |   |        |             |  |   |        |  
|Other                                                                             |  |              |        |   |             |   |        |             |  |   | 160     |  
|Equity instruments issued in lieu of payment for services received                |  |              |        |   |             |   | 20      |             |  |   | 1,147   |  
|Change in operating assets and liabilities:                                       |  |              |         |   |             |   |         |             |  |   |         |  
|Accounts receivable                                                               |  |              | 9,714   |   |             |   | 4,771   |             |  |   | (1,259  | )
|Other current assets                                                              |  |              | 1,992   |   |             |   | 799     |             |  |   | (636    | )
|Other assets                                                                      |  |              | (776    | ) |             |   | (1,739  | )           |  |   | (718    | )
|Accounts payable                                                                  |  |              | 1,302   |   |             |   | (2,069  | )           |  |   | (7,375  | )
|Accrued liabilities                                                               |  |              | 3,077   |   |             |   | (4,422  | )           |  |   | (253    | )
|                                                                                  |  |              |         |   |             |   |         |             |  |   |         |  
|Cash used in operating activities                                                 |  |              | (7,676  | ) |             |   | (9,974  | )           |  |   | (45,275 | )
|INVESTING ACTIVITIES                                                              |  |              |         |   |             |   |         |             |  |   |         |  
|Proceeds from sale of assets                                                      |  |              | 775     |   |             |   | 243     |             |  |   | 452     |  
|Purchases of property and equipment                                               |  |              | (2,383  | ) |             |   | (1,299  | )           |  |   | (2,389  | )
|Acquisition of CD&L (net of cash acquired of $531)                                |  |              | (51,599 | ) |             |   |        |             |  |   |        |  
|Other                                                                             |  |              |        |   |             |   | 80      |             |  |   |        |  
|                                                                                  |  |              |         |   |             |   |         |             |  |   |         |  
|Cash used in investing activities                                                 |  |              | (53,207 | ) |             |   | (976    | )           |  |   | (1,937  | )
|FINANCING ACTIVITIES                                                              |  |              |         |   |             |   |         |             |  |   |         |  
|Proceeds from new revolving credit facility, net                                  |  |              | 6,546   |   |             |   |        |             |  |   |        |  
|Repayments of revolving credit agreements, net                                    |  |              | (20,547 | ) |             |   | (7,333  | )           |  |   | (112    | )
|Repayment of CD&Ls line of credit facility                                       |  |              | (9,371  | ) |             |   |        |             |  |   |        |  
|Proceeds from notes payable and warrants, net                                     |  |              | 63,523  |   |             |   |        |             |  |   |        |  
|Payments of notes payable and long-term debt                                      |  |              | (7,551  | ) |             |   | (785    | )           |  |   | (388    | )
|Payments of CD&Ls seller-financed debt from previous acquisitions                |  |              | (1,555  | ) |             |   |        |             |  |   |        |  
|Proceeds from issuance of preferred stock, net                                    |  |              | 42,541  |   |             |   | 14,977  |             |  |   | 52,230  |  
|Proceeds from issuance of common stock, net                                       |  |              |        |   |             |   |        |             |  |   | 11      |  
|Proceeds from issuance of restricted stock                                        |  |              |        |   |             |   |        |             |  |   | 57      |  
|                                                                                  |  |              |         |   |             |   |         |             |  |   |         |  
|Cash provided by financing activities                                             |  |              | 73,586  |   |             |   | 6,859   |             |  |   | 51,798  |  
|                                                                                  |  |              |         |   |             |   |         |             |  |   |         |  
|Net change in cash                                                                |  |              | 12,703  |   |             |   | (4,091  | )           |  |   | 4,586   |  
|                                                                                  |  |              |         |   |             |   |         |             |  |   |         |  
|Cash, beginning of period                                                         |  |              | 1,715   |   |             |   | 5,806   |             |  |   | 1,220   |  
|                                                                                  |  |              |         |   |             |   |         |             |  |   |         |  
|Cash, end of period                                                               |  | $            | 14,418  |   |             | $ | 1,715   |             |  | $ | 5,806   |  
|                                                                                  |  |              |         |   |             |   |         |             |  |   |         |  



SEE ACCOMPANYING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



54



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##### Table of Contents

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements



---



|1. |  | DESCRIPTION OF BUSINESS
|-- |  | -----------------------



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



|2. |  | SIGNIFICANT ACCOUNTING POLICIES
|-- |  | -------------------------------



Principles of Consolidation



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.



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



The consolidated financial statements for the year ended
June 30, 2007 include the financial position and results of operations of Peritas LLC (Peritas) as required by FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN No. 46). The
financial statements of Peritas were not consolidated into the Companys financial statements for the three and nine-month periods ended April 1, 2006, as the Company was not the primary beneficiary of Peritas during that time. The
accompanying financial statements for the years ended June 30, 2007, July 1, 2006 and July 2, 2005 include $0.4 million, $0.2 million and $0.6 million, respectively, in revenue and $0.7 million, $0.1 million, and nil,
respectively, of net loss related to Peritas. For a description of the history of Peritas, see Note 5. Consolidated Financial Interest Entity.



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
2007, 2006 and 2005 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. During 2007 and 2006, the Company changed its estimate for prior period uncollectible accounts
receivable, resulting in a benefit of $2.3 million or $0.09 per share and $1.5 million or $0.10 per share, respectively.



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Notes to Consolidated Financial Statements (continued)



---



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. The Company has one customer that accounted for 12.3% of its 2007 revenues. No other customers have revenues in excess of 10%. In 2006, the Company had two customers that
accounted for 13.3% and 10.4% of net revenue. In 2005, no one customer accounted for 10% of net revenue. 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 the Companys historical collection experience, current trends, credit policy and a percentage of accounts receivable by aging category. At June 30, 2007, no single customer
had an accounts receivable balance greater than 10% of the Companys total trade accounts receivable. At July 1, 2006, one customer had an accounts receivable balance equal to 10.9% of the Companys total trade accounts receivable.



Property and Equipment



Property and equipment are recorded at cost and are depreciated over their
estimated useful lives using the straight-line method. The estimated useful lives of buildings and leasehold improvements are the shorter of 40 years or the life of the lease and are three to seven years for furniture, equipment, vehicles and
computer software.



Long-Lived Assets



The Company reviews long-lived assets, including definite life intangible
assets, 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.



Amortization expense was $3.2 million for the year ended June 30, 2007. Total amortization expense for each of the next five years is estimated to be
as follows: $3.1 million in 2008 and $2.1 million in each of 20092012.



The gross carrying amount and accumulated amortization of intangible assets is as follows (in thousands):



|                         |  |                        |        |                        |   |       |  |   |       
|------------------------ |  | ---------------------- | ------ | ---------------------- | - | ----- |  | - | ------
|                         |  | Customer Relationships |        | Non-compete Agreements |   | Total
|                         |  |                       
|Carrying amount          |  | $                      | 25,600 |                        | $ | 1,900 |  | $ | 27,500
|Accumulated amortization |  |                        | 2,223  |                        |   | 950   |  |   | 3,173 
|                         |  |                        |        |                        |   |       |  |   |       
|Net                      |  | $                      | 23,377 |                        | $ | 950   |  | $ | 24,327
|                         |  |                        |        |                        |   |       |  |   |       



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Notes to Consolidated Financial Statements (continued)



---



Goodwill



The Company accounts for its goodwill in accordance with the provisions of FASB SFAS No. 142, Goodwill and Other Intangible Assets. Under
these rules, goodwill and other intangible assets deemed to have indefinite useful lives are not amortized but are subject to impairment tests at least annually, or more frequently if circumstances occur that indicate impairment may have occurred.



The Company completed its annual goodwill impairment
evaluation through 2007, and concluded that no impairment existed for all years presented.



Deferred Financing Costs



Deferred financing costs relate to the cost incurred in the arrangement of the Companys debt agreements and are being amortized to interest expense using the straight-line method over the terms of the related debt. Accumulated
amortization of deferred financing costs was $2.0 million and $2.9 million at June 30, 2007 and July 1, 2006, respectively. Amortization included in the consolidated statement of operations as a component of interest expense was $3.9
million, $1.7 million and $1.6 million for the fiscal years ended June 30, 2007, July 1, 2006 and July 2, 2005, respectively. On July 3, 2006, $0.8 million of deferred financing costs on the Companys consolidated
balance sheet were expensed as an extinguishment loss in conjunction with the payment of the associated debt.



Fair Value of Financial Instruments



The carrying amounts ofcash, accounts receivable andaccounts payable approximate fair value because of their short maturities. At June 30, 2007, the Company had $7.5 million outstanding under its
revolving credit facility with Wells Fargo Foothill, and $78.2 million outstanding under its Senior Notes. The fair market value of the Senior Notes is $70.4 million based on current asking prices for trades at 90% of face value. The carrying amount
of the revolving credit facility approximates fair value as the rate of interest on the revolving credit facility approximate current market rates of interest for similar instruments with comparable maturities, and the interest rate is variable.



Income Taxes



The Company recognizes deferred income taxes for the future tax consequences
associated with differences between the tax bases of assets and liabilities and our operating loss carryforwards 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 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.



Comprehensive Loss



Comprehensive loss was $39.5 million, $16.1 million and $49.6 million for
the years ended June 30, 2007, July 1, 2006 and July 2, 2005. The difference between net loss and total comprehensive loss in all respective periods related to foreign currency translation adjustments. All assets and liabilities
of foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at the balance sheet date. The resulting translation adjustments are recorded as foreign currency translation adjustments, a component ofAccumulated
comprehensive income within theShareholders equity section of theConsolidated Balance Sheets. Income and expense items are translated at average exchange rates for the year.



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Notes to Consolidated Financial Statements (continued)



---



Share-Based Payments



In December 2004, the FASB issued SFAS No. 123 (revised 2004),Shared-Based Payment (SFAS 123(R)), which is a
revision of SFAS No. 123,Accounting for Stock-Based Compensation. SFAS 123(R) supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees (APB 25), and amends SFAS No. 95,Statement of Cash
Flows. Generally the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income
statement based on their fair values.



On July 3, 2005,
the Company adopted SFAS 123(R) using a modified prospective method resulting in the recognition of share-based compensation expense of $0.9 million for the year ended July 1, 2006. Prior period amounts have not been restated. Under this
modified prospective method, the Company recorded compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Prior to the adoption
of SFAS 123(R), we accounted for share-based compensation using APB 25 and related interpretations. Under APB 25, the Company recognized compensation expense based on the intrinsic value of stock options on the grant date. Substantially all stock
options granted to employees have exercise prices equal to the fair market value of the Companys common stock on the grant date. As such, the Company did not recognize compensation expense prior to July 3, 2005 related to most stock
option grants.



On March 6, 2006 certain stock options
awards associated with the departure of the Companys Chief Financial Officer were modified to provide for immediate vesting. Under SFAS 123(R), this modification required the Company to re-measure the fair value of the options on the date of
the modification and to immediately recognize the calculated compensation expense of $8,600. The share-based compensation expense previously recorded of $22,330 was reversed as the options had not vested.



The Company estimates the fair value of each option grant on the date of the
grant using the Black-Scholes option-pricing model. 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.



The following table details the effect on net loss applicable to common
shareholders and basic and diluted loss per share had compensation expense for the employee share-based awards been recorded in the year ended July 2, 2005 based on the fair value method under SFAS 123 (In thousands, except per share amounts):



|                                                                                                               |  |   |          |  
|-------------------------------------------------------------------------------------------------------------- |  | - | -------- | -
|Net loss applicable to common shareholders, as reported                                                        |  | $ | (106,869 | )
|Add: Stock-based employee compensation expense included in reported net loss applicable to common shareholders |  |   | 155      |  
|Deduct: Stock-based compensation expense determined under fair value method for all awards                     |  |   | (189     | )
|                                                                                                               |  |   |          |  
|Pro forma                                                                                                      |  | $ | (106,903 | )
|                                                                                                               |  |   |          |  
|Basic and diluted loss per common share:                                                                       |  |   |          |  
|As reported                                                                                                    |  | $ | (21.01   | )
|                                                                                                               |  |   |          |  
|Pro forma                                                                                                      |  | $ | (21.02   | )
|                                                                                                               |  |   |          |  



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Notes to Consolidated Financial Statements (continued)



---



New Accounting Pronouncements



In May 2005, the FASB issued SFAS No. 154,Accounting Changes and Error Corrections (SFAS 154).
SFAS 154 is a replacement for APB Opinion No. 20,Accounting Changes, and FASB Statement No. 3,Reporting Accounting Changes in Interim Financial Statements. SFAS 154 applies to all voluntary changes in accounting
principle and changes the accounting for and reporting of changes for and reporting of a change in accounting principle. SFAS 154 requires retrospective application of prior periods financial statements of a voluntary change in accounting
principle unless it is impracticable. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effort effect of changing to the new
accounting principle. SFAS 154 requires that a change in method of depreciation, amortization, or depletion for long-lived non-financial assets be accounted for as a change in accounting estimate that is affected by a change in accounting principle.
Opinion 20 previously required that such a change be reported as a change in accounting principle. This Statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Statement
154 did not have a material effect on the Companys financial statements.



In June 2006 the FASB issued Financial Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes.FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in an enterprises financial statements in accordance with SFAS 109, Accounting for Income Taxes.FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006, which means that it will be effective for our fiscal year beginning July 1, 2007. We are in the process of evaluating this guidance and therefore have not yet determined the effect that the adoption of
FIN 48 will have on our financial statements.



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



In February 2007 the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial
Liabilities.SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value at specific election dates. SFAS 159s objective is to improve financial reporting by reducing both complexity
in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS 159 requires companies to provide additional information that will help users of financial statements to more
easily understand the effect of the Companys choice to use fair value on its earnings. SFAS 159 also requires companies to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of
the balance sheet. The new standard does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in SFAS 157, Fair Value Measurements,and SFAS 107, Disclosures about



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Notes to Consolidated Financial Statements (continued)



---



Fair Value of Financial Instruments.SFAS 159 is effective for fiscal years beginning after November 15, 2007, which means that it will be
effective for the Companys fiscal year beginning June 29, 2008. The Company is in the process of evaluating SFAS 159 and therefore has not yet determined the effect that the adoption will have on its financial statements.



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



On July 3, 2006, the Company, its wholly owned subsidiary CD&L Acquisition Corp (Merger Sub) and CD&L, entered into an agreement
and plan of merger (the Merger Agreement) to acquire CD&L. CD&L was another leading provider of time-definite logistics services.



The primary reasons for the acquisition were to achieve the following strategic and financial benefits:



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



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



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



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



| |  |  | costs savings through operational synergies and elimination of redundant expenses.
| | - |  | ----------------------------------------------------------------------------------



The Merger Agreement provided that, at the closing, following CD&L shareholder approval, Merger Sub would be merged with
and into CD&L (the Merger), with each then-outstanding share of common stock of CD&L being converted into the right to receive $3.00 per share in cash. As a result of the Merger, which closed on August 17, 2006, CD&L
became a wholly owned subsidiary of the Company. Contemporaneously with the signing of the Merger Agreement, the Company:



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



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



| |  |  | acquired approximately 49% of CD&Ls outstanding common stock in consideration for which the Company issued 3,205 Units valued at $3.0 million, 2,465,418
shares of common stock valued at $3.2 million or $1.30 per share, equal to the closing price of common shares on the day the final terms of the transaction were agreed; and paid $19.0 million in cash, pursuant to purchase agreements entered into
with the holders of certain of CD&Ls convertible debentures and convertible preferred stock;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | repaid approximately $5.8 million of the Companys indebtedness owed to BET Associates, LP.
| | - |  | -------------------------------------------------------------------------------------------



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Notes to Consolidated Financial Statements (continued)



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



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



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



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



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



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



In
total, the aggregate net cash proceeds from the sale of the Units were approximately $63.5 million and from the sale of the Series Q Preferred Stock were approximately $42.5 million. Approximately $51.6 million of the proceeds were used to finance
the CD&L acquisition, approximately $26.3 million were used to repay indebtedness owed by us to Bank of America, N.A. ($20.5 million), BET Associates, LP ($5.8 million), approximately $1.6 million were used to repay CD&L seller-financed debt
from previous acquisitions, approximately $9.4 million were used to repay CD&Ls line of credit facility and $17.2 million was retained for general corporate purposes.



In addition, the Company assumed a contingent liability to make a maximum of $3.5 million in payments under the change of
control provisions of the employment agreements of four former CD&L executives within 110 days of the receipt of their letters of resignation, which needed to be tendered before August 17, 2007, one year following the Merger closing. On
August 17, 2006, three of the four former CD&L executives submitted letters of resignation. In accordance with the change of control provisions of the applicable employment agreements, a total of $2.6 million was paid to the three
executives in January 2007. This amount was accounted for as an addition to the purchase price for CD&L. The other CD&L executive did not resign by August 17, 2007.



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



Senior Notes



On July 3, 2006, the Company issued $78.2 million in aggregate
principal amount of 12% Senior Secured Notes due 2010 (the Senior Notes) in a private placement transaction pursuant to an indenture dated as of July 3, 2006 among the Company, certain of its subsidiaries and Wells Fargo, N.A., as
trustee. The Senior Notes were issued at a discount of 5.66% of face value. The net proceeds from the sale of the Senior Notes, after deducting the discount and estimated offering expenses payable by the Company, were approximately
$63.5 million. The Senior Notes were issued in units comprised of (a) $1,000 in aggregate principal amount at maturity of Senior Notes and (b) a warrant to purchase 345 shares of the Companys common stock exercisable at $1.45
per share. See Note 8Debt.



Warrants



As part of the Units, the Company issued warrants to
purchase an aggregate of 26,980,725 shares of the Companys common stock at an initial exercise price of $1.45 per share, subject to adjustment, valued at $26.9 million using a Black-Scholes option pricing model, adjusted for warrant dilution.
The term of these warrants expires on July 3, 2010. The warrants are subject to an automatic exercise feature, based on the trading price of the Companys common stock, subject to specified limitations. The warrants contain other customary
terms and provisions.



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Notes to Consolidated Financial Statements (continued)



---



In addition to issuing warrants as part of the Units, the Company also issued warrants on
July 3, 2006 to purchase 797,500 shares of the Companys common stock to affiliates of TH Lee Putnam Ventures L.P., (THLPV), in consideration of services provided by one or more of these parties, at an exercise price of $0.01
per share, valued at $1.1 million using a Black-Scholes option model. The warrants issued to affiliates of THLPV have terms similar to the warrants issued as part of the Units except that they do not provide for automatic exercise to affiliates of
THLPV. Mr. James G. Brown, founder and Managing Director of TH Lee Putnam Ventures L.P., is one of our directors.



Series Q Convertible Preferred Stock



In addition to the sales of Series Q Preferred Stock discussed above, the Company also issued on July 3, 2006 an aggregate of 277,770 shares of
Series Q Preferred Stock in consideration of services, determined by the Company to have a value of not less than $10.00 per share, to certain of the investors, the placement agents for the Unit and Series Q Preferred Stock offerings and affiliates
of THLPV for various services they provided to Velocity. See Note 9Shareholders Equity for further discussion of the terms of the Series Q Preferred Stock.



