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U.S. SECURITIES AND EXCHANGE COMMISSION



WASHINGTON DC 20549



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FORM 10-K



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

SECURITIES EXCHANGE ACT OF 1934



For the fiscal year ended June 28, 2003



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Commission File No. 0-28452



VELOCITY EXPRESS CORPORATION

(Exact name of registrant as specified in its charter)



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



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



(612) 492-2400

(Registrants telephone number, including area code)



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



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



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



Yes    x        No ̈



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K. ̈



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



Yes ̈No    x



State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last
sold, or the average bid and asked price of such common equity, as of the last business day of the registrants most recently completed second fiscal quarter: December 28, 2002: $3,163,687.



As of September 22, 2003, there were 5,443,993 shares of Common Stock of the registrant
issued and outstanding.



DOCUMENTS INCORPORATED BY REFERENCE



None



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TABLE OF CONTENTS



|PART I.                       |  | 1                                                                                   
|----------------------------- |  | ------------------------------------------------------------------------------------
|                              |  |                                                                                     
|ITEM 1                        |  | Description of Business                                                             
|                              |  |                                                                                     
|ITEM 2.                       |  | Description of Property                                                             
|                              |  |                                                                                     
|ITEM 3.                       |  | Legal Proceedings                                                                   
|                              |  |                                                                                     
|ITEM 4.                       |  | Submission of Matters to a Vote of Security Holders                                 
|                              | 
|PART II.                      |  | 7                                                                                   
|                              |  |                                                                                     
|ITEM 5.                       |  | Market for Common Equity and Related Stockholder Matters                            
|                              |  |                                                                                     
|ITEM 6.                       |  | Selected Financial Data                                                             
|                              |  |                                                                                     
|ITEM 7.                       |  | Managements Discussion and Analysis                                                
|                              |  |                                                                                     
|ITEM 7A.                      |  | Quantitative and Qualitative Disclosures About Market Risk                          
|                              |  |                                                                                     
|ITEM 8.                       |  | Financial Statements and Supplementary Data                                         
|                              |  |                                                                                     
|ITEM 9.                       |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|                              |  |                                                                                     
|ITEM 9A.                      |  | Controls and Procedures                                                             
|                              | 
|PART III.                     |  | 44                                                                                  
|                              |  |                                                                                     
|ITEM 10.                      |  | Directors and Executive Officers of the Registrant                                  
|                              |  |                                                                                     
|ITEM 11.                      |  | Executive Compensation                                                              
|                              |  |                                                                                     
|ITEM 12.                      |  | Security Ownership of Certain Beneficial Owners and Management                      
|                              |  |                                                                                     
|ITEM 13.                      |  | Certain Relationships and Related Transactions                                      
|                              | 
|PART IV.                      |  | 64                                                                                  
|                              |  |                                                                                     
|ITEM 15.                      |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|                              | 
|SIGNATURES                    |  | 65                                                                                  
|                              | 
|POWER OF ATTORNEY             |  | 65                                                                                  
|                              | 
|FINANCIAL STATEMENT SCHEDULES |  | 66                                                                                  
|                              | 
|EXHIBIT INDEX                 |  | 67                                                                                  



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PART I.



Forward-Looking Information



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



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



ITEM 1    DESCRIPTION OF BUSINESS



Company Overview



Velocity Express Corporation
(formerly known as United Shipping & Technology, Inc.) and its subsidiaries are engaged in the business of providing same-day transportation and distribution/logistics services to individual consumers and businesses. The Company operates
primarily in the United States with limited operations in Canada. The Company currently operates in a single-business segment.



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



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



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



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



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



The largest customer base for scheduled logistics consists of financial
institutions that need a wide variety of services including the pickup and delivery of non-negotiable instruments, primarily canceled checks and ATM receipts, the delivery of office supplies, and the transfer of inter-office mail and correspondence.
Distribution logistics typically involves receiving bulk shipments from the customer and dividing and sorting them for delivery to specific locations. Customers utilizing distribution logistics normally include pharmaceutical wholesalers, retailers,
manufacturers or other companies who must distribute merchandise every day from a



1



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single point of origin to many locations within a clearly defined geographic region. Most expedited logistics services occur within a major metropolitan area
or radius of 40 miles, and the Company usually offers one-hour, two- to four-hour and over four-hour delivery services depending on the customers time requirements. These services are typically available 24 hours a day, seven days a week.
Expedited logistics services also include critical parts management and delivery for companies.



Acquisition and Integration of Corporate Express Delivery Systems



Effective August 28, 1999, United Shipping & Technology Inc., through a wholly-owned subsidiary, acquired from CEX Holdings, Inc. (CEX)
all of the outstanding shares of common stock of Corporate Express Delivery Systems, Inc. (CEDS), a provider of same-day delivery solutions. CEDS changed its name to UST Delivery Systems, Inc., and subsequently changed its name to
Velocity Express, Inc. (Velocity). The results of Velocitys operations have been included in the Companys consolidated financial statements since August 28, 1999.



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



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



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



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



Industry Overview



The Company operates in the
same-day time-critical logistics industry, which includes scheduled and non-scheduled, same-day transportation of documents and packages in local and inter-city markets. The industry also provides warehousing, facilities management and logistics
solutions, as well as supply chain management and cross-dock and package aggregation services.



The Company believes the market for same-day time-critical logistics solutions is large and growing. Based on industry studies, the U.S. same-day transportation services market is estimated to generate revenues in
excess of $20 billion per year. Although the market is large, it is highly fragmented. There are relatively low entry barriers in this market as the capital requirements to start a local courier business are relatively small and the industry is not
subject to extensive regulation. The Company believes there are currently as many as 6,000



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same-day transportation companies in the United States. Most are privately held and operate only on the local level. The focus is generally on operations,
with little attention given to marketing and sales. Accordingly, the Company believes there is little perceived service differentiation between competitors, and that customer loyalty is generally short-term.



There are no dominant brands in the same-day time-critical 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® and Federal Express®, both of which use technology extensively.



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



Regulation and Safety



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



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



From time to time, the Companys drivers are involved in accidents. The Company carries liability insurance with a per claim self-insured retention. Owner-operators and independent contractors are required to
maintain auto liability insurance at amounts required by the Company. The Company also has insurance policies covering fidelity liability, which coverage includes all drivers. The Company reviews prospective drivers to ensure that they have
acceptable driving records, and pass a criminal background and drug test, among other criteria.



Sales and Marketing



The Company has initiated a comprehensive sales and marketing program that emphasizes its competitive position as the leading national provider of same-day transportation services. The Company has also realigned its



3



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national accounts and logistics team, and restructured its field sales organization to effectively pursue growth opportunities. Sales efforts are conducted
at both the local and national levels through the Companys extensive network of local sales representatives. The Company employs 74 marketing and sales representatives who make regular calls on existing and potential customers to determine
their ongoing delivery and logistics needs. Sales efforts are coordinated with customer service representatives who regularly communicate with customers to monitor the quality of services and quickly respond to customer concerns.



The Companys sales department develops and executes marketing
strategies and programs that are supported by corporate communications and research services. The corporate communications department also provides ongoing communication of corporate activities and programs to employees, the press and the general
public. The expansion of the Companys national sales program and continuing investment in technology to support expanding operations have been undertaken at a time when large companies are increasing their demand for delivery providers who
offer a range of delivery services at multiple locations. As of the end of fiscal 2003, approximately 70 percent of the Companys revenues come from national companies needing multi-location logistics solutions.



Competition



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



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



Technology



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



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



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



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



4



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Trademarks



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



Employees



As of June 28, 2003, the Company had approximately 1,553 employees, of whom approximately 733 primarily were employed in
various management, sales, and other corporate positions and approximately 820 were employed as drivers and operations personnel. Additionally, the Company had contracts with approximately 4,000 independent contractor drivers in its delivery
operations in North America. The Company believes that its relations with its employees are good and the Company is not a party of any collective bargaining agreement.