Amended Agreement with Financial Advisor



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



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



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



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



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Notes to Consolidated Financial Statements (continued)



---



CD&L Series A Convertible Subordinated Debenture Purchase Agreement



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



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



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



CD&L Voting Agreements



As a condition to entering into the Merger Agreement and the Debenture
Purchase Agreement on July 3, 2006, the Company required that certain officers, directors, and other shareholders enter into a voting agreement. Under the voting agreement each such stockholder agreed to vote in favor of the merger and the
Merger Agreement and against any action which would result in a breach of the Merger Agreement or voting agreement. The voting agreement also provided that such stockholders would vote against any extraordinary corporate transaction, sale or
transfer of assets, change to the Board of Directors, change in capitalization, charter or bylaws, change to the structure or business of CD&L, or any other action which would potentially interfere, delay or adversely effect the merger or
transactions contemplated thereby. The prohibition did not apply to a vote for a competing merger offer that the CD&L Board of Directors determined to be on more favorable terms than the Velocity Merger Agreement, provided that the CD&L
Board of Directors recommended that the stockholders not approve the merger transaction with the Company. The voting agreement terminated upon the effective date of the merger.



CD&L Seller-Financed Debt



Contemporaneously with the Companys merger with CD&L, the Company was obligated under the Indenture for the Companys Senior Notes to
satisfy all indebtedness of CD&L. That indebtedness included four promissory notes in an aggregate principal amount of approximately $1,600,000 (the CD&L Seller Notes) and a letter of credit issued by Bank of America for the
account of CD&L in the approximate amount of $3,800,000 (the CD&L Letter of Credit). In addition, the Company chose to cash collateralize the CD&L Letter of Credit until December 22, 2006, when it put in place a working
capital line of credit under which a replacement letter of credit was issued. See Note 8Debt for further discussion of the terms of the new revolving credit facility.



Purchase Accounting



The acquisition was accounted for as a purchase business combination. The consolidated financial statements include the results of CD&L from
July 3, 2006. The Company recorded a minority interest for the portion of CD&L not controlled for the period from July 3, 2006 to August 17, 2006 when the minority interest



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Notes to Consolidated Financial Statements (continued)



---



was acquired. The combined purchase price of $63.2 million is comprised of $52.1 million in cash, 2,465,418 shares of common stock valued at $1.31 per share,
3,205 Senior Notes due 2010 with attached warrants (see Note 8Debt) valued at $3.0 million, and transaction costs of $4.8 million. The purchase price was allocated to the net assets acquired and liabilities assumed based on their estimated
fair values as of the acquisition date. The Company engaged a third party to assist with the valuation of certain acquired intangibles. The excess of the purchase price over the estimated fair value of the net assets acquired, including identifiable
intangible assets, of $39.0 million was allocated to goodwill.



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



|                                                                          |  |   |        
|------------------------------------------------------------------------- |  | - | -------
|Assets                                                                    |  |   |        
|Current assets:                                                           |  |   |        
|Cash                                                                      |  | $ | 531    
|Accounts receivable                                                       |  |   | 28,587 
|Prepaid expenses and other current assets                                 |  |   | 2,907  
|                                                                          |  |   |        
|Total current assets                                                      |  |   | 32,025 
|Fixed assets                                                              |  |   | 3,259  
|Goodwill                                                                  |  |   | 38,961 
|Intangible assets:                                                        |  |   |        
|Customer relationships                                                    |  |   | 25,600 
|Non compete agreements                                                    |  |   | 1,900  
|                                                                          |  |   |        
|Total intangible assets                                                   |  |   | 27,500 
|Other assets                                                              |  |   | 741    
|                                                                          |  |   |        
|Total assets                                                              |  |   | 102,486
|                                                                          |  |   |        
|Liabilities                                                               |  |   |        
|Current liabilities:                                                      |  |   |        
|Accounts payable and accrued liabilities, including unfavorable contracts |  |   | 23,914 
|Short term borrowings                                                     |  |   | 13,371 
|Current maturities of long-term debt                                      |  |   | 542    
|                                                                          |  |   |        
|Total current liabilities                                                 |  |   | 37,827 
|Other liabilities                                                         |  |   | 1,425  
|                                                                          |  |   |        
|Total liabilities:                                                        |  |   | 39,252 
|                                                                          |  |   |        
|Net assets acquired                                                       |  | $ | 63,234 
|                                                                          |  |   |        



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



During 2007, the
Company recorded various adjustments to the estimated CD&L liabilities dated as of July 3, 2006 as more information became available regarding the obligations, permitting the Company to make a better estimate of the amount of their ultimate
settlement, or the obligations were actually settled in cash for amounts that were different than estimated at the time of the acquisition. The adjustments of these liabilities resulted in an increase to the goodwill recorded on the CD&L
acquisition.



In the fourth quarter of 2007, the Company made
the following adjustments to goodwill in finalizing the allocation of the purchase price to assets and liabilities:



| |  |  | $3.3 million reduction to the preliminary fair market value assigned to the acquired customer relationships intangible asset
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



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---



| |  |  | An increase in assumed liabilities of $2.9 million associated with the determination of the fair market value of a preacquisition contingent liability
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $3.8 million related to unfavorable contracts (see below)
| | - |  | ---------------------------------------------------------



Unfavorable Contracts



Velocity Express acquired a contract with a significant customer from CD&L dated June 2006 that stipulates route consolidations are permitted only if
agreed to by both parties. Velocity Express acquired a second contract with this customer from CD&L dated August 2005 that contains billing rates that are below market rates for the distribution services being provided in that area.



We believe that these contracts contain unfavorable terms and conditions
and thus represent unfavorable contracts when compared to market rates and other contractual provisions of comparable customers in the same vertical market. As a result, unfavorable contract liabilities of $1.4 million for the driver pay associated
with fixed dedicated routes, and $1.5 million for the below market billing rates were recorded at the acquisition date. Twelve months of excess driver pay liability was amortized into operations reducing the Companys driver pay expense in our
consolidated statement of operations; and twelve months of the below market billing rates liability was amortized into operations and is classified as revenue in our consolidated statement of operations. As of June 30, 2007, these unfavorable
contracts were fully amortized and negotiations continue in an effort to modify this contract to normal commercial terms.



Velocity Express acquired a non cancelable contract with a significant financial services customer from CD&L dated February 2004 and expiring on
January 31, 2008 that stipulates that CD&L carry, at its own expense, secure and maintain specified levels of insurance. We believe that this contract contains unfavorable terms and conditions and thus represents an unfavorable contract
when compared to similar contractual provisions of comparable customers in the financial services vertical market. As a result, an unfavorable contract liability of $0.5 million for excess insurance premiums was recorded at the acquisition date.
$0.4 million of the excess premium liability was amortized into operations reducing the Companys cost of sales in our consolidated statement of operations. As of June 30, 2007, there was $0.1 million of this unfavorable contract liability
remaining.



Velocity Express acquired a contract with a
financial services customer from CD&L dated March 2005 that stipulates that this customer has sole discretion to discontinue or delete delivery routes. We believe that this contract contains unfavorable terms and conditions and thus represents
an unfavorable contract when compared to similar contractual provisions of comparable customers in the financial services vertical market. As a result, an unfavorable contract liability of $0.2 million for the driver pay associated with fixed
dedicated routes was recorded at the acquisition date. Ten months of excess driver pay liability was amortized into operations reducing the Companys driver pay expense in our consolidated statement of operations. As of June 30, 2007, this
unfavorable contract was fully amortized and negotiations continue in an effort to modify this contract to normal commercial terms.



Velocity Express acquired three contracts with a transportation and logistics customer from CD&L dated March 2002, May 2002, and April 2004 that
prevent Velocity Express from re-routing pre-determined fixed dedicated routes. We believe that this contract also contains unfavorable terms and conditions and thus represents an unfavorable contract. As a result, an unfavorable contract liability
of $0.2 million for the driver pay associated with fixed dedicated routes was recorded at the acquisition date. Eleven months of excess driver pay liability was amortized into operations reducing the Companys driver pay expense in our
consolidated statement of operations. As of June 30, 2007, this unfavorable contract was fully amortized and negotiations continue in an effort to modify this contract to normal commercial terms.



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Notes to Consolidated Financial Statements (continued)



---



In total, the Company amortized into operations $7.8 million of unfavorable contract liabilities.



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



|                                     |  |                    |         |   |             |   |         |  
|------------------------------------ |  | ------------------ | ------- | - | ----------- | - | ------- | -
|                                     |  | For the year ended |        
|                                     |  | June 30,2007       |         |   | July 1,2006 |  
|Revenue                              |  | $                  | 410,102 |   |             | $ | 440,102 |  
|Net loss                             |  |                    | (39,165 | ) |             |   | (32,155 | )
|                                     |  |                    |         |   |             |   |         |  
|Basic and diluted net loss per share |  | $                  | (2.52   | ) |             | $ | (3.09   | )
|                                     |  |                    |         |   |             |   |         |  



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



|4. |  | RESTRUCTURING CHARGES AND ASSET IMPAIRMENTS
|-- |  | -------------------------------------------



At the end of the third quarter of fiscal 2005 Company management redefined its business model to take advantage of the Companys strengths in
service delivery its local markets. Approximately 40 operating centers were designated for closure and employee headcount was reduced by about 200. At that time, the Company recorded a charge of $602,000 related to the restructuring; mostly
reflective of severance costs. During the final quarter of fiscal 2005 the Company ceased use of most of the named facilities and recorded an additional $550,000 in net lease contract termination costs and fixed asset impairments as well as $100,000
in severance, and an estimated $300,000 charge was recorded to recognize the cost of service contracts that have no future economic benefit to the Company.



During the third quarter of fiscal 2006, the Company recorded a charge of $0.3 million related to severance and benefits for approximately 120 employees,
and related to revisions in its estimates of previously recorded costs and losses associated with excess facilities.



During fiscal 2007, in connection with the integration of CD&L, the Companys management commenced its integration plan which included staff
reduction of approximately 200 employees due to redundant positions, a retention incentive program for key individuals of CD&L and the designation of 39 operating centers for closure. In connection with this integration plan, the Company
recorded restructuring charges of approximately $0.4 million related to severance costs and retention incentives and approximately $2.4 million in lease termination costs related to the 39 facilities which closed during the fiscal year. In addition,
the Company reversed previously recorded costs by approximately $33,000 for revisions in the Companys estimates of previously recorded costs associated with prior period restructurings.



Approximately $0.9 million of the liability remained accrued at June 30,
2007, $0.8 million of which is included with current accrued liabilities and $0.1 million is included with other long-term liabilities.



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---



A summary of the restructuring liabilities and the activity for the years ended June 30, 2007
and July 1, 2006 is as follows (amounts in thousands):



|                              |  |                                      |       |                    |   |          |  |   |                                    |   |  |                                      |     |                    |  |          |     |  |                                    |       |  |                                       |        |   |  |   |     |   |  |   |    
|----------------------------- |  | ------------------------------------ | ----- | ------------------ | - | -------- |  | - | ---------------------------------- | - |  | ------------------------------------ | --- | ------------------ |  | -------- | --- |  | ---------------------------------- | ----- |  | ------------------------------------- | ------ | - |  | - | --- | - |  | - | ---
|                              |  | RestructuringLiabilitiesJuly 2, 2005 |       | RestructuringCosts |   | Payments |  |   | Adjustmentsand Changesin Estimates |   |  | RestructuringLiabilitiesJuly 1, 2006 |     | RestructuringCosts |  | Payments |     |  | Adjustmentsand Changesin Estimates |       |  | RestructuringLiabilitiesJune 30, 2007
|Employee termination benefits |  | $                                    | 520   |                    | $ | 347      |  | $ | (647                               | ) |  | $                                    | (59 | )                  |  | $        | 161 |  | $                                  | 382   |  | $                                     | (455   | ) |  | $ | (56 | ) |  | $ | 32 
|Lease termination costs       |  |                                      | 559   |                    |   |         |  |   | (350                               | ) |  |                                      | 57  |                    |  | $        | 266 |  |                                    | 2,392 |  |                                       | (1,898 | ) |  |   | 179 |   |  | $ | 939
|Other                         |  |                                      | 311   |                    |   |         |  |   | (180                               | ) |  |                                      | (41 | )                  |  |          | 90  |  |                                    |      |  |                                       |       |   |  |   | (90 | ) |  |   |   
|                              |  |                                      |       |                    |   |          |  |   |                                    |   |  |                                      |     |                    |  |          |     |  |                                    |       |  |                                       |        |   |  |   |     |   |  |   |    
|                              |  | $                                    | 1,390 |                    | $ | 347      |  | $ | (1,177                             | ) |  | $                                    | (43 | )                  |  | $        | 517 |  | $                                  | 2,774 |  | $                                     | (2,353 | ) |  | $ | 33  |   |  | $ | 971
|                              |  |                                      |       |                    |   |          |  |   |                                    |   |  |                                      |     |                    |  |          |     |  |                                    |       |  |                                       |        |   |  |   |     |   |  |   |    



During fiscal 2007,
Peritas LLC (see Note 5Consolidated Financial Interest Entity) recognized an impairment of $0.5 million in conjunction with a write-down to fair value of assets held for sale. Also during 2007, Velocity recognized an impairment of $0.1 million
in leasehold improvements.



|5. |  | CONSOLIDATED FINANCIAL INTEREST ENTITY
|-- |  | --------------------------------------



In January 2003, the FASB issued Interpretation No. 46,Consolidation of Variable Interest Entities (FIN No. 46), as revised by FIN 46 [revised
December 2003], Consolidation of Variable Interest Entities (FIN 46R), which requires the consolidation of variable interest entities. During May 2004 the Company entered into a business venture designed to provide both
the manpower and the vehicle fleet to service, firsta major customer and, subsequentlya growing market demand. This major customers desire to outsource its delivery operation and related vehicle fleet provided the genesis for this
new business venture, named Peritas LLC (Peritas), a variable interest entity. It was formed by MCG Global (MCG), one of the Companys largest investors with a strategic objective to acquire a fleet of vehicles and to
lease such vehicles to Independent Contractors (ICs) to service outsourced customer business endeavors. Peritas provides vehicle leases to ICs interested in providing outsource services to some customers on behalf of Velocity and
Velocity provides administrative services to Peritas such as collection of vehicle rental fees from independent contractors for a fee.



Velocity arranged the initial purchase of $799,000 of customer vehicles, for Peritas, with an offset against account receivable balances due from the
aforementioned customer. For the fiscal year ended July 3, 2004 the Company consolidated the operations of Peritas in accordance with FIN No. 46R. Fiscal 2004 net sales were $36,000.



During August 2004, Peritas paid Velocity for the initial vehicle purchases of $799,000. Additional vehicle purchases
amounting to $987,000 were subsequently made by Velocity on behalf of Peritas and repaid. Velocity also advanced cash to Peritas and paid Peritas vendors on behalf of Peritas throughout fiscal 2005. These advances exceeded amounts collected from
independent contractors by Velocity on behalf of Peritas. The resulting receivable generated was deemed a variable interest in Peritas.



During November 2004, Peritas was purchased from MCG by TH Lee Putnam Ventures (THLPV), another of Velocitys significant investors.
Peritas also entered into a $3.0 million Loan and Security Agreement with Comerica in the second quarter of fiscal 2005, of which 35% of the outstanding amounts due under the line were guaranteed by THLPV. As a result of borrowings under the new
Agreement, Comericas outstanding debt, net of the 35% guarantee from THLPV, exceeded Velocitys variable interest in Peritas; and Comerica became the primary beneficiary to absorb a majority of Peritas expected losses. Velocity no longer
had a variable interest in Peritas that was at risk of disproportionate loss relative to its voting rights. Accordingly, Peritas was deconsolidated from the Companys financial statements upon the completion of these transactions during fiscal
2005.



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Notes to Consolidated Financial Statements (continued)



---



During fiscal 2006, as Peritas periodically paid down the borrowings under the loan with Comerica,
Velocitys receivable with Peritas continued to increase. In March, 2006, Velocitys variable interest in Peritas increased to an amount that exceeded the outstanding balance under the line with Comerica, net of the 35% guarantee from
THLPV; and Velocity once again became the primary beneficiary to absorb a majority of Peritas expected losses. Accordingly, Peritas was consolidated with the Companys financial statements at July 1, 2006 and for the three months then ended.
Upon consolidation, the Company recorded Peritas assets and liabilities at their historical carrying value of $1.1 million and $2.2, respectively, due to common ownership. Peritas accumulated losses of $1.1 million were recognized by the Company as
an expense in the fourth quarter. The accompanying financial statements for the year ended June 30, 2007 include $0.4 million in revenue and $0.7 million of net loss related to Peritas. Future income, if any, to the extent of such losses will
be allocated to the Company before the controlling entity.



|6. |  | PROPERTY AND EQUIPMENT
|-- |  | ----------------------



Property and equipment consist of the following:



|                                     |  |              |         |   |             |   |         |  
|------------------------------------ |  | ------------ | ------- | - | ----------- | - | ------- | -
|                                     |  | June 30,2007 |         |   | July 1,2006 |  
|Land                                 |  | $            |        |   |             | $ | 194     |  
|Buildings and leasehold improvements |  |              | 2,699   |   |             |   | 2,146   |  
|Furniture, equipment and vehicles    |  |              | 9,194   |   |             |   | 6,329   |  
|Computer Software                    |  |              | 16,865  |   |             |   | 14,494  |  
|                                     |  |              |         |   |             |   |         |  
|                                     |  |              | 28,758  |   |             |   | 23,163  |  
|Less accumulated depreciation        |  |              | (20,301 | ) |             |   | (16,582 | )
|                                     |  |              |         |   |             |   |         |  
|                                     |  | $            | 8,457   |   |             | $ | 6,581   |  
|                                     |  |              |         |   |             |   |         |  



Depreciation expense
was $4.3 million, $4.3 million and $3.5 million in 2007, 2006 and 2005, respectively



|7. |  | ASSETS HELD FOR SALEVEHICLES
|-- |  | -----------------------------



Vehicles held by Peritas have been classified as assets held for sale. Losses recognized in conjunction with the write down of these vehicles to
fair-value were approximately $0.5 million in 2007 and $0.1 million in 2006. Such losses are included in restructuring charges and asset impairments on the Companys consolidated statements of operations. At June 30, 2007, the carrying
value of the vehicles is $0.1 million. Peritas sold all of its remaining vehicles during the first quarter of fiscal year 2008.



|8. |  | DEBT
|-- |  | ----



Revolving Credit Facility



On December 22, 2006, the Company and some its subsidiaries entered into a senior secured revolving credit agreement with a syndicate of lenders led by Wells Fargo Foothill, Inc. (Wells). Wells is the administrative agent
under the revolving credit agreement. The revolving credit agreement matures on the earlier of: (i) the date that is 90 days prior to the earliest date on which the principal amount of any of the Senior Notes is scheduled to become due and
payable under the Indenture (as defined below) or (ii) December 22, 2011. Each of the Companys subsidiaries (other than CD&L, the Companys inactive subsidiaries and foreign subsidiaries) is a borrower under the revolving
credit agreement, and CD&L and the Company have guaranteed the borrowers obligations under the revolving credit agreement. The borrowers obligations are joint and several. The Company



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Notes to Consolidated Financial Statements (continued)



---



also entered into a security agreement whereby the Companys obligations under the revolving credit agreement are secured by substantially all of the
assets of each borrower and each guarantor subject to the rights of the holders of the Senior Notes. The revolving credit agreement provides for up to $25 million of aggregate financing, $11.0 million of which may be in the form of letters of
credit. Initially the Company can borrow up to $12.0 million, including letters of credit. The Company can increase borrowings to $25.0 million upon the achievement of certain financial performance measures. At closing, Wells issued two letters of
credit: one for $3 million to secure the Companys and its subsidiaries cash management obligations with respect to bank accounts maintained by the Company and its subsidiaries with Wells Fargo Bank, N.A. and a second for $3.5 million to
collateralize its participation in the captive insurance company that provides certain of its insurance coverage. In June 2007 the letter of credit with Wells Fargo Bank, N.A. was reduced by $1.5 million and the letter of credit issued to the
captive insurance company was reduced by $0.6 million. In September 2007, the letter of credit securing the Company and its subsidiaries cash management obligations was further reduced by $1.5 million as the Company moved its cash management
obligations to another financial institution.