ITEM 2.    DESCRIPTION OF PROPERTY



As of June 28, 2003, The Company operated from 139 leased facilities in the United States and two leased facilities in Canada (not including customer-owned facilities). 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 ofLeasedFacilities |  | State                    |  | Number ofLeasedFacilities
|-------------------- |  | ------------------------- |  | ------------------------ |  | -------------------------
|Alabama              |  | 3                         |  | Nebraska                 |  | 3                        
|Arizona              |  | 2                         |  | New Jersey               |  | 3                        
|Arkansas             |  | 2                         |  | New Mexico               |  | 2                        
|California           |  | 8                         |  | New York                 |  | 17                       
|Colorado             |  | 1                         |  | North Carolina           |  | 9                        
|Connecticut          |  | 1                         |  | North Dakota             |  | 2                        
|District of Columbia |  | 1                         |  | Oklahoma                 |  | 4                        
|Florida              |  | 8                         |  | Oregon                   |  | 1                        
|Georgia              |  | 4                         |  | Pennsylvania             |  | 4                        
|Idaho                |  | 1                         |  | South Carolina           |  | 1                        
|Illinois             |  | 1                         |  | South Dakota             |  | 2                        
|Iowa                 |  | 8                         |  | Tennessee                |  | 3                        
|Louisiana            |  | 8                         |  | Texas                    |  | 10                       
|Maryland             |  | 2                         |  | Utah                     |  | 1                        
|Massachusetts        |  | 1                         |  | Virginia                 |  | 8                        
|Michigan             |  | 4                         |  | Washington               |  | 4                        
|Minnesota            |  | 4                         |  | Wisconsin                |  | 2                        
|                     |  |                           |  |                          |  |                          
|Mississippi          |  | 4                         |  | Total facilities in U.S. |  | 139                      



The Companys
corporate headquarters is located at Four Paramount Plaza, 7803 Glenroy Road, Suite 200, Bloomington, Minnesota. The Company believes that its properties are well maintained, in good condition and adequate for its present needs. Furthermore, the
Company believes that suitable additional or replacement space will be available when required.



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As of June 28, 2003, the Company leased approximately 735 vehicles of various types through operating
leases, which were operated by drivers employed by the Company. The Company also engages independent contractors who provide their own vehicles and are required to carry insurance coverage at levels dictated by the Company.



Aggregate rental expense, primarily for facilities, was approximately $15.5
million for the year ended June 28, 2003. See Note 10 to the Companys Consolidated Financial Statements.



ITEM 3.    LEGAL PROCEEDINGS



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



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



Cautionary Statements Regarding Pending Litigation and Claims



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



| |  |  | The Company has made estimates of its exposure in connection with the lawsuits and claims that have been made. As a result of litigation or settlement of cases, the actual amount of
exposure in a given case could differ materially from that projected. In addition, in some instances, the Companys liability for claims may increase or decrease depending upon the ultimate development of those claims.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



No matters were submitted to shareholders during the fourth quarter of fiscal 2003.



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PART II.



ITEM 5.    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS



The Companys Common Stock currently trades under the symbol VEXP on the Nasdaq SmallCap Market. The following table sets forth the
quarterly high and low closing prices for the Companys Common Stock, as reported by Nasdaq for each full quarterly period within the two most recent fiscal years. These prices represent inter-dealer prices without adjustment for mark-up,
mark-down or commission and do not necessarily reflect actual transactions.



|Period         |  | High |       | Low
|-------------- |  | ---- | ----- | ---
|Fiscal 2003:   |  |      |       |    
|First Quarter  |  | $    | 3.20  |    
|Second Quarter |  |      | 1.94  |    
|Third Quarter  |  |      | 0.94  |    
|Fourth Quarter |  |      | 0.98  |    
|               |  |     
|Fiscal 2002:   |  |      |       |    
|First Quarter  |  | $    | 5.43  |    
|Second Quarter |  |      | 14.50 |    
|Third Quarter  |  |      | 17.00 |    
|Fourth Quarter |  |      | 9.95  |    



The closing price of
the Companys stock on September 22, 2003 was $0.82.



On
September 22, 2003, the number of registered holders of record of Common Stock was 390. Approximately 2,934 shareholders hold common stock in street name.



The transfer agent for the Companys Common Stock is American Stock Transfer & Trust, 59 Maiden Lane, New York, New
York.



The Company has not paid any cash dividends on its
Common Stock and expects that for the foreseeable future it will follow a policy of retaining earnings in order to finance the continued operations of its business. Payment of dividends is within the discretion of the Companys Board of
Directors and will depend upon the earnings, capital requirements and operating and financial condition of the Company, among other factors. Further, the Companys ability to pay dividends is restricted under the terms of the revolving credit
facility and subordinated debt facility.



Recent Sales of Unregistered
Securities



The following describes sales of the
Companys securities in the last fiscal quarter without registration under the Securities Act of 1933 (the Securities Act):



During fiscal 2003, the Company authorized the issuance of up to $5.0 million of its Series H Convertible Preferred Stock (Series H
Preferred). The initial conversion price of the Series H Preferred is $1.00 per common share, and the Series H Preferred is initially convertible into ten shares of the Companys common stock upon the later of shareholder approval or
April 30, 2003. Both the conversion price and the number of common shares into which the Series H Preferred is convertible are subject to adjustment in order to prevent dilution. During fiscal 2003, the Company sold 500,000 shares of Series H
Preferred to investors for net proceeds of approximately $4.6 million and issued 2.5 million common stock warrants at an exercise price of $0.01 per share in a private placement exempt from registration under Regulation D of the Securities Act.



The Series H Preferred contained a call provision that
provided the Company with the right to repurchase any or all of the shares of Series H Preferred at a purchase price of $1.00 per share of common stock until the



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expiration of the call provision on April 30, 2003. If the Company did not call the Series H Preferred prior to the call date, the Company would be required
to issue a warrant to purchase additional shares of common stock. The Company did not exercise its call right with respect to the Series H Preferred prior to its expiration on April 30, 2003, and on May 1, 2003, issued 3.8 million warrants with a
five-year term and an exercise price of $0.01 per share to the holders of the Series H Preferred, bringing the total number of shares of Series H Preferred sold to 500,000, the total five-year common stock warrants issued to 6.3 million, and the
total proceeds to $4.6 million.



The Company did not use an
underwriter or placement agent in connection with selling the Series H Preferred, and no underwriting commissions were paid. No means of general solicitation was used in offering the securities. The securities were sold to a limited group of
accredited investors within the meaning of Rule 501(a) of Regulation D under the Securities Act of 1933 (the Securities Act) in a private placement transactions, exempt from registration under Section 4(2) of the Securities Act and Rule
506 of Regulation D thereunder.



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##### Index to Financial Statements

ITEM 6.    SELECTED FINANCIAL DATA



Set forth below is selected financial data for fiscal years 2003, 2002, 2001, 2000 and 1999:



|                                                                       |  | Year Ended                            |        
|---------------------------------------------------------------------- |  | ------------------------------------- | -------
|                                                                       |  | June 28,2003                          |        
|                                                                       |  | (In thousands, except per share data) |        
|Selected Statements of Operations Data:                                |  |                                       |        
|Revenue                                                                |  | $                                     | 307,138
|Cost of services                                                       |  |                                       | 241,136
|                                                                       |  |                                       |        
|Gross profit                                                           |  |                                       | 66,002 
|Operating expenses                                                     |  |                                       | 74,989 
|Restructuring charge                                                   |  |                                       |       
|                                                                       |  |                                       |        
|Operating income (loss)                                                |  |                                       | (8,987 
|Net interest (expense) income                                          |  |                                       | (2,971 
|Common stock warrant charge                                            |  |                                       |       
|Other (expense) income                                                 |  |                                       | (301   
|                                                                       |  |                                       |        
|Net loss                                                               |  | $                                     | (12,259
|                                                                       |  |                                       |        
|Net loss applicable to common shareholders                             |  | $                                     | (15,609
|                                                                       |  |                                       |        
|Basic and diluted loss per common share                                |  | $                                     | (3.39  
|                                                                       |  |                                       |        
|Basic and diluted weighted average number of common shares outstanding |  |                                       | 4,606  
|                                                                       | 
|                                                                       |  | As of                                 |        
|                                                                       |  | June 28, 2003                         |        
|Balance Sheet Data:                                                    |  |                                       |        
|Working capital (deficit)                                              |  | $                                     | (20,419
|Total assets                                                           |  |                                       | 106,489
|Long-term debt and capital leases                                      |  |                                       | 4,602  
|Redeemable preferred stock                                             |  |                                       |       
|Shareholders equity (deficit)                                         |  |                                       | 22,450 