Borrowings under
the revolving credit agreement bear interest at a rate equal to, at the borrowers option, either a base rate, or a LIBOR rate plus an applicable margin of 2.50%. The Companys borrowing rate at June 30, 2007 was 8.25%. The base rate
is the rate of interest announced from time to time by Wells Fargo Bank, N.A. as the prime rate. In addition to paying interest on outstanding borrowings under the revolving credit agreement, the borrowers are also required to pay a letter of credit
fee that accrues at a rate equal to 2.50% per year multiplied by the average daily balance of the undrawn amount of all outstanding letters of credit. The borrowers are required to pay an issuance charge to the issuing lender of 0.825% per
year (such rate subject to change). The borrowers are also required to pay customary fees of the administrative agent, as well as costs and expenses of the administrative agent and the lenders, arising in connection with the revolving credit
agreement.



The revolving credit agreement contains a number of
customary covenants that, among other things, restrict the borrowers and guarantors ability to incur additional debt, create liens on assets, sell assets, pay dividends, engage in mergers and acquisitions, change the business conducted
by the borrowers or guarantors, make capital expenditures and engage in transactions with affiliates. The revolving credit agreement also includes a specified financial covenant requiring the borrowers to achieve a minimum EBITDA (as defined in the
revolving credit agreement), measured on a month-end basis at the end of each calendar quarter, and to certify compliance on a monthly basis. At June 30, 2007, in accordance with the terms of the agreement, the Company had $0.1 million in
available borrowings. In connection with the revolving credit agreement, the Company also entered into a security agreement whereby the Companys obligations under the revolving credit agreement are secured by substantially all of the assets of
each borrower and each guarantor subject to the rights of the holders of the Senior Notes.



The Company did not meet its minimum EBITDA levels contained in its credit agreement for the period ending March 31, 2007. Wells, in its capacity as agent and lender under the credit agreement granted the Company
a waiver. The Company negotiated revised minimum EBITDA targets and revised reporting requirements with Wells, in its capacity as agent and lender, pursuant to an amendment dated May 25, 2007. The Company did not meet its minimum EBITDA levels
contained in its credit agreement for the period ending July 28, 2007 and August 25, 2007. Wells, in its capacity as agent and lender, under the credit agreement granted the Company waivers. The Company negotiated (1) revised monthly
minimum EBITDA requirements and (2) agreed to an increase in the interest rate of 75 basis points in LIBOR margin (from 2.5% to 3.25%) until trailing twelve month EBITDA equals $15.0 million, dropping 25 basis points when trailing twelve month
EBITDA is greater than $15.0 million and reverts back to the original interest rate when trailing twelve month EBITDA is greater than $20.0 million with the lender with an amended agreement dated October 15, 2007.



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As a condition to and in connection with executing the Supplemental Indenture to the Senior Notes
described below, the Company entered into an amendment, effective as of July 13, 2007, to the revolving credit agreement. The Amendment: (i) permits the sale of the Companys Canadian subsidiary (or the assets thereof),
(ii) provides that the Company need not apply to repay borrowings under the Credit Agreement proceeds of the sale of the Companys Canadian subsidiary or certain treasury stock or offerings of equity, (iii) permits the increase of the
interest rate on the Senior Notes from 12.0% to 13.0% and (iv) establishes a borrowing base reserve of $400,000, which reserve shall be reduced to zero when the Company delivers to Wells, in its capacity as agent, its financial statements for
its fiscal quarter ending December 31, 2007, provided no event of default under the Credit Agreement then exists.



Long Term Debt



Long-term debt consists of the following:



|                                         |  |                        |        |   |             |   |        |  
|---------------------------------------- |  | ---------------------- | ------ | - | ----------- | - | ------ | -
|                                         |  | June 302007            |        |   | July 1,2006 |  
|                                         |  | (Amounts in thousands) |       
|Senior Notes, net of discount of $23,507 |  | $                      | 54,698 |   |             | $ |       |  
|Revolving note                           |  |                        |       |   |             |   | 20,547 |  
|Senior subordinated note                 |  |                        |       |   |             |   | 5,587  |  
|Variable interest entity note            |  |                        | 230    |   |             |   | 1,117  |  
|Capital leases                           |  |                        | 982    |   |             |   | 84     |  
|Other                                    |  |                        | 158    |   |             |   | 213    |  
|                                         |  |                        |        |   |             |   |        |  
|                                         |  |                        | 56,068 |   |             |   | 27,548 |  
|Less current maturities                  |  |                        | (558   | ) |             |   | (1,363 | )
|                                         |  |                        |        |   |             |   |        |  
|Total Long Term Debt                     |  | $                      | 55,510 |   |             | $ | 26,185 |  
|                                         |  |                        |        |   |             |   |        |  



The future maturities
of long-term debt consist of the following (amounts in thousands):



|             |  |              |        |       |   |       |  |   |       
|------------ |  | ------------ | ------ | ----- | - | ----- |  | - | ------
|             |  | Senior Notes |        | Other |   | Total
|Fiscal year: |  |              |        |       |   |       |  |   |       
|2008         |  | $            |       |       | $ | 558   |  | $ | 558   
|2009         |  |              |       |       |   | 15    |  |   | 15    
|2010         |  |              | 78,205 |       |   | 11    |  |   | 78,216
|2011         |  |              |       |       |   | 786   |  |   | 786   
|Thereafter   |  |              |       |       |   |      |  |   |      
|             |  |              |        |       |   |       |  |   |       
|             |  | $            | 78,205 |       | $ | 1,370 |  | $ | 79,575
|             |  |              |        |       |   |       |  |   |       



Senior Notes



On July 3, 2006, the Company issued $78.2 million in aggregate
principal amount of Senior Notes due June 30, 2010 in a private placement transaction pursuant to the Indenture (the Indenture) dated as of July 3, 2006 among the Company, certain of its subsidiaries and Wells Fargo, N.A., as
trustee. The Senior Notes were issued at a discount of 5.66% of face value. The net proceeds from the sale of the Senior Notes, after deducting the discount and estimated offering expenses payable by the Company, were approximately $63.5 million.
The Senior Notes were issued in units comprised of (a) $1,000 in aggregate principal amount at maturity of Senior Notes and (b) a warrant to purchase 345 shares of the Companys common stock exercisable at $1.45 per share.



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Notes to Consolidated Financial Statements (continued)



---



$46.9 million of the net proceeds of the offering of the Senior Notes and related warrants were
allocated to the Senior Notes and $26.9 million of the net proceeds were allocated to the warrants based on their relative fair values. The Company is accreting the difference between the carrying amount of the Senior Notes and their face value over
the remaining term using the effective interest method. Total accretion in 2007 was $7.8 million. The effective annual cost is 32.8%.



The Senior Notes bear interest at an annual rate of 12% at June 30, 2007. As discussed below, the annual interest rate increased to 13% in July 2007.
They may be redeemed at the Companys option after June 30, 2009, upon payment of the then applicable redemption price. Beginning 90 days after issuance, the Company may also redeem up to 35% of the aggregate principal amount of the
Senior Notes, with proceeds derived from the sale of Velocity capital stock. The Company may also redeem Senior Notes with proceeds derived from the exercise of warrants subject to specified limits. In each instance, the optional redemption price is
112% of the principal balance of the Senior Notes redeemed if the redemption occurs before June 30, 2007; 106% if the redemption occurs between June 30, 2007 and June 29, 2009; and 100% if the redemption occurs thereafter.



Subject to a second supplemental indenture dated December 22, 2006,
which prohibits mandatory redemption of Senior Notes if there are outstanding obligations under the revolving credit facility, holders of Senior Notes have the right to cause the Company to redeem, at par, up to 25% of the original principal amount
of Senior Notes if the Companys consolidated cash flow, for the period of four consecutive fiscal quarters preceding the second anniversary of the issue date, is less than $20 million. The holders also have the right to cause the Company to
redeem subject to certain exceptions (including there being any outstanding obligations under the revolving credit facility), at par, up to an additional 25% of the original principal amount of Senior Notes if our consolidated cash flow, for the
period of four consecutive fiscal quarters preceding the third anniversary of the issue date, is less than $25 million. The holders right to cause the Company to redeem Senior Notes will terminate under certain circumstances, if at or prior to
such second or third anniversary date the volume-weighted average trading price for Velocity common stock exceeds $2.75 per share for any 20 trading days within any consecutive 30-trading-day period from the issue date through such anniversary date.
Upon a change of control, holders will also have the right to require the Company to repurchase all or any part of their Senior Notes at a price equal to 101% of the aggregate principal amount thereof.



The Indenture, as amended, contains restrictive covenants regarding the
ability of the Company and its restricted subsidiaries to incur additional indebtedness and issue preferred stock, make restricted payments, incur liens, enter into asset sales, enter into transactions with affiliates, enter into sale and leaseback
transactions, consolidate, merge and sell all or substantially all of their assets, enter into a new senior credit facility (or refinance any such facility) without giving the holders a right of first refusal to provide such financing and other
covenants customary for similar transactions. In addition, the Company must maintain $4.0 million of cash, and cash equivalents and a minimum of $30.0 million of cash, cash equivalents and qualified accounts receivable for the first year following
the merger, increasing to $31 million for the second year and then increasing by $2.0 million per year on each anniversary date until maturity. The indenture contains customary events of default.



The Senior Notes are guaranteed by the Companys domestic subsidiaries
and were originally secured by a first-priority lien on collateral consisting of substantially all of the Companys and its domestic subsidiaries tangible and intangible assets. On December 22, 2006, the indenture was amended to
permit the Company to enter into the new revolving credit facility and to modify certain other provisions of the Senior Notes, such as to limit the ability of holders of the Senior Notes to cause the Company to redeem the Senior Notes based on the
Companys consolidated cash flow if there are then outstanding any obligations under the revolving credit facility. In addition, the trustee subordinated the lien securing the Senior Notes to the lien securing the revolving credit facility, as
required by the Indenture.



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---



On July 25, 2007, the Company entered into a third supplemental indenture modifying the
indenture governing their Senior Notes. The supplemental indenture (1) temporarily reduces the requirement that the Company maintain at all times cash and cash equivalents subject to specified liens under the minimum cash covenant to $4.0
million through May 15, 2008, which becomes a permanent reduction upon satisfaction of certain conditions; (2) waives the requirement in the debt incurrence covenant regarding the reduction of the credit facility basket with respect to the
possible sale of the Companys Canadian subsidiary and (3) waives the requirement in the asset sales covenant that requires a permanent reduction in credit facilities from the net proceeds of asset sales with respect to the possible sale
of the Companys Canadian subsidiary. An allonge to the existing Senior Notes also raises the interest rate payable on the Notes from 12.0% to 13.0%.



Variable Interest Entity Note



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



Interest on the
equipment advances accrues at a rate of prime plus 1% and is due on the first calendar day of each month during the term of the agreement. Any equipment advances outstanding on March 19, 2005 are payable in forty-two equal monthly installments
of principal, plus all accrued interest, beginning on first business day following March 19, 2005 and continuing on the same days of each month thereafter through July 19, 2008, at which time all amounts due in connection with the
equipment advances and all other amounts due under this agreement, shall be immediately due and payable. At June 30, 2007, the outstanding principal balance in connection with this agreement was $230,000 with accrued interest of $2,000. The
carrying value of the equipment securing the loan is $101,000 at June 30, 2007.



Refinancing of Revolving Credit Facility



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



Refinancing of Senior Subordinated Note



In 2006, the Company also maintained a $6.0 million senior subordinated note with interest payable quarterly at 15% per annum. The initial carrying
value of the senior subordinated note was $6.0 million and was reduced by $0.6 million for the fair value of Series I Preferred Convertible Stock. The senior subordinated note was refinanced on July 3, 2006 with the proceeds from the sale of
the Senior Notes (discussed above). In connection with the July 3, 2006 debt refinancing, the Company expensed its remaining unamortized debt discount of $0.2 million.



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|9. |  | SHAREHOLDERS EQUITY
|-- |  | --------------------



Our Amended and Restated Certificate of Incorporation authorizes the issuance of 999,515,270 shares of capital stock, consisting of 700,000,000 shares of
common stock and 299,515,270 shares of preferred stock, par value $.004 per share. Of such preferred stock, we have designated 6,904,783 shares as Series M Convertible Preferred Stock; 2,544,097 shares as Series N Convertible Preferred Stock;
1,625,000 shares as Series O Convertible Preferred Stock; 5,022,000 shares as Series P Convertible Preferred Stock and 9,704,813 shares as series Q Convertible Preferred Stock.



The Company received a notice on June 29, 2007 from the NASDAQ Capital Stock Market (NASDAQ) that we are
not in compliance with the Marketplace Rule 4310(c)(4) regarding the minimum bid requirement for the continued listing of our common stock on the NASDAQ. We have a period of 180 days, until December 26, 2007, to attain compliance by maintaining
a bid price of $1 for ten consecutive trading days. If we are unable to demonstrate bid price compliance by December 26, 2007, but are found to meet all other initial listing requirements for the NASDAQ, we may receive an additional 180-day
compliance period. If we do not meet compliance requirements within the second 180-day period, NASDAQ will notify us that our common stock will be de-listed. Upon receiving this notice, we will file a current report on Form 8-K with the SEC
disclosing that and related details. Although we may regain compliance with the NASDAQ listing requirements, the negative publicity surrounding the receipt of this notice will likely have a material adverse effect on the price of our Common Stock,
our ability to raise capital, whether debt or equity, in the future unless and until this situation is resolved and will likely cause a negative perception of, and confidence in, us by our investors, customers, vendors, creditors and employees.
Further failing to maintain our NASDAQ listing will result in our breaching covenants made to holders of our preferred stock and certain warrants. We cannot assure you that we will be successful in regaining compliance with NASDAQs listing
requirements.



In the event of delisting, trading, if any,
would be conducted in the over-the-counter market in the so-called pink sheets or on the OTC Bulletin Board. In addition, our securities could become subject to the SECs penny stock rules. These rules would impose
additional requirements on broker-dealers who effect trades in our securities, other than trades with their established customers and accredited investors. Consequently, the delisting of our securities and the applicability of the penny stock rules
may adversely affect the ability of broker-dealers to sell our securities, which may adversely affect your ability to resell our securities. If any of these events take place, you may not be able to sell as many securities as you desire, you may
experience delays in the execution of your transactions and our securities may trade at a lower market price than they otherwise would.



Common stock



During fiscal 2006, the Company issued 500,000 shares of common stock in accordance with the settlement agreement and mutual release entered into as of
December 7, 2005 with Banc of America Commercial Finance Corporation, Banc of America Leasing & Capital, LLC, John Hancock Life Insurance Company, Hancock Mezzanine Partners, L.P., Charles F. Short, III, Sidewinder Holdings, Ltd. and
Sidewinder, N.A., Ltd. (the Settlement Agreement) for breach of contract, fees, interest and other charges arising from a contract entered into in 1997 between the company (formerly Corporate Express Delivery Systems, Inc.) and Mobile
Information Systems, Inc. During fiscal 2007, the Company issued an additional 2,356,190 shares of common stock with a value of $1.7 million in accordance with the Settlement Agreement. The issuance of the additional common shares in 2007 concluded
the Settlement Agreement. In addition, such issuance prompted an event of dilution, whereby the conversion ratio of Series M, N, O, and P Convertible Preferred Stock was adjusted in accordance with their anti-dilution provisions. See Note 14.
Commitments and Contingencies.



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During fiscal 2007, the company issued approximately (in thousands) 2,465 shares of common stock as
consideration for the purchase of CD&L plus 313 shares, with a value of $0.4 million, as payment for services related to the purchase and 2,700; 850; 10; 3,783 and 3,379 shares of common stock as a result of shareholder conversions of Series M
Convertible Preferred Stock, Series N Convertible Preferred Stock, Series O Convertible Preferred Stock, Series P Preferred Stock and Series Q Preferred Stock, respectively.



During fiscal 2006, the Company issued approximately (in thousands) 1,270, 1,169 and 926, shares of common stock as a
result of shareholder conversions of Series M Convertible Preferred Stock, Series N Convertible Preferred Stock, and Series O Convertible Preferred Stock, respectively within original terms of each respective agreement.



During fiscal 2006, the Company issued 7,000 shares of common stock upon the
exercise of common stock warrants.



During fiscal 2005, the
Company issued approximately 12,835,000 shares of common stock as a result of shareholder conversions of Series B, C, D, F, G, H, I, J, K, and L Convertible Preferred Stock in accordance with shareholder approval of Series M Convertible Preferred
Stock on February 14, 2005.



Series Q Convertible Preferred Stock



On July 3, 2006, the Company entered into a Stock
Purchase Agreement by and among the Company and certain investors named therein, pursuant to which the Company sold for cash an aggregate of 4,000,000 shares of Series Q Convertible Preferred Stock (Series Q Preferred) for net proceeds
of $38.2 million. Each share of the Companys Series Q Preferred Stock is initially convertible into 9.0909 shares of Velocity common stock, representing an initial conversion price of $1.10 per share, subject to adjustment and other customary
terms for similar offerings. The Company may force holders of Series Q Preferred Stock to convert their shares if the daily weighted average market price of our common stock is equal to or greater than 200 percent of the then applicable Series Q
Preferred Stock conversion price for a specified period of time, subject to specified conditions. In addition, for so long as any of these shares are outstanding, the Company may not enter into any equity line of credit, variable or
future-priced resetting, self-liquidating, adjusting or conditional fund raising, or similar financing arrangements. Based on the pricing of the Series Q Preferred Stock, the sale of Series Q Preferred Stock contained a beneficial
conversion amounting to $13.3 million which was recognized as a deemed dividend to preferred shareholders at the time of the sale with a charge against net loss available to common shareholders.



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



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



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



Amended Agreement with Financial Advisor



On November 7, 2006, Velocity and Meritage Capital Advisors LLC
(Meritage) entered into a letter agreement (the 2006 Letter Agreement), pursuant to which the Company and Meritage agreed to amend certain terms of their letter agreement dated September 1, 2005 (the 2005 Letter
Agreement). Pursuant to the 2006



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



Series P Convertible Preferred Stock



On October 14, 2005, the Company entered into Stock Purchase Agreements (the Purchase Agreements) with one group of institutional
investment funds and one accredited investor (the Investors). The Purchase Agreements provided for the private placement of 3,099,513 shares of a newly authorized series of the Companys preferred stock (the Series P
Preferred) in exchange for aggregate gross proceeds of $10,352,370. The Series P Preferred has a term of three years (the Term) and is entitled to receive a dividend at the rate of eight percent per annum of the Series P
Preferred stated value, payable quarterly, in cash or paid-in-kind (PIK) shares of Series P Preferred at the option of the Company. Effective July 3, 2006, the holders of Series P Preferred consented to reduce the dividend rate to
six percent per annum. Under certain events of default, the dividend rate will convert to 18%. To the extent that the issuance of such PIK shares would result in the Company issuing in excess of 20% of its outstanding Common Stock, the issuance will
require the prior approval of the Companys shareholders. Upon any liquidation, dissolution or winding up of the Company, the Investors of the shares of Series P Preferred shall rank on parity with the holders of the Companys Series M
Convertible Preferred Stock. Originally, each of the Investors had the right, at its option at any time, to convert any shares of Series P Preferred into shares of common stock at an initial conversion ratio of one share of preferred stock to one
common share. Due to the anti-dilution provisions contained in the Series P Preferred Stock and events that have triggered such provisions, one share of preferred stock currently converts to approximately 2.72 shares of common stock. This conversion
ratio is subject to certain future adjustments. At any time after the effective date of the Registration Statement and (i) prior to the Term, or (ii) upon a Change of Control, the Company shall have the right, but not the obligation, to
redeem all or a portion of the shares of Series P Preferred by tendering to the Holder 130% of the stated value of the outstanding Series P Preferred together with all accrued dividends. At the end of the Term, the Company shall have the right, but
not the obligation, to redeem all or a portion of the shares of Series P Preferred by tendering to the holder 100% of the conversion price together with all accrued but unpaid dividends.



Each Investor also received an A Warrant and B Warrant, each to purchase up to 20% of the amount of Series P Preferred
purchased. The exercise of the A Warrant and B Warrant were subject to the prior approval of the Companys shareholders. The exercise price for both warrants is $4.00, subject to adjustments. Additionally, the B Warrant was only exercisable in
the event that a registration statement, allowing for the sale of the Series P Preferred, was not declared effective within 270 days of closing. Because the registration statement was declared effective within 270 days, the B Warrant is no longer
exercisable. The Company allocated $1.2 million of the proceeds to the warrants based on their fair values. The Company has the option to redeem both warrants in the event that the Companys common stock maintains a closing price of at least
$7.00 for twenty consecutive trading days. The Investors are also parties to a Registration Rights Agreement (the Rights Agreement). The Rights Agreement required the filing of a registration statement no later than 90 days after the
closing date, and that it be effective within 180 days. Due to the value of the A warrant, the sale of Series P Preferred contained a beneficial conversion amounting to $1.2 million which was recognized as a deemed dividend to preferred shareholders
at the time of sale and as a charge against net loss available to common shareholders.



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Notes to Consolidated Financial Statements (continued)



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Series O Convertible Preferred Stock



On July 20, 2005, the Company executed Stock Purchase Agreements with seven institutional and accredited investors to
provide for the private placement of 1,400,000 shares of a newly authorized series of the Companys preferred stock (the Series O Preferred) in exchange for aggregate gross proceeds of $5,600,000. Based on the pricing of the Series
O Preferred, the sale of Series O Preferred contained a beneficial conversion amounting to $3.1 million which was recognized as a deemed dividend to preferred shareholders at the time of the sale with a charge against net loss available to common
shareholders.



The Series O Preferred is entitled to receive in
preference to holders of all other classes of stock, other than holders of the Series M Preferred and N Preferred, a dividend paid-in-kind at the rate of six percent per annum of the Series O Preferred stated value. Upon any liquidation,
dissolution or winding up of the Company, the holders of the shares of Series O Preferred shall rank senior to the holders of the Common Stock, but junior to the holders of the Series M Convertible Preferred Stock, the Series N Convertible Preferred
Stock, the Series P Preferred, and the Series Q Preferred, as to such distributions, and shall be entitled to be paid an amount per share equal to the Series O Preferred stated value plus any accrued and unpaid dividends (the Liquidation
Preference). In addition to being junior to the Series M Convertible Preferred Stock and Series N Convertible Preferred Stock from the standpoint of liquidation, the Series O Preferred also has reduced voting rights. For example, the approval
of at least 62.5% of the outstanding shares of Series O Preferred is not required in order for the Company to merge, dispose of substantial assets, engage in affiliate transactions, pay dividends, authorize new stock options plans, license or sell
its intellectual property or change the number of board of directors.



Each of the investors has the right, at its option at any time, to convert any such shares of Series O Preferred into such number of fully paid and non assessable whole shares of common stock at an initial conversion ratio of one share of
preferred stock to one common share. Due to the anti-dilution provisions contained in the Series O Preferred Stock and events that have prompted such provisions, one share of preferred stock converts to approximately 1.92 shares of common stock as
of June 30, 2007. This conversion ratio is subject to certain future adjustments.



Series N Convertible Preferred Stock



Pursuant
to a Stock Purchase Agreement executed on April 28, 2005, the Company contracted to sell to nine institutional and accredited investors 2,544,097 shares of Series N Convertible Preferred Stock (Series N Preferred) for $3.685 per
share for net proceeds of $9,375,000. Each share of Series N Preferred was originally convertible into one common share. Due to the anti-dilution provisions contained in the Series N Preferred Stock and events that have prompted such provisions, one
share of preferred stock converts to approximately 1.77 shares of common stock as of June 30, 2007. This conversion ratio is subject to certain future adjustments. The proceeds were used for general working capital needs. The Series N Preferred
is entitled to receive a dividend paid-in-kind at the rate of six percent per annum of the Series N Preferred stated value of $3.685 per share. Upon any liquidation, dissolution or winding up of the Company the holders of the shares of Series N
Preferred shall rank senior to the holders of the Common Stock and holders of the Series O Preferred, but junior to the holders of the Series M Convertible Preferred Stock, the Series P Preferred, and the Series Q Preferred, as to such
distributions, and shall be entitled to be paid an amount per share equal to the Series N Preferred stated value plus any accrued and unpaid dividends. The approval of Investors holding at least 62.5% of the outstanding shares of the Series N
Preferred is required for certain significant corporate actions, including mergers and sales of substantially all of the Companys assets. Based on the pricing of the Series N Preferred, the sale of Series N Preferred contained a beneficial
conversion amounting to $4.8 million which was recognized as a deemed dividend to preferred shareholders at the time of the sale and a charge against net loss available to common shareholders.



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Notes to Consolidated Financial Statements (continued)



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Series M Convertible Preferred Stock



On December 21, 2004, the Company executed a purchase agreement to raise approximately $21.0 million of new equity
capital investment. The investment was initially in the form of a convertible note which converted into Series M Convertible Preferred Stock (Series M Preferred) upon approval of the transaction by the Companys shareholders on
February 14, 2005. The proceeds were used for general working capital needs. The Series M Preferred accrues cumulative dividends paid-in-kind equal to six percent per annum. As part of the transaction, the investors required that the
Companys charter be amended in a number or respects, including a requirement that all previously issued preferred equity be converted to common stock. In the event of any liquidation or winding up of the Company, the holders of the Series M
Preferred shall rank senior to the holders of the Series N Preferred and the Series O Preferred, but junior to the holders of Series Q Preferred, and on parity with the holders of the Series P Preferred and will be entitled to a preference on
liquidation equal to one times (1x) the original purchase price of the Series M Preferred plus accrued and unpaid dividends. A consolidation or merger of the Company or a sale of substantially all of its assets shall be treated as liquidation
for these purposes. The Company sold an additional $1,910,000 of Series M Convertible Notes (the Additional Notes) during January of 2005. Mr. Alexander Paluch, a member of the Companys Board of Directors, purchased $40,000 of
the Additional Notes and East River II, LP, an investment fund for which Mr. Paluch serves as a General Partner, purchased $250,000 of the Additional Notes in this offering.



Subsequent to formal shareholder approval at the shareholders meeting held on February 14, 2005 the amounts of
the total Series M Preferred investment, plus accrued dividends, $23.1 million, was reclassified on the Companys balance sheet as components of shareholders equity. The Series M Preferred was deemed to contain a beneficial conversion
amounting to $23.1 million which was recognized as a charge against net loss available to common shareholders at the time that the notes converted to equity.



In each instance of security sale, it is the opinion of the Company that the offering was fair, to the shareholders at the time of the transaction. For
Series M such opinion is supported by a fairness opinion obtained by the Company.



Each share of Series M Preferred was originally convertible into one common share. Due to the anti-dilution provisions contained in the Series M Preferred Stock and events that have prompted such provisions, one share
of preferred stock converts to approximately 1.77 shares of common stock as of June 30, 2007. This conversion ratio is subject to certain future adjustments.



Amendments to Series M, N, O, P and Q Convertible Preferred StockOn July 3, 2006, the
holders of the Series M Preferred, the Series N Preferred, the Series O Preferred and the Series P Preferred consented to ranking junior to the Series Q Preferred in the event of any liquidation or winding up of the Company.



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



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Notes to Consolidated Financial Statements (continued)



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



Capital
Distribution



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



Capital Contribution Agreement and Warrant to Purchase Common Stock



As part of the above-described Series M private placement, the Series M investors required that THLPV reach an agreement to extend, for a two-year period,
the July 1, 2004 capital contribution agreement previously entered into between THLPV and the Former Senior Lender. Under the terms of the capital contribution agreement, in the event that THLPV elected to not provide further financial support
for the Company, THLPV was required to notify the Companys Former Senior Lender of such decision and provide specific levels of financial support for a thirty (30) day period following the notification. In exchange for entering in to the
capital contribution agreement, the Former Senior Lender agreed to waive certain financial covenants under the Companys credit facilities. At the time, THLPV did not receive any compensation in exchange for entering into the capital
contribution agreement. As part of the extension of the capital contribution agreement the Company issued a warrant to purchase 193,552 shares of common stock to THLPV. The warrant had an estimated fair value of $2.3 million at the time issued. The
term of the warrant is five years and has an exercise price of $0.005 per share. Due to the value of the warrant, the Company recorded $2.3 million as a deferred financing cost and additional paid-in capital.



On February 17, 2006, in connection with the seventh amendment to the
amended and restated revolving credit facility with the Former Senior Lender, the Company entered into the first amendment to the Capital Contribution Agreement whereby the Former Senior Lender acknowledges that in the event that THLPV elected to
not provide further financial support for the Company, the maximum amount of the deposit that THLPV may be required to make shall be reduced from $1,950,000 to $1,450,000. On July 3, 2006 the revolving credit facility with the Former Senior
Lender was refinanced with the proceeds from the Unit offering, and the capital contribution agreement became null and void.



|10. |  | EQUITY COMPENSATION PLANS
|--- |  | -------------------------



Stock Options



The Company maintains the 2000 Stock Option Plan (the 2000 Plan) and the 2004 Stock Incentive Plan (the 2004 Plan), pursuant to
which it may grant equity awards to eligible persons. The Company also maintains the 1995 Stock Option Plan (the 1995 Plan), under which no additional options may be granted. However, the



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1995 Plan and all outstanding options thereunder shall remain in effect until such outstanding options have expired or been canceled. The shareholders of the
Company have approved the 1995 Plan, the 2000 Plan, and the 2004 Plan. All outstanding options issued in accordance with the 1996 Director Stock Option Plan have expired.



The 2000 Plan and the 2004 Plan combined provide for the issuance of up to 5,034,000 shares. Options may be granted to employees, directors
and consultants. 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 were
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 two-year period. The 2000 Stock Option Plan also allows for the issuance
of performance shares or restricted stock. As of July 1, 2006, and July 2, 2005, there were 850 shares of restricted stock outstanding.



The Company had 4,228,547 shares available for grants under the option plans at June 30, 2007.



Under the assumptions indicated below, the weighted-average fair value of
stock option grants to employees for the year ended July 1, 2006 was $1.92 per share. For the year ended July 1, 2006, the fair value of the warrants granted to employees was $1.5 million. Also, in the year ended July 1, 2006, the
Company issued 142,333 common stock warrants to a broker in connection with costs of a prior period issue of preferred stock. The Company recorded the warrants at $896,017 which was the fair value of the services received. There were no stock
options granted in 2007 or 2005. The table below indicates the key assumptions used in the option and warrant valuation calculations for share based awards granted to employees in 2006 and a discussion of our methodology for developing each of
the assumptions used in the valuation model:



|                        |  |       |      
|----------------------- |  | ----- | -----
|Term                    |  | 3.91  | Years
|Volatility              |  | 125.3 | %    
|Dividend Yield          |  | 0.00  | %    
|Risk-free interest rate |  | 5.13  | %    
|Forfeiture rate         |  | 0.13  | %    



TermThis
is the period of time over which the awards granted are expected to remain outstanding. The options and warrants issued in the year ended July 1, 2006 have a maximum contractual term of either five or seven years. An increase in the expected
term will increase compensation expense.



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



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



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



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



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Notes to Consolidated Financial Statements (continued)



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A summary of the status of the Companys outstanding stock options as of June 30, 2007 and
activity during the year then ended is presented below:



|                                              |  |                  |   |  |                                |       |                                           |   |                                        |  |   |  
|--------------------------------------------- |  | ---------------- | - |  | ------------------------------ | ----- | ----------------------------------------- | - | -------------------------------------- |  | - | -
|                                              |  | Number ofOptions |   |  | Weighted AverageExercise Price |       | Weighted AverageRemainingContractual Life |   | AggregateIntrinsic Value(in thousands)
|Balance - Options Outstanding at July 1, 2006 |  | 606,613          |   |  | $                              | 20.29 |                                           |   |                                        |  |   |  
|Granted                                       |  |                 |   |  |                                |      |                                           |   |                                        |  |   |  
|Exercised                                     |  |                 |   |  |                                |      |                                           |   |                                        |  |   |  
|Expired/Forfeited                             |  | (101,490         | ) |  |                                | 7.53  |                                           |   |                                        |  |   |  
|                                              |  |                  |   |  |                                |       |                                           |   |                                        |  |   |  
|Options outstanding, June 30, 2007            |  | 505,123          |   |  | $                              | 22.83 |                                           | $ | 8.31 Years                             |  | $ | 
|                                              |  |                  |   |  |                                |       |                                           |   |                                        |  |   |  
|Options exercisable, June 30, 2007            |  | 277,623          |   |  | $                              | 39.44 |                                           | $ | 8.19 Years                             |  | $ | 
|                                              |  |                  |   |  |                                |       |                                           |   |                                        |  |   |  



As of June 30,
2007 there was $0.2 million of total unrecognized compensation cost related to stock options.



There were no exercises of stock options during the three years ended June 30, 2007.



During fiscal 2003, the Company issued 480,750 incentive stock options to employees in consideration for the employees entering into non-compete
agreements. The fair value of these stock options amounted to approximately $382,000 and was recognized as expense in the statement of operations over the three-year vesting period of the options. Expense recognized in fiscal 2005 related to these
stock options was $127,000.



During fiscal 2002, the Company
issued 150,000 non-statutory stock options to two of the its board members at 85% of the fair market value of the Companys common stock on the date of grant. The expense associated with the options amounted to approximately $338,000 and was
recognized in the statement of operations over the three-year vesting period of the options. Expense recognized in fiscal 2005 related to these stock options was $28,000.



In the year ended July 1, 2006, the Company granted 2,715,022 common stock warrants to certain employees, contractors, and other
vendors for services provided. The Company calculated the fair value of the common stock warrants using the Black-Scholes option-pricing model using the parameters detailed above.



During the year ended June 30,2007, the Company issued 28,252,492 common stock warrants primarily related to the
CD&L acquisition and related transactions. These warrants were valued at approximately $28.5 million based on valuation from a third party valuation consultant and the use of the Black-Scholes valuation model.



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A summary of the status of the Companys common stock warrants outstanding as of June 30,
2007 and activity during the nine-month period then ended is presented below:



|                                                    |  |                   |   |  |                               |        |                                           |      |       |                                        |   |    
|--------------------------------------------------- |  | ----------------- | - |  | ----------------------------- | ------ | ----------------------------------------- | ---- | ----- | -------------------------------------- | - | ---
|                                                    |  | Number ofWarrants |   |  | WeightedAverageExercise Price |        | Weighted AverageRemainingContractual Life |      |       | AggregateIntrinsic Value(in thousands)
|Warrants Outstanding Beginning of Period            |  | 1,532,040         |   |  | $                             | 4.34   |                                           |      |       |                                        |   |    
|Granted                                             |  | 28,252,492        |   |  | $                             | 1.41   |                                           |      |       |                                        |   |    
|Exercised                                           |  |                  |   |  | $                             |       |                                           |      |       |                                        |   |    
|Forfeit/Expired                                     |  | (12,545           | ) |  | $                             | 174.92 |                                           |      |       |                                        |   |    
|                                                    |  |                   |   |  |                               |        |                                           |      |       |                                        |   |    
|Warrants outstanding, and exercisable June 30, 2007 |  | 29,771,987        |   |  | $                             | 1.49   |                                           | 3.01 | years |                                        | $ | 918
|                                                    |  |                   |   |  |                               |        |                                           |      |       |                                        |   |    



|11. |  | EMPLOYEE BENEFIT PLANS
|--- |  | ----------------------



Defined Contribution Retirement Plan



The Company has defined contribution retirement plans (the Plans). All full-time employees of the Company are eligible to participate in the
Plans. Company contributions to these plans are discretionary. The Company made no matching contributions for fiscal years 2007, 2006 or 2005.



The Companys Canadian subsidiary has a Registered Retirement Savings Plan (RRSP). All full time employees of the Canadian subsidiary are eligible to
participate in the plan upon successful completion of their probationary period. Participating employees must contribute a minimum of 3% of their earnings and the Company will match this 3% contribution. Employees may contribute more to the plan if
they wish to the maximum allowable as set by the Canada Revenue Agency. The Company made contributions of $47,913 for fiscal year 2007 and $46,839 for fiscal year 2006. The Company is reimbursed by Imperial Oil (within the confines of the service
contract) for this plan on an individual percentage indicator basis agreed upon annually with the budget submission. For fiscal year 2007 and 2006, the Company was reimbursed $37,791 and $38,095, respectively.



|12. |  | COMPUTATION OF LOSS PER SHARE
|--- |  | -----------------------------



Loss Per Share



Basic loss per share is computed by dividing net loss applicable to common shareholders by the weighted average number of common shares outstanding for
the period. Diluted loss per share reflects the potential dilution that could occur if securities or other obligations to issue common stock such as options, warrants, or convertible preferred stock were exercised or converted into common stock that
then shared in the earnings of the Company. For all periods presented, diluted net loss per share is equal to basic net loss per share because the effect of including such securities or obligations would have been antidilutive.