---

|(1) |  | During the first quarter of fiscal 2000, the Company acquired all the common stock of Velocity Express, Inc., formerly known as Corporate Express Delivery Systems, Inc. The results
of operations of Velocity are included from the date of acquisition.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ITEM 7.    MANAGEMENTS DISCUSSION AND ANALYSIS



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



Critical Accounting Policies and Estimates



The Companys discussion and analysis of financial condition and
results of operations are based upon the Companys consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and



9



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##### Table of Contents

##### Index to Financial Statements

expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to
bad debts, goodwill and intangible assets, insurance reserves, income taxes, and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions
or conditions.



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



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



The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make payments when due or
within a reasonable period of time thereafter. Estimates are used in determining this allowance based on the Companys historical collection experience, current trends, credit policy and a percentage of accounts receivable by aging category. If
the financial condition of the Companys customers were to deteriorate, resulting in an impairment of their ability to make required payments, additional allowances may be required. In fiscal 2003, the Company hired an outside collection agency
that assisted in a detailed review of the Companys accounts receivable. As a result of the review, the Company noticed a deterioration in various customer receivable accounts and wrote off approximately $4.0 million of customer receivables.



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



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



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



The Company maintains an insurance program with insurance policies that have various deductible levels. 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, with consideration of incurred but not reported claims, as of the balance sheet date. Actual claim settlements may differ materially from these estimated reserve amounts.



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



In determining the carrying value of the Companys net deferred tax assets, the Company must assess the likelihood of sufficient future taxable
income in certain tax jurisdictions, based on estimates and assumptions in order to realize the benefit of these assets. Management evaluates whether the deferred tax assets may be realized and assesses the need for additional valuation allowances
or reduction of existing allowances. Consistent with prior years, the Company has assessed a valuation allowance against its entire deferred tax asset as of June 28, 2003.



10



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##### Table of Contents

##### Index to Financial Statements

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



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



Overview



The Company is engaged in the business of providing
same-day time-critical logistics solutions to individual consumers and businesses, primarily in the United States with limited operations in Canada.



The Company has one of the largest nationwide networks of time-critical logistics solutions in the United States and is a leading provider of scheduled,
distribution and expedited logistics services. The Companys service offerings are divided into the following categories:



| |  |  | Scheduled logistics consisting of the daily pickup and delivery of parcels with narrowly defined time schedules predetermined by the customer, for example, financial institutions
that need a wide variety of services including the pickup and delivery of non-negotiable instruments, primarily canceled checks and ATM receipts, the delivery of office supplies, and the transfer of inter-office mail and correspondence.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Distribution logistics consisting of the receipt of customer bulk shipments that are divided and sorted at major metropolitan locations and delivered into multiple routes with
defined endpoints and more broadly defined time schedules. Customers utilizing distribution logistics normally include pharmaceutical wholesalers, retailers, manufacturers or other companies who must distribute merchandise every day from a single
point of origin to many locations within a clearly defined geographic region.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expedited logistics consisting of unique and expedited point-to-point service for customers with extremely time sensitive delivery requirements. Most expedited logistics services
occur within a major metropolitan area or radius of 40 miles, and the Company usually offers one-hour, two- to four-hour and over four-hour delivery services depending on the customers time requirements. These services are typically available
24 hours a day, seven days a week. Expedited logistics services also include critical parts management and delivery for companies.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Companys customers represent a variety of industries and utilize the Companys services across multiple service offerings. Revenue
categories and percentages of total revenue are as follows:



|Commercial & office products |  | 31.8 | %
|---------------------------- |  | ---- | -
|Financial services           |  | 29.2 | %
|Healthcare                   |  | 23.7 | %
|Technology                   |  | 5.6  | %
|Energy                       |  | 5.1  | %
|Transportation & logistics   |  | 4.6  | %



11



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##### Table of Contents

##### Index to Financial Statements

Historical Results of Operations



Year ended June 28, 2003 Compared to Year Ended June 29, 2002



Revenue for the year ended June 28, 2003 decreased $35.6 million or 10.4% to $307.1 million from $342.7 million for the year
ended June 29, 2002. The decrease in revenue for the year ended June 28, 2003 is related to the divesture of a non-core air courier business operation of $4.1 million and lower volume experienced as a result of customer attrition, revenue loss
associated with pricing pressure, and volume declines from the soft economy and severe weather of approximately $50.3 million. This decline was offset by revenue growth from new customer contracts during fiscal 2003 of approximately $18.8 million.