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---



The following table presents a reconciliation of the numerators and denominators of basic and diluted
loss per share for fiscal 2007, 2006 and 2005:



|                                                     |  |                                              |         |   |             |   |         |              |  |   |          |  
|---------------------------------------------------- |  | -------------------------------------------- | ------- | - | ----------- | - | ------- | ------------ |  | - | -------- | -
|                                                     |  | Year Ended                                   |        
|                                                     |  | June 30,2007                                 |         |   | July 1,2006 |   |         | July 2, 2005 | 
|                                                     |  | (Amounts in thousands, except pershare data) |        
|Numerator:                                           |  |                                              |         |   |             |   |         |              |  |   |          |  
|Net loss                                             |  | $                                            | (39,532 | ) |             | $ | (16,038 | )            |  | $ | (49,844  | )
|Beneficial conversion feature for Series J Preferred |  |                                              |        |   |             |   |        |              |  |   | (7,367   | )
|Beneficial conversion feature for Series K Preferred |  |                                              |        |   |             |   |        |              |  |   | (14,777  | )
|Beneficial conversion feature for Series L Preferred |  |                                              |         |   |             |   |        |              |  |   | (7,000   | )
|Beneficial conversion feature for Series M Preferred |  |                                              |         |   |             |   |         |              |  |   | (23,111  | )
|Beneficial conversion feature for Series N Preferred |  |                                              | (2,528  | ) |             |   | (471    | )            |  |   | (4,770   | )
|Beneficial conversion feature for Series O Preferred |  |                                              | (1,048  | ) |             |   | (3,262  | )            |  |   |         |  
|Beneficial conversion feature for Series P Preferred |  |                                              | (2,448  | ) |             |   | (1,250  | )            |  |   |         |  
|Beneficial conversion feature for Series Q Preferred |  |                                              | (15,211 | ) |             |   |        |              |  |   |         |  
|Series M Preferred dividends paid-in-kind            |  |                                              | (1,382  | ) |             |   | (1,512  | )            |  |   |         |  
|Series N Preferred dividends paid-in-kind            |  |                                              | (363    | ) |             |   | (370    | )            |  |   |         |  
|Series O Preferred dividends paid-in-kind            |  |                                              | (142    | ) |             |   | (139    | )            |  |   |         |  
|Series P Preferred dividends paid-in-kind            |  |                                              | (554    | ) |             |   | (605    | )            |  |   |         |  
|Series Q Preferred dividends paid-in-kind            |  |                                              | (2,783  | ) |             |   |        |              |  |   |         |  
|                                                     |  |                                              |         |   |             |   |         |              |  |   |          |  
|Net loss applicable to common shareholders           |  | $                                            | (65,991 | ) |             | $ | (23,647 | )            |  | $ | (106,869 | )
|                                                     |  |                                              |         |   |             |   |         |              |  |   |          |  
|Denominator for basic and diluted loss per share:    |  |                                              |         |   |             |   |         |              |  |   |          |  
|Weighted average common stock shares outstanding     |  |                                              | 26,085  |   |             |   | 15,907  |              |  |   | 5,087    |  
|                                                     |  |                                              |         |   |             |   |         |              |  |   |          |  
|Basic and Diluted Loss Per Share                     |  | $                                            | (2.53   | ) |             | $ | (1.49   | )            |  | $ | (21.01   | )
|                                                     |  |                                              |         |   |             |   |         |              |  |   |          |  



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



|                               |  |                        |  |             |  |            
|------------------------------ |  | ---------------------- |  | ----------- |  | -----------
|                               |  | June 30,2007           |  | July 1,2006 |  | July 2,2005
|                               |  | (Amounts in thousands)
|Stock options                  |  | 505                    |  | 606         |  | 18         
|Common stock warrants          |  | 29,772                 |  | 1,532       |  | 207        
|Convertible preferred stock:   |  |                        |  |             |  |            
|Series M Convertible Preferred |  | 7,457                  |  | 5,372       |  | 2,406      
|Series N Convertible Preferred |  | 1,758                  |  | 1,375       |  | 449        
|Series O Convertible Preferred |  | 970                    |  | 474         |  |           
|Series P Convertible Preferred |  | 5,097                  |  | 3,100       |  |           
|Series Q Convertible Preferred |  | 42,385                 |  |            |  |           
|                               |  |                        |  |             |  |            
|                               |  | 87,944                 |  | 12,459      |  | 3,080      
|                               |  |                        |  |             |  |            



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|13. |  | INCOME TAXES
|--- |  | ------------



The significant components of deferred income tax assets and liabilities, primarily long-term, were as follows(amounts in thousands):



|                                        |  |              |         |   |             |   |         |  
|--------------------------------------- |  | ------------ | ------- | - | ----------- | - | ------- | -
|                                        |  | June 30,2007 |         |   | July 1,2006 |  
|Deferred Income Tax Assets:             |  |              |         |   |             |   |         |  
|Federal net operating loss carryforward |  | $            | 96,331  |   |             | $ | 82,701  |  
|Allowance for bad debt                  |  |              | 1,323   |   |             |   | 1,244   |  
|Accrued legal fees                      |  |              | 2,297   |   |             |   | 2,029   |  
|Accrued compensation                    |  |              | 1,637   |   |             |   | 1,365   |  
|Goodwill                                |  |              | 1,276   |   |             |   |        |  
|Restructure costs                       |  |              | 411     |   |             |   | 165     |  
|Self insurance                          |  |              | 516     |   |             |   | 832     |  
|Foreign net operating loss              |  |              | 376     |   |             |   |        |  
|Other                                   |  |              | 17      |   |             |   | 13      |  
|                                        |  |              |         |   |             |   |         |  
|Total deferred income tax benefit       |  |              | 104,184 |   |             |   | 88,349  |  
|Deferred Income Tax Liabilities:        |  |              |         |   |             |   |         |  
|Customer relationships                  |  |              | (10,573 | ) |             |   |        |  
|Non-compete agreements                  |  |              | (1,083  | ) |             |   |        |  
|                                        |  |              |         |   |             |   |         |  
|Total deferred tax liabilities          |  |              | (11,656 | ) |             |   |         |  
|                                        |  |              |         |   |             |   |         |  
|Net Deferred Tax Assets                 |  |              | 92,528  |   |             |   | 88,349  |  
|Less valuation allowance                |  |              | (92,528 | ) |             |   | (88,349 | )
|                                        |  |              |         |   |             |   |         |  
|Net deferred income tax asset           |  | $            |        |   |             | $ |        |  
|                                        |  |              |         |   |             |   |         |  



At June 30, 2007
the Company had net operating loss carry forwards for income tax purposes of approximately $253.5 million, which expire from 2008 through 2027. 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 $4.2
million, $8.1 million and $17.7 million in fiscal years 2007, 2006 and 2005, respectively. In conjunction with the CD&L acquisition the Company assumed $8.9 million in deferred tax liabilities. The Company utilized its valuation allowance to
offset these deferred tax liabilities in purchase accounting. This $8.9 million offset is a component of the $4.2 million charge in the valuation allowance in fiscal 2007.



A reconciliation of the U.S. federal statutory rate to the effective rate follows:



|                                        |  |              |    |  |             |    |  |             |   
|--------------------------------------- |  | ------------ | -- |  | ----------- | -- |  | ----------- | --
|                                        |  | Year Ended   |   
|                                        |  | June 30,2007 |    |  | July 1,2006 |    |  | July 2,2005 |   
|US federal statutory tax rate           |  | (34.0        | )% |  | (34.0       | )% |  | (34.0       | )%
|State tax benefit                       |  | 0.0          | %  |  | (0.0        | )% |  | (3.3        | )%
|Non consolidated affiliates             |  | 1.3          | %  |  | 3.5         | %  |  | 0.0         | % 
|Non-deductible items                    |  | 0.4          | %  |  | 0.1         | %  |  | 0.1         | % 
|Deferred income tax valuation allowance |  | 32.3         | %  |  | 30.4        | %  |  | 37.2        | % 
|                                        |  |              |    |  |             |    |  |             |   
|Effective tax rate                      |  | 0.0          | %  |  | 0.0         | %  |  | 0.0         | % 
|                                        |  |              |    |  |             |    |  |             |   



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|14. |  | COMMITMENTS AND CONTINGENCIES
|--- |  | -----------------------------



Lease Commitments



The Company leases equipment, vehicles, and buildings under non-cancelable leases.



Following is a schedule by years of future minimum rental payments required under operating leases with initial or remaining
non-cancelable lease terms in excess of one year as of June 30, 2007:



|                                    |  |   |       
|----------------------------------- |  | - | ------
|Year Ending June 30:                |  |   |       
|2008                                |  | $ | 10,316
|2009                                |  |   | 6,962 
|2010                                |  |   | 5,308 
|2011                                |  |   | 3,366 
|2012                                |  |   | 2,288 
|Thereafter                          |  |   | 6,269 
|                                    |  |   |       
|Total minimum payments required (1) |  | $ | 34,509
|                                    |  |   |       

---

|(1) |  | Minimum payments have not been reduced by minimum sublease rentals of $0.4 million due in the future under noncancelable subleases.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------



Following is a schedule by years of future minimum lease payments under
capital lease obligations together with present value of the net minimum lease payments as of June 30, 2007 (amounts in thousands):



|                                                |  |   |       |  
|----------------------------------------------- |  | - | ----- | -
|Year Ending June 30:                            |  |   |       |  
|2008                                            |  | $ | 267   |  
|2009                                            |  |   | 260   |  
|2010                                            |  |   | 251   |  
|2011                                            |  |   | 235   |  
|2012                                            |  |   | 108   |  
|Thereafter                                      |  |   |      |  
|                                                |  |   |       |  
|Total minimum lease payments                    |  |   | 1,121 |  
|Less: Amount representing interest (1)          |  |   | (139  | )
|                                                |  |   |       |  
|Present value of net minimum lease payments (2) |  | $ | 982   |  
|                                                |  |   |       |  



Rent expense was $16.2
million, $11.1 million and $16.9 million during the years ended June 30, 2007, July 1, 2006 and July 2, 2005, respectively, offset by sublease rental income of $0.2 million, $0.3 million and $0.5 million, respectively.



Automobile and Workers Compensation Liabilities



During the third quarter of fiscal year 2005, we initiated an insurance
program with minimal or no deductibles. Prior to that time, we maintained an insurance program with policies that had various higher deductible levels; and thus were partially self-insured for automobile and workers compensation claims
incurred during that period. The Company is also partially self-insured through high deductible policies for cargo claims. Provisions for losses expected under these programs are recorded based upon the Companys estimates of the aggregate
liability for claims incurred and applicable deductible levels. 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. As of June 30, 2007 and July 1, 2006, the Company has deposits with its insurance carrier of $0.5 million and $1.7 million, respectively.



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The Company has established accruals 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.



In January 2007, the Company began insuring its workers compensation risks through insurance policies with substantial
deductibles and retains risk as a result of its deductibles related to such insurance policies. The Companys deductible for workers compensation is $500,000 per loss with an annual aggregate stop loss of approximately $1,600,000. The
Company reserves the estimated amounts of uninsured claims and deductibles 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, which include fully developed estimates of both reported claims and incurred but not reported claims, as of the balance sheet date. Actual claim settlements
may differ materially from these estimated reserve amounts. As of June 30, 2007, the Company has accrued approximately $1.8 million for case reserves plus development reserves and estimated losses incurred, but not reported.



Litigation



The Company is subject to legal proceedings and claims that arise in the ordinary course of their business. The Company
determined the amount of its legal accrual with respect to these matters in accordance with generally accepted accounting principles based on managements estimate of the probable liability. In the opinion of management, none of these legal
proceedings or claims is expected to have a material adverse 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.



Office Depot, Inc., previously one of the Companys largest
customers, terminated its agreements with the Company in late October 2006. The Company believes that Office Depot did so in violation of the agreements, which provided for termination only upon: (a) 60 days prior notice if the termination is
without cause; and (b) if the termination is with cause, then upon 30 days notice, with the opportunity to cure. Office Depots termination was for alleged cause and provided no opportunity to cure as the termination was effective
virtually immediately.



Consequently, on Friday, May 4,
2007, Velocity filed suit against Office Depot in Superior Court of Kent County, Delaware. That suit seeks three separate forms of relief. The first claim is for almost $600,000 for unpaid invoices. The second claim is for approximately $3.1 million
resulting from Office Depots failure to pay the minimums required of it pursuant to the agreements. The third claim is for damages resulting from the improper termination, including loss of contributions to Velocitys profit resulting
from the alleged improper termination. The damages for the last claim assume that the improperly cancelled agreements would have remained in effect at least another year. Office Depot filed its answer on July 18, 2007. Discovery is ongoing.
There is no assurance the Company will be successful in pursuing this lawsuit, that Office Depot will not file a claim against us, or that the legal costs in doing so will outweigh any amounts received from Office Depot.



In connection with the CD&L acquisition, the Company assumed a reserve
for a tentative settlement of a tax assessment against CD&L in the State of California. The assessment resulted from an audit of CD&Ls subsidiary, Clayton/National Courier Systems, Inc. by the California Employment Development
Department (the



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EDD) On July 13, 2007, the Company finalized the settlement with the EDD which requires the Company to make certain payments and provide
certain insurance coverage for its independent contractor drivers. The agreement does not constitute an admission or determination as to worker classification related to any of the drivers covered by the agreement.



In January 2007, two Notices of Assessment seeking payroll taxes were issued
by the EDD against Velocity Express, Inc. The first Notice of Assessment covers the period July 1, 2003 to December 31, 2004. The second Notice of Assessment covers the period of January 1, 2005 to June 30, 2006. In February
2007, the Company filed a Petition for Reassessment disputing both assessments in their entirety and requesting that this matter be referred to an administrative law judge for resolution.



In connection with the CD&L acquisition, the Company assumed a reserve for a class action suit filed in December, 2003
in the Superior Court of the State of California for the County of Los Angeles, seeking to certify a class of California based independent contractors from December 1999 to the present. The complaint seeks unspecified damages for various employment
related claims, including, but not limited to overtime and minimum wage claims. CD&L filed an Answer to their Complaint on or about January 2, 2004 denying all allegations. Discovery on this matter is ongoing. In January 2007, the Company
was served another summons and complaint which was pled as a wage and hour class action suit. The suit covers California drivers who had been engaged by Clayton/National Courier Systems, Inc. between 2001 and the present. The Company believes that
this second suit will be consolidated with the first suit because it covers the same group of independent contractor drivers over the same period of time. Velocity intends to vigorously defend these cases through trial if necessary and continues to
reject all allegations of the Complaint as amended.



On
August 1, 2005, the Company received notice from the Superior Court for the State of California, County of Santa Clara, that the Court had entered an order granting certain motions for summary judgment against the Company in the matter styled
Velocity Express, Inc. v. Banc of America Commercial Finance Corporation, Banc of America Leasing and Capital, LLC, John Hancock Life Insurance Company and John Hancock Mezzanine Lenders, LP, Charles F. Short III, Sidewinder Holdings Ltd. and
Sidewinder N. A. Ltd. Corp., (the Plaintiffs). The motions sought to resolve the substantive liability issues in the case and to recover in excess of $10 million for breach of contract, fees, interest and other charges arising from a
contract entered into in 1997 between the company (formerly Corporate Express Delivery Systems, Inc.) and Mobile Information Systems, Inc. (MIS). By granting the motions, the court did resolve the liability issues and hold that Banc of
America/Hancock is entitled to recover the amounts sued for.



On December 7, 2005 the parties executed a negotiated settlement outside of the court; with the Company making scheduled payments totaling $2.9 million after an initial good faith payment of $0.3 million. In addition, on
December 9, 2005, the Plaintiffs were issued 500,000 shares of the Companys common stock, guaranteed at a $6.00 per share minimum value subject to future conditions (the Guarantee). The Plaintiffs also received an accelerated
payment of $0.5 million of the $2.9 million settlement pursuant to conditions of the agreement related to the Companys raise of any equity funding. The total expense related to the settlement, including legal fees was approximately $5.8
million, of which $0.1 million was expensed in the year ended July 1, 2006. The Company recorded imputed interest of $0.3 million for the year ended July 1, 2006. As part of the final settlement, the Company received waivers of financial
covenants of the Companys Amended and Restated Loan and Security Agreement with Bank of America/Fleet Capital Corporation (the Senior Lender), and with BET Associates, LP relative to waiver of certain financial covenants of its
Subordinated Debt. At issuance of the Common Stock, the Guarantee had an estimated initial fair value of $1.8 million, which was recorded as a liability on the consolidated balance sheet. The estimated fair value of the Guarantee was determined
using the



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December 9, 2005 closing price of the Companys common stock trading on the NASDAQ-SCM stock market. For the year ended July 1, 2006, the
Company recorded other expense on the consolidated statement of operations for the change in fair value of the Guarantee of approximately $0.5 million. The Guarantee will be adjusted to its fair value on a quarterly basis, with the corresponding
charge or credit to other expense or other income until the liability is settled.



In accordance with the settlement agreement and mutual release (the Settlement Agreement) entered into as of December 7, 2005 with Banc of America Commercial Finance Corporation, Banc of America
Leasing & Capital, LLC, John Hancock Life Insurance Company, Hancock Mezzanine Partners, L.P., Charles F. Short, III, Sidewinder Holdings, Ltd. and Sidewinder, N.A., Ltd., we issued 500,000 shares of common stock to accredited investors on
December 12, 2005. The Company registered the resale of the common stock with the Securities and Exchange Commission. Additionally, in accordance with a price protection guaranty, as the common stock did not maintain a minimum price of at least
$6.00 per share for five consecutive trading days during the 12-month period following the effective date of that registration statement, the Company was required to deliver additional shares of common stock to achieve the original value of $6.00
per share. During fiscal 2007, the Company issued 2,356,190 shares of common stock in accordance with the settlement agreement and mutual release.



On August 5, 2005 the Company entered into a settlement related to actions arising from an effort, by John H. Harland Company
(Harland), to recover from Velocity payments made by Harland to Patrick Connelly under a long-standing employment agreement between Connelly and a predecessor company to Velocity. Connelly claimed to be entitled to payments of
approximately $15,000 per month during his lifetime. An order was entered in the arbitration in April 2005 directing Velocity to resume making the monthly payments. Mr. Connelly died subsequent to the arbitration ruling, thereby terminating any
further obligation to make the monthly payments. Under the settlement with Harland, with an initial payment of $250,000, the Company paid $325,000 over the next eleven [11] months, for a total of $575,000.



The Company brought action against SVT, Inc (SVT), a company that
had previously supplied significant information technology functions to Velocity. The Company successfully sought injunctive relief and money damages. SVT counterclaimed for amounts it said Velocity owed to SVT for services already provided. On
December 3, 2004 the case settled in favor of SVT for $1.25 million, which was paid in full by Velocity in January 2005.



The Company has accrued $4.7 million, as its best estimate, for all of the above exposures which is included with current accrued liabilities as of
June 30, 2007. Actual results could differ from these estimates. Such changes could result in a material change to future results of operations



Guarantees of Indebtedness of Others



In accordance with FASB Interpretation No. (FIN) 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, the Company recognizes liabilities for the fair value of guarantees to make payments to a vendor for minimum lease payments due from certain independent contractors in the event the independent
contractors default on their respective leases with the vendor.



The maximum potential amount of future payments that the Company could be required to make under the guarantee is $1.0 million, and as of June 30, 2007 and July 1, 2006, the Company had $0.2 million and zero accrued, respectively,
for the Companys obligations under these guarantees.



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Registration Payment Arrangements



In accordance with FASB Staff Position No. EITF 00-19-2, a contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement shall be recognized and measured separately in accordance with SFAS No. 5 and FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss.



In conjunction with the issuance of its Series M, Series N, Series O, Series
P and Series Q Convertible Preferred Stock, and its Unit Warrant Shares issued to purchasers of the Companys Senior Notes, the Company entered into registration rights agreements under which the Company is required to pay liquidated damages in
the event that, following its initial approval, the Company does not maintain an effective registration statements covering the additional shares of common stock into which these securities can be converted. Liquidated damages are calculated as
an amount equal to 1.5% of the aggregate amount invested by each investor for Series M, Series N, Series O and Series P Convertible Preferred Stock holders, 1.0% of the aggregate amount invested by each investor for Series Q Convertible
Preferred Stock holders, and 0.5% of the aggregate amount invested by each investor for Unit Warrants Shares, for each 30-day period following the date by which such registration statement should have been filed.



In the event that the Companys does not maintain the effectiveness of
the registration statement covering these shares of common stock, the Company could become liable for additional liquidated damages. As of June 30, 2007, there is zero accrued for the Companys registration payment arrangements noted
above, as suspension of the Companys effective registration statement is not deemed probable or estimable. The maximum potential amount of consideration, undiscounted, that the Company could be required to transfer under the registration
payment arrangement is $1.3 million per 30-day period with no limitation as to the number of 30-day periods to which liquidating damages could be due.



|15. |  | RELATED PARTY TRANSACTIONS
|--- |  | --------------------------



Contracts and Arrangements with MCG Global, LLC



We entered into a Contractor Services Agreement (the Agreement) with MCG Global, LLC and its related entities (MCG), effective as
of July 27, 2003 as described above under Employment Agreements, Termination of Employment and Change in Control Agreements, which description is incorporated herein by reference, under which Vincent A. Wasik provides all services
as our Chief Executive Officer. Mr. Wasik was a stockholder and our Chairman of the Board at the time the Service Agreement was entered into. The Service Agreement provides that the Compensation Committee on an annual basis shall establish the
compensation for these services. On January 15, 2005, the Compensation Committee modified the Service Agreement by eliminating the grant of warrants to purchase shares of our common stock. In fiscal 2007, 2006 and 2005, we recorded compensation
expense of $850,000, $600,000 and $900,000 for these services, respectively.



We sublease a portion of our headquarters office space in Westport, Connecticut from MCG. The sublease agreement was approved by our Audit Committee who determined that the terms of the sublease were at market rates.
We also reimburse MCG for limited use of MCGs personnel and for office expenses. During the fiscal years 2007, 2006 and 2005, Mr. Wasik and MCG were reimbursed approximately $173,000, $107,000 and $158,000, respectively, for expenses incurred
on the Companys behalf of which approximately $63,000, $51,000 and $40,000 was for the sublease described above. During fiscal 2007 and 2005, the Company also reimbursed THLPV approximately $22,000 and $59,000 respectively for expenses
incurred on the Companys behalf. Additionally, see discussion of the Reimbursement Agreement with THLPV below.



Capital Contribution Agreement and Warrant to Purchase Common Stock



As part of the Series M Preferred private placement, THLPV agreed to extend for a two-year period the July 1, 2004 capital contribution agreement
previously entered into between THLPV and our lenders in support of our revolving credit facility. Under the terms of the capital contribution agreement, in the event that THLPV



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elects to not provide further financial support to us, THLPV is required to notify our lenders of such decision and provide specific levels of financial
support for a thirty-day period following the notification. In exchange for entering into the capital contribution agreement, the lenders agreed to waive certain financial covenants under our credit facilities. At the time, THLPV did not receive any
compensation in exchange for entering into the capital contribution agreement. As part of the extension of the capital contribution agreement, we issued to THLPV a warrant to purchase 193,552 shares of our common stock. The warrants had an estimated
fair value of $2.3 million. The term of the warrant is five years, and the warrant has an exercise price of $0.005 per share. The fair value of the warrant was recorded as a deferred financing cost.



On February 17, 2006, in connection with the seventh amendment to the
amended and restated revolving credit facility with the Senior Lender, the Company entered into the first amendment to the Capital Contribution Agreement whereby the Senior Lender acknowledges that in the event that THLPV elects to not provide
further financial support for the Company, the maximum amount of the deposit that THLPV may be required to make shall be reduced from $1,950,000 to $1,450,000. On July 3, 2006 the revolving credit facility with the Former Senior Lender was
refinanced with the proceeds from the Unit offering, and the capital contribution agreement became null and void.



Reimbursement Agreement with TH Lee Putnam Ventures



Effective June 29, 2006, we entered into a reimbursement agreement (the Reimbursement Agreement) with THLPV. Under the terms of the
Reimbursement Agreement:



| | (a) |  | The Company acknowledges its indebtedness to THLPV for: (i) costs and expenses of approximately $90,000 incurred by THLPV on behalf of the Company; (ii) an overfunding in
the amount of $130,000 on a prior credit facility maintained by THLPV for the Company; (iii) merger and acquisition services rendered by THLPV to the Company; and (iv) credit enhancements provided by THLPV to the Company in the form of
loan guarantees. Under the terms of the Reimbursement Agreement, the Company agreed to satisfy the obligations described above through the payment of cash in the amount of $89,551, 11,818 shares of Series Q Convertible Preferred Stock with a fair
value of $130,000 and the issuance of warrants to purchase 797,500 shares of common stock at an exercise price of $0.01 per share (noted above) with a fair value of approximately $1.1 million.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | The Company acknowledges an obligation to a law firm for fees and expenses aggregating $149,000 for work arranged by THLPV on behalf of the Company and the Company agreed to satisfy
such obligation in cash.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Non Controlling Interest in a
Variable Interest Entity



We have an agency relationship
with Peritas, LLC (Peritas), a vehicle rental company wholly-owned by THLPV. Peritas was initially formed and owned by MCG. The founder and principal of MCG is Vincent Wasik, our Chairman of the Board and CEO. MCG established Peritas to
accommodate our need for the Peritas services pending a new owner. Neither MCG nor Mr. Wasik has received any revenue, compensation or benefit from short-term ownership or management of Peritas, and Peritas was transferred to THLPV for no
consideration. The business of Peritas is to rent delivery vehicles to independent contractors who perform services for us and other companies.



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Capital Distribution



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



Grant of Warrant to Purchase Common Stock



Mr. Wasik serves as the Companys Chief
Executive Officer pursuant to an agreement between the Company and MCG Global, LLC (MCG). Mr. Wasik is an owner and principal of MCG. His compensation is paid through MCG. In 2006, a warrant to purchase 245,899 shares of our common
stock with a fair value of approximately $0.4 million was granted to Mr. Wasik under the 2004 Stock Incentive Plan. The warrant has an exercise price of $2.56 per share, a term of five years, and is exercisable one year subsequent to the date
of grant.



GCC Eagles, LLC Contractor Services Agreement



During fiscal years ended June 30, 2007 and July 1, 2006, Velocity
purchased consulting and advisory services pursuant to a monthly contractor services agreement between Velocity Express and GCC Eagles, LLC of $0.3 million and $0.3 million, respectively. Garrett Stonehouse, managing member and sole owner of
GCC Eagles, LLC, is an immediate family member of Vince Wasik, the Chief Executive Officer of Velocity Express. The amount due to GCC Eagles at June 30, 2007 was $19,000.



Advances from Management for stock purchase



In June 2007, in connection with a private placement of common stock to management in July 2007, members of management paid $573,000 in cash to the
Company as advances on the purchase of stock. The advances from management are included in current accrued liabilities on June 30, 2007. In July 2007, an additional $527,000 was recorded as a stock subscription receivable and the Company issued
approximately 1,000,000 shares of Common Stock to management. The remainder of the balance due from management will be paid by payroll deductions or scheduled monthly payments.



|16. |  | SALE OF OTTAWA, ONTARIO OPERATIONS
|--- |  | ----------------------------------



On April 29, 2005 the Company sold its Ottawa, Ontario operations, and certain assets, to its respective senior management for approximately $280,000
resulting in a non-cash loss of approximating $80,000. As the sale included assets which were pledged as security when the Company executed and delivered a guarantee dated January 25, 2002 to Bank of America/Fleet Capital Corporation, our
Senior Lender, to guarantee the indebtedness, liabilities and obligations of certain borrowers, a partial release was required from our Senior Lender as a condition of sale. Our Senior Lender granted such partial release in contemplation of the
sale, requiring that net proceeds be remitted to apply against loans outstanding under the revolving credit facility. Remittance of proceeds was made direct to our Senior Lender by the purchaser coincidental with the close of the transaction. Gross
revenues for the Ottawa operation approximate $3.0 million annually and the impact on the Companys results from operations is de minimus.



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|17. |  | SUBSEQUENT EVENTS AND LIQUIDITY
|--- |  | -------------------------------



Warrant Conversions



In connection with a consent solicitation from the holders of the Senior Notes, in July 2007, the Company raised approximately $3.0 million from the
exercise of approximately 6.0 million warrants. The warrants were exercised by the holders of the Senior Notes at an exercise price of $0.50 per warrant. Conditions for the consents included the sale of the warrants and an increase of the
interest rate to 13%. The holders of the Senior Notes consented to reduce the minimum cash covenant from $7.5 million to $4.0 million through March 2008, subject to closing conditions. The lower minimum cash covenant will become permanent when
Velocity achieves an average of $2.5 million of EBITDA for the September 2007, December 2007 and March 2008 quarters. On July 25, 2007, the Company entered into a third supplemental indenture modifying the indenture governing the Senior
Notes to include the above changes. The warrants exercised contained an original exercise price of $1.45 per warrant; the inducement reducing the exercise price by $0.95, from $1.45 to $0.50, will be recorded as interest expense in the first quarter
of fiscal year 2008. See Note 8Debt.



Management Stock Purchase



In June 2007, management of the Company and certain key
advisors entered into binding agreements to purchase approximately 1 million shares of Common Stock at a purchase price of $1.10 per share. As of June 30, 2007, the Company received $573,000 from management as advances related to the stock
purchase. An additional $68,000 was received in July 2007 and the Company recorded a stock subscription receivable of $417,000. The remainder of the balance due from management will be paid by payroll deductions or scheduled monthly payments. See
Note 15Related Party Transactions.



Liquidity



In 2007, the Company reported a loss from operations of approximately $19.6
million, which resulted in negative working capital of approximately $6.8 million at June 30, 2007. The reasons for the losses are described under Managements Discussion and Analysis of Financial Condition and Results of Operations -
Historical Results of Operations contained in this Report, including, in particular, the continued cost of the integration of CD&L. The CD&L integration has taken 9 months longer and cost approximately $7 million more than the
Companys original estimates. As a result, the Company did not meet the minimum EBITDA levels contained in its credit agreement for the period ending March 31, 2007. Wells, in its capacity as agent and lender under the credit agreement, granted
the Company a waiver and then entered into an amendment to the credit agreement dated May 25, 2007 that provided for lower minimum EBITDA targets and revised reporting requirements. Notwithstanding the May amendment, due to an unanticipated degree
of customer losses related to the migration of financial services customers to electronic check clearing under the Federal Check 21 initiative and unfavorable contracts the Company assumed with the CD&L acquisition, the Company again did not
meet its minimum EBITDA levels contained in its credit agreement for the periods ending July 28, 2007 and August 25, 2007. Wells, in its capacity as agent and lender under the credit agreement, granted the Company waivers and entered into another
amended agreement dated October 15, 2007 which included (1) lower monthly minimum EBITDA requirements through December 2008 and (2) an increase in the interest rate of 75 basis points in LIBOR margin (from 2.5% to 3.25%) until trailing twelve month
EBITDA equals $15.0 million, dropping to a 25 basis point increase when trailing twelve month EBITDA is greater than $15.0 million and reverting back to the original interest rate when trailing twelve month EBITDA is greater than $20.0 million.



The Company is managing to an operating plan which it expects
to result in positive cash flow over the next year. Key components of the operating plan include the following:





| |  |  | improving gross margins by using our newly integrated route information database to identify and correct a number of specific, predominately legacy CD&L routes
- fewer than 10% of all routes - where our average driver settlement has exceeded competitive market norms for the work performed;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | winding down payments related to restructuring and integration related activities from $10 million in fiscal 2007 to less than $2 million in fiscal 2008;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | lower operating and SG&A expenses by reducing headcount, restoring our historical market-based deductions from independent contractor settlements to recoup
driver support costs not recovered during fiscal 2007, and changing or eliminating services and the related costs associated with telecommunications, workforce acquisition, and miscellaneous other activities;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | further improvement in gross margins compared to prior quarters, and based on the continuing roll-out of the Companys route optimization software, which was
made possible by the completion of route data migration in fiscal 2007; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increasing profitable revenue growth from recently announced, existing and potential customers in targeted markets;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | further improving accounts receivable collections resulting from the customer database integration which was completed in fiscal 2007.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



In addition, we expect to further improve our cash position in fiscal 2008
by the following steps:



| |  |  | sale of our Canadian subsidiary in the second quarter of fiscal 2008, as negotiations with interested parties have progressed favorably;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | issuance of approximately 1,000,000 shares of common stock in connection with a private placement to management in July 2007 under which selected members of the
management team were offered the opportunity to purchase common shares. $573,000 was paid to the Company in June 2007, and an additional $527,000 is being paid by payroll deductions or scheduled monthly payments during the first half of fiscal 2008;
and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | in connection with a consent solicitation from the holders of the Senior Notes in July 2007, approximately $3.2 million was raised from the exercise of
approximately 6.0 million warrants. (see discussion above for more details)
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company believes that, based on its operating plan, cash to be received from the pending sale of its Canadian subsidiary, cash received from a private placement of common stock and warrant exercises in July 2007,
and results to date, it will have sufficient cash flow to meet its expected cash needs and to satisfy the covenants contained in the agreements governing its debt (including the revised minimum EBITDA covenant under the credit agreement) in the next
twelve month period. The Company is factoring into its plan, among other things, the requirements under the Indenture governing the Senior Notes to maintain a minimum cash balance of $4.0 million through May 15, 2008 and $8.5 million thereafter
through June 28, 2008, which is subject to adjustment in the event that certain conditions are not met, and to make the December 2007 and June 2008 interest payments on the Senior Notes in cash of $5.1 million each. As of June 30, 2007, the Company
had $14.5 million in cash and $0.1 million in available borrowings under its revolving credit facility. Based on the current operating plan (including the related assumptions), cash to be received from the pending sale of a subsidiary, cash received
from a private placement of common stock and warrant exercises in July 2007 and results from operations and qualitative feedback from field management since June 30, 2007, the Company believes it will be in compliance with its covenants, including
those summarized above. As such, the Company believes it will continue to meet its obligations in the ordinary course of business as they become due through June 28, 2008.



As with any operating plan, there are risks associated with the Companys ability to execute it. Therefore, there can be no assurance
that the Company will be able to satisfy the revised minimum EBITDA requirement or other applicable covenants to its lenders, or achieve the operating improvements described above. If the



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Company is unable to execute this plan in general or if, after making the December 30, 2007 or June 30, 2008 interest payment, the Company cannot remain in
compliance with the minimum cash requirement, it will need to find additional sources of cash not contemplated by the current operating plan and/or raise additional capital to sustain continuing operations as currently contemplated. Further, the
Company will take additional actions if necessary to reduce expenses. In that case, the Company would need to amend, or seek one or more further waivers of, the minimum EBITDA covenant under the credit agreement and the minimum cash requirement
under the Indenture. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that may result from
the outcome of this uncertainty. For a discussion of these risks and related matters discussed above, see Risk Factors.



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|18. |  | SUPPLEMENTAL CASH FLOW INFORMATION
|--- |  | ----------------------------------



|                                                                                                 |  |              |        |             |   |             |  |   |        |  
|------------------------------------------------------------------------------------------------ |  | ------------ | ------ | ----------- | - | ----------- |  | - | ------ | -
|                                                                                                 |  | Year ended   |       
|                                                                                                 |  | June 30,2007 |        | July 1,2006 |   | July 2,2005 | 
|Supplemental Disclosures of Cash Flow Information:                                               |  |              |        |             |   |             |  |   |        |  
|Cash paid during period for interest                                                             |  | $            | 1,046  |             | $ | 4,689       |  | $ | 2,851  |  
|Canadian income tax refund                                                                       |  |              |       |             |   |            |  |   | (236   | )
|                                                                                                 | 
|The following represents a supplemental schedule of non-cash investing and financing activities: |  |              |        |            
|                                                                                                 |  |              |       
|Non-cash Investing and Financing Activities:                                                     |  |              |        |             |   |             |  |   |        |  
|Issuance of Units for purchase of CD&L                                                           |  |              | 3,022  |             |   |            |  |   |       |  
|Issuance of Common Stock for purchase of CD&L                                                    |  |              | 3,230  |             |   |            |  |   |       |  
|Issuance of Common Stock to settle a lawsuit                                                     |  |              | 1,668  |             |   | 1,230       |  |   |       |  
|Conversion of Note to Series M Preferred                                                         |  |              |       |             |   |            |  |   | 22,550 |  
|Series Q Preferred issued for services rendered                                                  |  |              | 3,226  |             |   |            |  |   |       |  
|Series M Preferred issued for services rendered                                                  |  |              |       |             |   |            |  |   | 360    |  
|Series P Preferred issued for services rendered                                                  |  |              |       |             |   | 20          |  |   |       |  
|Series M Preferred issued for PIK dividends                                                      |  |              | 1,382  |             |   | 841         |  |   | 724    |  
|Series N Preferred issued for PIK dividends                                                      |  |              | 361    |             |   |            |  |   |       |  
|Series O Preferred issued for PIK dividends                                                      |  |              | 142    |             |   |            |  |   |       |  
|Series P Preferred issued for PIK dividends                                                      |  |              | 554    |             |   |            |  |   |       |  
|Series Q Preferred issued for PIK dividends                                                      |  |              | 2,116  |             |   |            |  |   |       |  
|Issuance of warrants for services rendered in connection with the CD&L acquisition               |  |              | 719    |             |   |            |  |   |       |  
|Issuance of warrants for services rendered in connection with Series M Preferred                 |  |              |       |             |   | 812         |  |   |       |  
|Issuance of warrants for services rendered in connection with Series N Preferred                 |  |              |       |             |   | 84          |  |   |       |  
|Issuance of warrants for services rendered in connection with Series P Preferred                 |  |              |       |             |   | 208         |  |   |       |  
|Fixed assets purchases financed through capital leases                                           |  |              | 946    |             |   | 53          |  |   | 61     |  
|Purchases of vehicles by variable interest entity through applied credits                        |  |              |        |             |   |            |  |   | 807    |  
|Conversion of Series B Preferred to Common Stock                                                 |  |              |       |             |   |             |  |   | 24,304 |  
|Conversion of Series C Preferred to Common Stock                                                 |  |              |       |             |   |            |  |   | 18,553 |  
|Conversion of Series D Preferred to Common Stock                                                 |  |              |       |             |   |            |  |   | 9,499  |  
|Conversion of Series F Preferred to Common Stock                                                 |  |              |       |             |   |            |  |   | 7,802  |  
|Conversion of Series G Preferred to Common Stock                                                 |  |              |       |             |   |            |  |   | 4,087  |  
|Conversion of Series H Preferred to Common Stock                                                 |  |              |       |             |   |            |  |   | 3,761  |  
|Conversion of Series I Preferred to Common Stock                                                 |  |              |       |             |   |            |  |   | 24,558 |  
|Conversion of Series J Preferred to Common Stock                                                 |  |              |       |             |   |            |  |   | 11,999 |  
|Conversion of Series K Preferred to Common Stock                                                 |  |              |       |             |   |            |  |   | 14,777 |  
|Conversion of Series L Preferred to Common Stock                                                 |  |              |       |             |   |            |  |   | 7,000  |  
|Beneficial conversion of Series Q Preferred Stock                                                |  |              | 15,211 |             |   |            |  |   |       |  
|Beneficial conversion of Series P Preferred Stock                                                |  |              | 2,448  |             |   | 1,250       |  |   |       |  
|Beneficial conversion of Series O Preferred Stock                                                |  |              | 1,048  |             |   | 3,262       |  |   |       |  
|Beneficial conversion of Series N Preferred Stock                                                |  |              | 2,528  |             |   | 471         |  |   | 4,770  |  
|Beneficial conversion of Series M Preferred Stock                                                |  |              |       |             |   |            |  |   | 22,751 |  
|Beneficial conversion of Series L Preferred Stock                                                |  |              |       |             |   |            |  |   | 7,000  |  
|Beneficial conversion of Series K Preferred Stock                                                |  |              |       |             |   |            |  |   | 14,777 |  
|Beneficial conversion of Series J Preferred Stock                                                |  |              |       |             |   |            |  |   | 7,367  |  



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|19. |  | QUARTERLY FINANCIAL INFORMATION (unaudited)
|--- |  | -------------------------------------------