Cost of services for the year ended June 28, 2003 was $241.1
million, a reduction of $23.7 million or 9.0% from $264.8 million for the year ended June 29, 2002. The reduction of $23.7 million consists of $3.7 million related to the divestiture of a non-core air courier business operation and $20.0 million in
reduced costs as a result of the reduced revenue described above. In fiscal 2002, the Companys results were impacted favorably by one-time gains achieved through the initial conversion to the variable cost model. As a result of the one-time
savings achieved in fiscal 2002, gross margin declined from 22.7% in the prior year to 21.5% for the year ended June 28, 2003. The Company continues to refine its variable cost strategy, which will allow the Company to continue to realize savings
related to overall driver and vehicle-related costs.



Selling
General and Administrative (SG&A) expenses for the year ended June 28, 2003 were $62.0 million or 20.2% of revenue, a reduction of $1.0 million or 1.6% as compared with $63.0 million or 18.4% of revenue for fiscal 2002. The decrease
in SG&A for fiscal 2003 resulting from integrating, through technology, all back office processes into one common platform as well as the Companys continued focus on this integration and scaling back expenses as a result of the soft
economy amounted to $6.3 million. The sale of a non-core air courier business operation eliminated $0.6 million of related costs. These reductions were offset by charges associated with the valuation of certain accounts receivable of $4.0 million
and various claims amounting to $1.9 million. In fiscal 2003, the Company hired an outside collection agency that assisted in a detailed review of the Companys accounts receivable. As a result of the review, the Company noticed a deterioration
in its various customer receivable accounts and took a charge of $4.0 million. Excluding these charges, the operational reduction in SG&A expenses from fiscal 2002 to fiscal 2003 was actually $6.9 million or 11.0%.



Occupancy charges for fiscal 2003 were $13.0 million, a reduction of $0.1
million or 0.8% from $13.1 million for the year ended June 29, 2002. The improvement for the year is due to divestitures of a non-core air courier business operation and better utilization of space in facilities currently occupied, offset by
slightly higher costs in the third and fourth quarters related to new office startups and higher utility costs related to the cold weather and higher fuel costs.



Interest expense for the year ended June 28, 2003 decreased $9.6 million to $3.0 million from $12.6 million for the year
ended June 30, 2002. Included in interest expense for the prior year are certain non-cash charges related to the conversion of the Series D Bridge Notes and interest thereon amounting to approximately $4.7 million as well as a non-cash charge of
$4.0 million related to a long-term guarantee the Company received from its largest shareholder on two letters of credit supporting the Companys revolving credit facility. Interest expense related to the Companys borrowings decreased
over the prior year primarily as a result of lower interest rates as the Company used LIBOR contracts for the majority of its borrowings under the revolving credit facility.



The net loss for the year ended June 28, 2003 was $12.3 million, compared with $10.5 million for the same period in fiscal
2002, an increase of $1.8 million or 17.1%. Exclusive of the SG&A charges of $5.9 million discussed above, the net loss for the year ended June 28, 2003 was $6.4 million.



Net loss applicable to common shareholders was $15.6 million for the year ended June 28, 2003 as compared with $20.4 million
for the year ended June 29, 2002. The difference in the current year between net



12



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##### Table of Contents

##### Index to Financial Statements

loss applicable to common shareholders and net loss relates to the beneficial conversion associated with Series H Preferred and the charge associated with
the issuance of warrants to the holders of Series H Preferred. In the prior year, the difference between net loss applicable to common shareholders and net loss was comprised of non-cash charges associated with the Companys redeemable
preferred stock.