Unaudited summarized financial data by quarter for fiscal years 2007 and 2006 is as follows (in thousands, except per share data):



|                                           |  |                    |        |   |                   |   |         |                      |  |   |                       |   |  |   |         |  
|------------------------------------------ |  | ------------------ | ------ | - | ----------------- | - | ------- | -------------------- |  | - | --------------------- | - |  | - | ------- | -
|                                           |  | Three Months Ended |       
|                                           |  | June 30,2007 (1)   |        |   | March 31,2007 (2) |   |         | December 30,2006 (3) |  |   | September 30,2006 (4) |  
|Revenue                                    |  | $                  | 98,556 |   |                   | $ | 98,180  |                      |  | $ | 102,272               |   |  | $ | 111,094 |  
|Gross profit                               |  | $                  | 26,445 |   |                   |   | 22,102  |                      |  |   | 21,949                |   |  |   | 27,548  |  
|Loss from operations                       |  | $                  | (182   | ) |                   |   | (6,245  | )                    |  |   | (8,719                | ) |  |   | (4,433  | )
|Net loss applicable to common shareholders |  | $                  | (6,198 | ) |                   |   | (13,345 | )                    |  |   | (15,237               | ) |  |   | (30,890 | )
|                                           |  |                    |        |  
|Basic and diluted net loss per share       |  | $                  | (0.20  | ) |                   | $ | (0.49   | )                    |  | $ | (0.61                 | ) |  | $ | (1.42   | )
|                                           |  |                    |        |   |                   |   |         |                      |  |   |                       |   |  |   |         |  

---

|(1) |  | The quarter ended June 30, 2007 includes purchase accounting adjustments related to unfavorable contracts acquired from CD&L. Revenue increased by $1.5 million and cost of
services decreased by $2.3 million due to these adjustments (See Footnote 3.Acquisition of CD&L, Inc. and Related Transactions) and includes the results of operations for Peritas LLC as follows: zero revenue; zero gross profit; and $0.5 million
of loss from operations.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | The quarter ended March 31, 2007 includes the results of operations for Peritas LLC as follows: revenue of $0.1 million; zero gross profit; and zero income from operations.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | The quarter ended December 30, 2006 includes the results of operations for Peritas LLC as follows: revenue of $0.1 million; gross loss of 0.1 million; and $0.1 million loss
from operations.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | The quarter ended September 30, 2006 includes the results of operations for Peritas LLC as follows: revenue of $0.2 million; gross profit of 0.1 million; and $0.1 million
profit from operations.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                           |  |                    |        |   |                  |   |        |                      |  |   |                   |   |  |   |        |  
|------------------------------------------ |  | ------------------ | ------ | - | ---------------- | - | ------ | -------------------- |  | - | ----------------- | - |  | - | ------ | -
|                                           |  | Three Months Ended |       
|                                           |  | July 1,2006 (1)    |        |   | April 1,2006 (2) |   |        | December 31,2005 (3) |  |   | September 30,2005 |  
|Revenue                                    |  | $                  | 50,092 |   |                  | $ | 50,476 |                      |  | $ | 49,316            |   |  | $ | 52,546 |  
|Gross profit                               |  | $                  | 13,892 |   |                  |   | 14,453 |                      |  |   | 14,180            |   |  |   | 14,334 |  
|Loss from operations                       |  | $                  | (4,016 | ) |                  |   | (1,830 | )                    |  |   | (2,454            | ) |  |   | (2,914 | )
|Net loss applicable to common shareholders |  | $                  | (7,519 | ) |                  |   | (3,915 | )                    |  |   | (5,636            | ) |  |   | (6,577 | )
|                                           |  |                    |        |  
|Basic and diluted net loss per share       |  | $                  | (0.44  | ) |                  | $ | (0.23  | )                    |  | $ | (0.35             | ) |  | $ | (0.47  | )
|                                           |  |                    |        |   |                  |   |        |                      |  |   |                   |   |  |   |        |  

---

|(1) |  | The quarter ended July 1, 2006 includes the results of operations for Peritas LLC as follows: revenue of $0.2 million; zero gross profit; and $0.1 million of loss from
operations. In addition, upon consolidation of Peritas LLC, Peritas accumulated losses of $1.1 million were recognized by the Company as expense in the fourth quarter due to common ownership.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Amounts previously reported for the quarter ended April 1, 2006 on Form 10-Q as loss from operations, net loss applicable to common shareholders, and basic and diluted net loss
per share of ($2,387), ($4,472), and ($0.27), respectively, have been changed for adjustments primarily to reflect a $557 reversal of share based compensation expense recorded on equity securities not outstanding for the period presented previously.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Amounts previously reported for the quarter ended December 31, 2005 on Form 10-Q as loss from operations, net loss applicable to common shareholders, and basic and diluted net
loss per share of ($2,669), ($5,777), and ($0.36), respectively, have been changed for adjustments primarily to reflect a $141 reversal of share based compensation expense recorded on equity securities not outstanding for the period presented
previously.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------



None.



ITEM 9A.  CONTROLS AND PROCEDURES



We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2007. Based upon that evaluation and subject to the
foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were deficient.



In connection with the preparation of our consolidated financial statements for the year ended July 1, 2006, due to resource constraints, a material
weakness became evident to management regarding our inability to simultaneously close the books on a timely basis each month and generate all the necessary disclosure for inclusion in our filings with the Securities and Exchange Commission. A
material weakness is a significant deficiency in one or more of the internal control components that alone or in the aggregate precludes our internal controls from reducing to an appropriately low level the risk that material misstatements in our
financial statements will not be prevented or detected on a timely basis. This material weakness was still present at June 30, 2007.



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



Changes in Internal Controls over Financial Reporting



Except as described above there have been no changes in internal controls over financial reporting in the fourth quarter of fiscal year 2007.



ITEM 9B.  OTHER INFORMATION



None.



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PART III.



ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE



Our directors and executive officers are as follows:



|                    |  |     |  |                                                                          
|------------------- |  | --- |  | -------------------------------------------------------------------------
|Name                |  | Age |  | Position                                                                 
|Vincent A. Wasik    |  | 63  |  | Chairman of the Board and Chief Executive Officer                        
|James G. Brown      |  | 43  |  | Director                                                                 
|Alex Paluch         |  | 51  |  | Director                                                                 
|Richard A. Kassar   |  | 60  |  | Director                                                                 
|Leslie E. Grodd     |  | 61  |  | Director                                                                 
|John J. Perkins     |  | 76  |  | Director                                                                 
|Mark T. Carlesimo   |  | 54  |  | Executive Vice President, General Counsel, and Secretary                 
|Andrew B. Kronick   |  | 44  |  | Executive Vice President, Business Development and Supply Chain Solutions
|Kay Perry Durbin    |  | 47  |  | Executive Vice President, Workforce Services                             
|Jeffrey Hendrickson |  | 62  |  | President and Chief Operating Officer                                    
|Edward W. Stone     |  | 54  |  | Chief Financial Officer                                                  



Vincent A.
Wasik was appointed as our Chairman of the Board in August 2001 and was further appointed as our President and Chief Executive Officer on July 28, 2003. In 1995, Mr. Wasik co-founded MCG Global, a private equity firm sponsoring
leveraged buyout acquisitions and growth capital investments and has served as Principal of MCG Global since that time. From 1988 to 1991, Mr. Wasik served as Chairman and CEO of National Car Rental System, Inc. From 1980 to 1983, he served as
President and CEO of Holland America Line. Mr. Wasik currently serves as an advisory board member of Mitchells/Richards, the largest upscale clothing retailer in Connecticut.



James G. Brown was elected to our Board in July 2000. Mr. Brown is a founder and Managing Director of TH
Lee Putnam Ventures, L.P., a $1 billion private equity fund focused exclusively on Internet and eCommerce companies. Previously, from 1995 to 1999, he served as a Senior Vice President and Industry Leader of GE Equity where he was responsible for
strategic and financial investments in eCommerce/Internet, consumer services and media/entertainment companies. Prior to joining GE Equity, Mr. Brown worked with Lehman Brothers as a Vice President from 1994 to 1995. Before that, he served at
Bain & Co., an international consulting firm, from 1992 to 1994. He began his career in the media industry, serving two years with A.C. Nielsen in research and two years with CBS Television Network in marketing. In addition to the Company,
Mr. Brown is a director of HomePoint Corp., FaceTime Communications, Inc., Prescient Markets, RealPulse.com, Inc. and LN Holdings, Inc.



Alex Paluch was appointed to our Board in August 2001. Mr. Paluch is a General Partner at East River Ventures Partnership, an
investment firm, which focuses in part on emerging technology-driven companies. Mr. Paluch currently serves on the board of directors of Equity Enterprises, Inc.



Richard A. Kassarwas appointed to our Board in August 2002. Since July 2006, Mr. Kassar has been
President of Freshpet, a pet food company. In August 2006, Mr. Kassar was employed as Principal of GO 7 Brands. Mr. Kassar was employed as Senior Vice President and Chief Financial Officer of The Meow Mix Company from 2002 to September
2006. From 2001 to 2002, he was self-employed as a consultant to venture capital firms, advising them primarily on the acquisition of consumer brands. From 1999 to 2001, Mr. Kassar was employed as Co-President and Chief Financial Officer of
Global Household Brands. From 1986 to 1999, he was employed by Chock Full ONuts in various positions, and had served as Senior Vice President and Chief Operating Officer. Mr. Kassar also serves as a director for World Fuel Services, Inc.
and Vaughan Foods, Inc.



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Leslie E. Grodd was appointed to the Board in January 2003. A Certified Public Accountant
and attorney, Mr. Grodd is counsel to the law firm of Halloran & Sage LLP in its Westport, Connecticut office. Before his association with Halloran & Sage, Mr. Grodd was a founding Principal in the law firm of Blazzard,
Grodd & Hasenauer, P.C., Westport, Connecticut since 1974. Prior to forming Blazzard, Grodd & Hasenauer, Mr. Grodd was associated with the firm of Coopers & Lybrand (now PricewaterhouseCoopers). Mr. Grodd is the
former chair of both the Federal Tax Committee of the Connecticut Society of Certified Public Accountants and the Executive Committee of the Tax Section of the Connecticut Bar Association.



John J. Perkins was appointed to our Board in August of 2004.
Mr. Perkins had served as the President and Chairman of International Insurance Group Ltd. since 1984 until the sale of the company in February 2007. Since 1996, Mr. Perkins has served as a Trustee of the City of Boston Retirement Fund.
Between 1974 and 1984, Mr. Perkins was the President of Corroon and Black of Massachusetts. Additionally, Mr. Perkins is the President of Somerset Corporate Advisors, a financial advisory firm, and a member of the Advisory Board of
Glasshouse Technologies, Aircuity, Inc. and Tuckerbrook Alternative Investments.



Jeffrey Hendrickson joined us in December 2003 as our President and Chief Operating Officer. Prior to joining us, from 2002 to 2003, Mr. Hendrickson was President and Chief Executive Officer of
Sport & Health Company, a privately held company headquartered in McLean, Virginia. From 2000 to 2002, Mr. Hendrickson was the President and Chief Operating Officer of BC Harris Publishing Company, Inc. During 2000,
Mr. Hendrickson served as Executive Vice President, Operations for Park N View, Inc. Park N View, Inc. filed for protection under Chapter 11 of the Federal Bankruptcy Laws in December 2000. He has also served in a senior executive
capacity for such organizations as Brinks, Inc., National Car Rental System, Inc., Chase Manhattan Corporation, and Hertz Corporation.



Edward W. Stone joined us in March 2006 as our Chief Financial Officer and was our interim Secretary from May 2006 until October 2006 after
the resignation of our previous Secretary. Mr. Stone has served as chief financial officer for six companies since 1984 and as a senior financial executive for three other companies. From September 2000 to August 2001, and from
November 2003 to March 2006, Mr. Stone was a Principal of Long Ridge CFO Associates, providing CFO consulting services to mid-sized and early-stage companies in the software, information and manufacturing industries. From September 2001 to
November 2003, he was the chief financial officer for Solucient LLC, a supplier of information to the healthcare industry. From October 1998 to August 2000, he was the chief financial officer for Executone Information Systems, Inc. and Acting chief
executive officer for Executones Healthcare Systems division. Mr. Stone was previously Vice President, Finance for The Thomson Corporation; Chief Financial & Administrative Officer for Krueger International, a manufacturer of
office furniture; Corporate Controller and then Vice President, Finance for the Searle Pharmaceuticals subsidiary of The Monsanto Company; and held senior financial positions with Time Inc. and Pfizer, Inc.



Mark T. Carlesimo has served as our Executive Vice President
and General Counsel since August 2006 and as our Secretary since October 2006. From September 1997 until August 2006, Mr. Carlesimo was Vice PresidentGeneral Counsel and Secretary of CD&L. From July 1983 until September 1997,
Mr. Carlesimo served as Vice President of Legal Affairs of Cunard Line Limited. Earlier in his career, Mr. Carlesimo served as Staff Counsel to Seatrain Lines, Inc., a cargo shipping company and was engaged in the private practice of law.



Andrew B. Kronick joined us in December 2001 as
our Senior Vice President of National Accounts and Logistics Services. In fiscal 2004, Mr. Kronick was named Executive Vice President, Business Development and Supply Chain Solutions. Prior to joining us, from 1999 to 2001, Mr. Kronick
served as President of Veredex Logistics and was co-founder of deliverEnow.com, both technology and same-day logistics solutions companies. Prior to that, from 1995 to 1999, he served as Corporate Vice President of Sales and Marketing of
Consolidated Delivery & Logistics, a national provider of time definite logistics solutions, a company of which he was a founding member.



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Kay Perry Durbin joined us in February 2000 as our Director of Compensation and Benefits.
In November 2001, she was named our Vice President of Compensation and Benefits. In September 2002, she was named Vice President Human Resources, and served in that capacity until August 2004 when she was named Senior Vice President, Workforce
Resources. In May 2006, Ms. Durbin was named Executive Vice President, Workforce Resources. Prior to joining us, Ms. Durbin was the Manager Compensation and Benefits for Fleetwood Retail Corporation and held HR positions with Amoco and
Shell Oil.



There are no family relationships between our
directors or executive officers.



Audit Committee



Our Audit Committee consists of the following individuals: Richard A.
Kassar, Chairman, Leslie E. Grodd, and John J. Perkins. The Board of Directors has determined that all members of the audit committee are independent for purposes of Rule 4200(a)(15) of NASDAQs Marketplace Rules and Rule 10A-3(b)(1) of the
Exchange Act. Each of the audit committee members is financially literate as determined by our board in its business judgment. In addition, the Board has determined that Richard A. Kassar is an audit committee financial expert under
applicable SEC rules. The Audit Committee operates under a written charter, which was adopted on October 23, 2004. The Audit Committee met 11 times during fiscal 2007.



Nominating Committee



The Nominating Committee consists of the following individuals: Leslie E. Grodd, Chairman, John J. Perkins and James G. Brown. The Nominating Committee
serves to identify and recommend individuals qualified to become members of the Board. The Nominating Committee met once during fiscal 2007.



Compensation Committee



The Compensation Committee consists of the following individuals: Alex Paluch, Chairman, John J. Perkins, and Richard A. Kassar. The principal duties and
responsibilities of the Compensation Committee are as follows: (i) to review and approve goals and objectives relating to the compensation of our Chief Executive Officer and, based upon a performance evaluation, to determine and approve the
compensation of the Chief Executive Officer; (ii) to make recommendations to our Board of Directors on the compensation of other executive officers and on incentive compensation and equity-based plans; and (iii) to prepare reports on
executive compensation to be included in our public filings with the SEC. The Compensation Committee met three times during fiscal 2007.



Section 16(a) Beneficial Ownership Reporting Compliance



Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors, executive officers and beneficial owners of 10% or more of
our common stock to file with the Securities and Exchange Commission initial reports of changes in ownership of our equity securities. Such persons are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.
Based on our review of copies of such reports received by us, or written representations from reporting persons, we believe that during fiscal 2007, our directors, executive officers and beneficial owners of 10% or more of our common stock filed all
reports on a timely basis, with the following exceptions: (i) a Form 3 was filed by Edward W. Stone, Jr. on July 7, 2006, reporting his March 6, 2006 status as Chief Financial Officer; (ii) a Form 3 was filed by Mark T. Carlesimo
on June 29, 2007, reporting his August 18, 2006 status as Executive Vice President, General Counsel, and Secretary; (iii) a Form 4 was filed by TH Lee Putnam Internet Partners LP on July 24, 2006, reporting the conversion of
1,218,922 shares of Series Q Convertible Preferred Stock and the exercise of a warrant to purchase 13,000 shares of Common Stock on July 3, 2006; and (iv) a Form 4 was filed by Vincent A. Wasik on June 29, 2007, reporting the purchase
of 720 shares of Common Stock on April 13, 2005.



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Code of Business Conduct and Ethics



We have adopted a Code of Business Conduct and Ethics (Code of Ethics) which applies to our directors, officers and employees.
The Code of Ethics is published on our website at www.velocityexp.com under Investor Info. Any amendments to the Code of Ethics and waivers of the Code of Ethics for our Chief Executive Officer or Chief Financial Officer will be
published on our website. You may request a copy of the Code of Ethics at no cost by writing to us at the following address: Velocity Express Corporation, One Morningside Drive North, Building B, Suite 200, Westport, CT 06880 Attention: Corporate
Secretary.



ITEM 11.  EXECUTIVE COMPENSATION



The information required for this Item is incorporated by reference from our Proxy Statement to be filed for our November 2007 Annual Meeting of Stockholders.



|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------



The information required for this Item is incorporated by reference from our Proxy Statement to be filed for our November
2007 Annual Meeting of Stockholders.



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|-------- | -------------------------------------------------------------------------



The information required for this Item is incorporated by reference from our Proxy Statement to be filed for our November
2007 Annual Meeting of Stockholders.



ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES



The information required for this Item is incorporated by reference from our Proxy Statement to be filed for our November 2007 Annual Meeting of Stockholders.



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PART IV.



ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES



| | (1) |  | Financial Statements
| | --- |  | --------------------



The consolidated financial statements required by this item are listed in Item 8, Financial Statements and Supplementary Data herein.



| | (2) |  | Financial Statement Schedules
| | --- |  | -----------------------------



Schedule IIValuation and Qualifying Accountsyears ended June 30, 2007, July 1, 2006 and July 2, 2005.



All other schedules for which provision is made in the applicable
regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.



| | (3) |  | Exhibits
| | --- |  | --------



Reference is made to the Exhibit Index.



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SIGNATURES



Pursuant to the
requirements of 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 Westport, state of Connecticut on
October 15, 2007.



VELOCITY EXPRESS CORPORATIONBy

/s/    VINCENT A. WASIKVincent A. WasikChairman of the Board, Chief Executive
OfficerBy

/s/    EDWARD W. STONEEdward W. StoneChief Financial Officer




POWER OF
ATTORNEY



KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints Edward W. Stone and Mark T. Carlesimo, 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.



Pursuant to the requirements of 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            
|                                          |  |                                                  
|/s/    VINCENT A. WASIKVincent A. Wasik   |  | Chairman of the Board and Chief Executive Officer |  | October 15, 2007
|                                          |  |                                                  
|/s/    EDWARD W. STONEEdward W. Stone     |  | Chief Financial Officer                           |  | October 15, 2007
|                                          |  |                                                  
|/s/    JAMES BROWNJames Brown             |  | Director                                          |  | October 15, 2007
|                                          |  |                                                  
|/s/    ALEX PALUCHAlex Paluch             |  | Director                                          |  | October 15, 2007
|                                          |  |                                                  
|/s/    RICHARD A. KASSARRichard A. Kassar |  | Director                                          |  | October 15, 2007
|                                          |  |                                                  
|/s/    LESLIE E. GRODDLeslie E. Grodd     |  | Director                                          |  | October 15, 2007
|                                          |  |                                                  
|/s/    JOHN J PERKINSJohn J Perkins       |  | Director                                          |  | October 15, 2007



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FINANCIAL STATEMENT SCHEDULES



VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

Schedule IIValuation and Qualifying Accounts

Fiscal Years 2007, 2006 and 2005

(Amounts in thousands)



|                              |  |                                |       |                                               |   |                |  |                          |       |  |   |      
|----------------------------- |  | ------------------------------ | ----- | --------------------------------------------- | - | -------------- |  | ------------------------ | ----- |  | - | -----
|Column A                      |  | Column B                       |       | Column C                                      |   | Column D       |  | Column E                
|Description                   |  | Balance at Beginning of Period |       | Additions charged to cost, expenses, revenues |   | Deductions (1) |  | Balance at End of Period
|Accounts receivable reserves: |  |                                |       |                                               |   |                |  |                          |       |  |   |      
|2007                          |  | $                              | 3,273 |                                               | $ | 479            |  | $                        | 475   |  | $ | 3,277
|2006                          |  |                                | 9,879 |                                               |   | 177            |  |                          | 6,783 |  |   | 3,273
|2005                          |  |                                | 4,743 |                                               |   | 8,028          |  |                          | 2,892 |  |   | 9,879

---

|(1) |  | write off of accounts receivable determined to be uncollectible
|--- |  | ---------------------------------------------------------------



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EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                               
|2.1           |  | Merger Agreement, dated September 8, 1999, by and among CEX Holdings, Inc., Corporate Express Delivery Systems, Inc., United Shipping & Technology, Inc. and United Shipping &
Technology Acquisition Corp. (incorporated by reference from the Companys Current Report on Form 8-K, filed October 8, 1999).                                                                                             
|              | 
|2.2           |  | Amendment No. 1 to Merger Agreement, dated September 22, 1999, by and among CEX Holdings, Inc., Corporate Express Delivery Systems, Inc., United Shipping & Technology, Inc. and United
Shipping & Technology Acquisition Corp. (incorporated by reference from the Companys Current Report on Form 8-K, filed October 8, 1999).                                                                         
|              | 
|2.3           |  | Amendment No. 2 to Merger Agreement, Settlement and General Release Agreement, dated August 2, 2001, by and among Corporate Express, Inc., successor by merger to CEX Holdings, Inc.,
Velocity Express, Inc. f/k/a Corporate Express Delivery Systems, Inc., and United Shipping & Technology, Inc. (incorporated by reference from the Companys Quarterly Report on Form 10-Q, filed November 13, 2001).
|              | 
|2.4           |  | Agreement and Plan of Merger, dated July 3, 2006, by and among Velocity Express Corporation, CD&L Acquisition Corp., a wholly-owned subsidiary of Velocity Express Corporation, and
CD&L, Inc., (incorporated by reference from the Companys Current Report on Form 8-K, filed July 10, 2006).                                                                                                           
|              | 
|3.1           |  | Amended and Restated Certificate of Incorporation of Velocity Express Corporation (incorporated by reference from the Companys Current Report on Form 8-K, filed February 16,
2005).                                                                                                                                                                                                                     
|              | 
|3.2           |  | Certificate of Amendment of Certificate of Incorporation of Velocity Express Corporation dated October 20, 2006 (incorporated by reference from the Companys Current Report on Form 8-K
filed on July 10, 2006).                                                                                                                                                                                         
|              | 
|3.3           |  | Amended and Restated Certificate of Incorporation of Velocity Express Corporation (incorporated by reference from the Companys Quarterly Report on Form 10-Q, filed November 21, 2006).                                                                                                                                                                                                                  
|              | 
|3.4           |  | Certificate of Designations, Preferences and Rights of Series N Convertible Preferred Stock (incorporated by reference from the Companys Current Report on Form 8-K, filed May 4, 2005).                                                                                                                                                                                                                 
|              | 
|3.5           |  | Certificate of Designations, Preferences and Rights of Series O Convertible Preferred Stock (incorporated by reference from the Companys Current Report on Form 8-K, filed July 26,
2005).                                                                                                                                                                                                               
|              | 
|3.6           |  | Certificate of Designations, Preferences and Rights of Series P Convertible Preferred Stock (incorporated by reference from the Companys Current Report on Form 8-K, filed October 20,
2005).                                                                                                                                                                                                            
|              | 
|3.7           |  | Certificate of Designations, Preferences and Rights of Series Q Convertible Preferred Stock (incorporated by reference from the Companys Current Report on Form 8-K, filed on July 6,
2006).                                                                                                                                                                                                             
|              | 
|3.8           |  | Amended Certificate of Designation of Series Q Convertible Preferred Stock (incorporated by reference from the Companys Current Report on Form 8-K, filed on July 6,
2006).                                                                                                                                                                                                                              
|              | 
|3.9           |  | Certificate of Amendment to Amended and Restated Certificate of Incorporation (incorporated by reference from the Companys Current Report on Form 8-K, filed September 14,
2006).                                                                                                                                                                                                                        
|              | 
|3.10          |  | Bylaws of Velocity Express Corporation (incorporated by reference from the Companys Current Report on Form 8-K, filed January 9, 2002).                                                                                                                                                                                                                                                                  
|              | 
|4.1           |  | Specimen form of common stock certificate (incorporated by reference from the Companys Annual Report on Form 10-K, filed September 27, 2002).                                                                                                                                                                                                                                                            



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|              |  |                                                                                                                                                                                                                                                                                                                   
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                       
|4.2           |  | Indenture, dated July 3, 2006, between Velocity Express Corporation and Wells Fargo Bank, N.A., as trustee, with respect to the Companys 12% Senior Secured Notes due 2010 (incorporated
by reference from the Companys Current Report on Form 8-K, filed July 10, 2006).                                       
|              | 
|4.3           |  | Supplemental Indenture, dated as of August 17, 2006, among the Company, Wells Fargo Bank, N.A., as trustee, and the Subsidiary Guarantors named thereto (incorporated by reference from
the Companys Quarterly Report on Form 10-Q, filed February 13, 2007).                                                    
|              | 
|4.4           |  | Second Supplemental Indenture dated as of December 22, 2006 among the Company, Wells Fargo Bank, N.A., as Trustee and the subsidiaries named thereto (incorporated by reference from our
Current Report on From 8-K filed on December 27, 2006).                                                                  
|              | 
|4.5           |  | Third Supplemental Indenture, dated July 25, 2007 (incorporated by reference from the Companys Current Report on Form 8-K filed on July 25, 2007).                                                                                                                                                               
|              | 
|4.6           |  | Security Agreement, dated July 3, 2006, by Velocity Express Corporation and the Subsidiary Guarantors named therein, to and in favor of Wells Fargo Bank, N.A., as trustee (incorporated by
reference from the Companys Current Report on Form 8-K, filed July 10, 2006).                                        
|              | 
|4.7           |  | Form of Warrant issued together with the 12% Senior Secured Notes due 2010 (incorporated by reference from the Companys Current Report on Form 8-K, filed July 10,
2006).                                                                                                                                        
|              | 
|4.8           |  | Form of Warrant issued in connection with services (incorporated by reference from the Companys Current Report on Form 8-K, filed July 10, 2006).                                                                                                                                                                
|              | 
|4.9           |  | Form of Common Stock Warrant between Velocity Express Corporation and management, dated February 12, 2004 (incorporated by reference from the Companys Quarterly Report on Form 10-Q,
filed May 11, 2004).                                                                                                       
|              | 
|4.10          |  | Registration Rights Agreement, dated July 3, 2006, between Velocity Express Corporation and the Investors named therein with respect to the Series Q Convertible Preferred Stock (incorporated
by reference from the Companys Current Report on Form 8-K, filed July 10, 2006).                                  
|              | 
|4.11          |  | Registration Rights Agreement, dated December 21, 2004, between Velocity Express Corporation and the Investors named therein with respect to the Series M Convertible Preferred Stock
(incorporated by reference from the Companys Current Report on Form 8-K, filed December 27, 2004).                         
|              | 
|4.12          |  | Registration Rights Agreement, dated April 28, 2005, between Velocity Express Corporation and the Investors named therein with respect to the Series N Convertible Preferred Stock
(incorporated by reference from the Companys Current Report on Form 8-K, filed May 4, 2005).                                  
|              | 
|4.13          |  | Registration Rights Agreement, dated July 18, 2005, between Velocity Express Corporation and the Investors named therein with respect to the Series O Convertible Preferred Stock (incorporated
by reference from the Companys Current Report on Form 8-K, filed July 26, 2005).                                 
|              | 
|4.14          |  | Registration Rights Agreement, dated October 14, 2005, between Velocity Express Corporation and the Investors named therein with respect to the Series P Convertible Preferred Stock
(incorporated by reference from the Companys Current Report on Form 8-K, filed October 20, 2005).                           
|              | 
|4.15          |  | Amendment No. 1 to the Registration Rights Agreement, dated October 19, 2006, between Velocity Express Corporation and the Investors named therein with respect to the Series Q
Convertible Preferred Stock (incorporated by reference from the Companys Quarterly Report on Form 10-Q, filed February 13, 2007).



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|              |  |                                                                                                                                                                                                                                                                                                                                         
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                             
|4.16          |  | Amendment No. 1 to the Registration Rights Agreement, dated October 19, 2006, between Velocity Express Corporation and the Investors named therein with respect to the Series M
Convertible Preferred Stock (incorporated by reference from the Companys Quarterly Report on Form 10-Q, filed February 13, 2007).                      
|              | 
|4.17          |  | Amendment No. 1 to the Registration Rights Agreement, dated October 19, 2006, between Velocity Express Corporation and the Investors named therein with respect to the Series N
Convertible Preferred Stock (incorporated by reference from the Companys Quarterly Report on Form 10-Q, filed February 13, 2007).                      
|              | 
|4.18          |  | Amendment No. 1 to the Registration Rights Agreement, dated October 19, 2006, between Velocity Express Corporation and the Investors named therein with respect to the Series O
Convertible Preferred Stock (incorporated by reference from the Companys Quarterly Report on Form 10-Q, filed February 13, 2007).                      
|              | 
|4.19          |  | Amendment No. 1 to the Registration Rights Agreement, dated October 19, 2006, between Velocity Express Corporation and the Investors named therein with respect to the Series P
Convertible Preferred Stock (incorporated by reference from the Companys Quarterly Report on Form 10-Q, filed February 13, 2007).                      
|              | 
|4.20          |  | Stock Purchase Warrant to purchase up to 193,552 shares of common stock issued to TH Lee Putnam Ventures, L.P., TH Lee Putnam Parallel Ventures, L.P., THLi Coinvestment Partners, LLC and Blue
Star I, LLC, dated December 21, 2004 (incorporated by reference from the Companys Annual Report on Form 10-K, filed December 23, 2004).
|              | 
|4.21          |  | Warrant to purchase up to 4,000 shares of common stock issued to BLG Ventures, LLC, dated August 23, 2001 (incorporated by reference from the Companys Quarterly Report on Form 10-Q,
filed November 13, 2001).                                                                                                                        
|              | 
|10.1          |  | 1995 Stock Option Plan (incorporated by reference from the Companys Quarterly Report on Form 10-QSB, filed February 15, 2000).                                                                                                                                                                                                         
|              | 
|10.2          |  | 1996 Director Stock Option Plan, as amended (incorporated by reference from the Companys Quarterly Report on Form 10-QSB, filed February 15, 2000).                                                                                                                                                                                    
|              | 
|10.3          |  | 2000 Stock Option Plan (incorporated by reference from the Companys Definitive Schedule 14A, filed May 8, 2000).                                                                                                                                                                                                                       
|              | 
|10.4          |  | 2004 Stock Incentive Plan (incorporated by reference from the Companys Definitive Schedule 14A, filed January 31, 2005).                                                                                                                                                                                                               
|              | 
|10.5          |  | Form of non-qualified stock option issued to employees as of June 2000 (incorporated by reference from the Companys Annual Report on Form 10-KSB, filed September 29,
2000).                                                                                                                                                           
|              | 
|10.6          |  | Form of Incentive Stock Option Agreement, dated October 29, 2001, between United Shipping & Technology, Inc., and management (incorporated by reference from the Companys Quarterly
Report on Form 10-Q, filed May 3, 2002).                                                                                                           
|              | 
|10.7          |  | Employment Agreement, dated November 28, 2001, between Velocity Express, Inc. and Andrew B. Kronick (incorporated by reference from the Companys Annual Report on Form 10-K, filed
December 23, 2004).                                                                                                                                 
|              | 
|10.8          |  | Employment Agreement, dated March 6, 2006, between Velocity Express Corporation and Edward W. Stone, Jr. (incorporated by reference from the Companys Current Report on Form 8-K,
filed March 7, 2006).                                                                                                                                



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.9          |  | Contractor Services Agreement, between Velocity Express Corporation and MCG Global, LLC (incorporated by reference from the Companys Annual Report on Form 10-K, filed December 23,
2004).                                                                                                                                                                                                                                                                                                                                          
|              | 
|10.10         |  | Agency Agreement, dated May 25, 2004, between Velocity Express, Inc. and Peritas, LLC (incorporated by reference from the Companys Annual Report on Form 10-K, filed December 23, 2004).                                                                                                                                                                                                                                                                                                                                            
|              | 
|10.11         |  | Reimbursement Agreement, dated June 29, 2006, between Velocity Express Corporation and TH Lee Putnam Ventures (incorporated by reference from the Companys Current Report on Form 8-K,
filed July 6, 2006).                                                                                                                                                                                                                                                                                                                         
|              | 
|10.12         |  | Purchase Agreement for 12% Senior Secured Notes and Warrants, dated July 3, 2006, between Velocity Express Corporation, the guarantors and purchasers named therein (incorporated by reference
from the Companys Current Report on Form 8-K/A, filed September 19, 2006).                                                                                                                                                                                                                                                           
|              | 
|10.13         |  | Unit Purchase Agreement, dated July 3, 2006, by and among Velocity Express Corporation, the guarantors named therein and Exeter Capital Partners IV, L.P. (incorporated by reference from the
Companys Current Report on Form 8-K, filed July 10, 2006).                                                                                                                                                                                                                                                                            
|              | 
|10.14         |  | Stock Purchase Agreement, dated as of July 3, 2006, for Series Q Preferred Stock, between Velocity Express Corporation and the Purchasers named therein (incorporated by reference from the
Companys Current Report on Form 8-K/A, filed September 19, 2006)].                                                                                                                                                                                                                                                                      
|              | 
|10.15         |  | Stock Purchase Agreement to purchase up to 500,000 additional shares of Series Q Convertible Preferred Stock, dated August 17, 2006, between Velocity Express Corporation and the purchasers
named therein (incorporated by reference from the Companys Current Report on Form 8-K, filed August 23, 2006).                                                                                                                                                                                                                         
|              | 
|10.16         |  | Series A Preferred Stock and Warrant Purchase Agreement, dated as of July 3, 2006, by and between Velocity Express Corporation and BNP Paribas (incorporated by reference from the
Companys Current Report on Form 8-K filed on July 10, 2006).                                                                                                                                                                                                                                                                                     
|              | 
|10.17         |  | Series A Preferred Stock, Common Stock and Warrant Purchase Agreement (Note and Warrant Consideration), dated as of July 3, 2006, by and between Velocity Express Corporation and Exeter
Capital Partners IV, L.P. (incorporated by reference from the Companys Current Report on Form 8-K filed on July 10, 2006)                                                                                                                                                                                                                  
|              | 
|10.18         |  | Series A Preferred Stock, Common Stock and Warrant Purchase Agreement (Share Consideration), dated as of July 3, 2006, by and between Velocity Express Corporation and Exeter Capital
Partners IV, L.P. (incorporated by reference from the Companys Current Report on Form 8-K filed on July 10, 2006)                                                                                                                                                                                                                             
|              | 
|10.19         |  | Series A Convertible Subordinated Debenture Purchase Agreement, dated as of July 3, 2006, by and between Velocity Express Corporation and each of the other parties thereto (incorporated by
reference from the Companys Current Report on Form 8-K filed on July 10, 2006).                                                                                                                                                                                                                                                        
|              | 
|10.20         |  | Settlement Agreement and Mutual Release, dated December 2005, by and among Velocity Express, Inc., formerly known as Corporate Express Delivery Systems, Velocity Express Corporation, Banc of
America Commercial Finance Corporation, Banc of America Leasing & Capital, LLC, John Hancock Life Insurance Company, Hancock Mezzanine Partners, L.P., Charles F. Short, III, Sidewinder Holdings, Ltd. and Sidewinder, N.A., Ltd. (incorporated by
reference from the Companys Current Report on Form 8-K, filed December 13, 2005).
|              | 
|10.21         |  | Security Agreement, dated December 22, 2006, among the Company, Wells Fargo Foothill, Inc. and the Subsidiary Guarantors named thereto (incorporated by reference from our Current Report on
Form 8-K filed on December 27, 2006).                                                                                                                                                                                                                                                                                                   



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                                 
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                     
|10.22         |  | Intercompany Subordination Agreement dated, as of December 22,2006, among the Company, the Subsidiary Guarantors named thereto and Wells Fargo Foothill, Inc. (incorporated by reference from
our Current Report on Form 8-K filed on January 5, 2007).                                                                                                                                         
|              | 
|10.23         |  | Contribution Agreement, dated as of December 22, 2006, among the Company and the Subsidiary Guarantors named thereto (incorporated by reference from our Current Report on Form 8-K/A filed on
January 5, 2007).                                                                                                                                                                                
|              | 
|10.24         |  | Intercreditor Agreement, dated as of December 22, 2006, among the Company, the Subsidiary Guarantors named thereto, Wells Fargo Bank, N.A., as trustee, and Wells Fargo Foothill, Inc.
(incorporated by reference from our Current Report on Form 8-K/A filed on January 5, 2007).                                                                                                              
|              | 
|10.25         |  | Credit Agreement, dated as of December 22, 2006, among the Company, the Subsidiary Guarantors named thereto, Wells Fargo Foothill, Inc., as arranger and administrative agent, and the several
banks and other financial institutions or entities from time to time parties to the Credit Agreement (incorporated by reference from our Current Report on From 8-K filed on December 27, 2006). 
|              | 
|10.26         |  | Waiver to Credit Agreement, dated as of May 14, 2007, by and among Velocity Express Corporation, the lenders party thereto and Wells Fargo Foothill, Inc., as arranger and administrative
agent (incorporated by reference from the Companys Quarterly Report on Form 10-Q, filed May 15, 2007).                                                                                               
|              | 
|10.27         |  | Amendment No. 6, dated May 25, 2007, to Credit Agreement dated as of December 22, 2006, among Velocity Express Corporation, the subsidiaries thereof party thereto, Wells Fargo Foothill,
Inc., as arranger and administrative agent, and the several lenders from time to time party thereto.                                                                                                  
|              | 
|10.28         |  | Amendment No. 7, dated July 13, 2007, to Credit Agreement dated as of December 22, 2006, among Velocity Express Corporation, the subsidiaries thereof party thereto, Wells Fargo
Foothill, Inc., as arranger and administrative agent, and the several lenders from time to time party thereto (incorporated by reference from the Companys Current Report on Form 8-K filed on July 25, 2007).
|              | 
|10.29         |  | Amendment No. 8, dated October 15, 2007, to Credit Agreement dated as of December 22, 2006, among Velocity Express Corporation, the subsidiaries thereof party thereto, Wells
Fargo Foothill, Inc., as arranger and administrative agent, and the several lenders from time to time party thereto.                                                                                              
|              | 
|21.1          |  | Subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                   
|              | 
|23.1          |  | Consent of UHY LLP, Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                                                              
|              | 
|23.2          |  | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                                                    
|              | 
|31.1          |  | Section 302 Certification of CEO.                                                                                                                                                                                                                                                                                                                                                               
|              | 
|31.2          |  | Section 302 Certification of CFO.                                                                                                                                                                                                                                                                                                                                                               
|              | 
|32.1          |  | Certification of Chief Executive Officer pursuant to 18 U.S.C as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                             
|              | 
|32.2          |  | Certification of Chief Financial Officer pursuant to 18 U.S.C as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                             



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