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



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



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



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



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



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



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



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



13



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##### Table of Contents

##### Index to Financial Statements

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



Liquidity and Capital Resources



Cash flow used in operations was $7.8 million for fiscal 2003. This use of funds was comprised of cash used in operations of $7.0 million and cash used as
a result of working capital changes of $0.8 million. Cash generated from the collection of accounts receivable was approximately $0.7 million. The Company has implemented new credit policies and has increased its scrutiny of its accounts receivable
base, which has led to the reduction in accounts receivable. The remaining use of working capital of $1.5 million during fiscal 2003 was due to funding of claims (including insurance, cargo and legal) and other miscellaneous accruals.



Cash flow used as a result of investing activities was $2.2
million and consisted primarily of capital expenditures for the Companys continued implementation of the customer-driven technology solutions initiative. The Companys customer-driven technology solutions initiative is comprised of two
elements: (i) smart package tracking technology which will provide a single source of aggregated delivery information to national customers, and (ii) a customer-oriented web portal for online information access to provide package tracking,
chain-of-custody updates, electronic signature capture, and real-time proof of delivery retrieval.



Cash flow from financing activities amounted to $8.9 million during fiscal 2003. The primary source of cash was from the issuance of the Series H
Preferred, which provided net proceeds of $4.6 million. Net borrowings on the revolving credit facility provided $4.5 million, and debt financing costs used $0.6 million. The exercise of common warrants resulted in proceeds of $0.4 million.



The Company reported a loss from operations of approximately
$9.0 million for fiscal 2003 and has negative working capital of approximately $20.4 million at June 28, 2003, primarily due to the reclassification of the revolving credit facility as a current liability due to its expiration in January 2004. At
June 28, 2003, the Company was in violation of the minimum availability and interest coverage ratio covenants of the revolving credit facility and the interest coverage ratio covenant of its senior subordinated debt facility. The Company is
attempting to obtain waivers for the violations. Due to the near-term maturity of the credit facility and the Companys inability to demonstrate that it has adequate working capital to repay the facility at maturity, substantial doubt about the
Companys ability to continue as a going concern has been raised. The Company is working to extend the revolving credit and senior subordinated debt facilities. The accompanying financial statements have been prepared as if the Company will
continue as a going concern.



During fiscal 2003, an increasing
portion of the Companys trade accounts payable became past due. In an effort to restructure its trade debt, the Company proposed a Trade Creditor Plan (the Plan) to various trade creditors with balances outstanding as of August 1,
2003. The Plan includes approximately 20 percent of the Companys outstanding accounts payable. The Company expects this Plan to be approved by a majority of the creditors included in the Plan and that the Plan will become effective on or
before October 31, 2003. Approval of the plan will strengthen the Companys working capital by allowing payments to vendors to be made over one to three years. Vendors under this Plan have been continuing to supply the Company with services and
goods.



During fiscal 2004, the Company intends to continue the
execution of activities it previously initiated to further improve the operating performance of the Company and to meet its fiscal 2004 financial plan. These activities include, but are not limited to, maximizing the effectiveness of the variable
cost model, implementation of customer-driven technology solutions, continued leveraging of the consolidated back office SG&A platform, and implementation of the Trade Creditor Plan. The Company is also in the process of raising $18.5 million in
equity which will be used to support the refinancing and extension of its revolving credit and senior subordinated



14



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##### Index to Financial Statements

debt facilities, to support the Trade Creditor Plan as discussed above, and for general working capital purposes. When concluded, these activities are
expected to provide the Company with sufficient working capital to fund its fiscal 2004 operating plan.



In the long term, the Company intends to continue to fund its operations through the extension of its existing revolving credit and senior subordinated
debt facilities. The Company maintains a revolving credit facility with Fleet Capital Corporation that allows for borrowings up to the lesser of $40 million or an amount based on a defined portion of receivables. Interest is payable monthly at a
rate of prime plus 1.25% (5.25% at June 28, 2003), or, at the Companys election, at LIBOR plus 3%. As of June 28, 2003, the Company has 81% of the facility under LIBOR contracts at interest rates ranging from 4.25% to 4.375%.In
addition, the Company is required to pay a commitment fee of 0.375% on unused amounts of the total commitment, as defined in the agreement. The facility matures January 2004. The Companys accounts receivable have been pledged to secure
borrowings under the revolving note. The Company is subject to certain restrictive covenants, the more significant of which include limitations on dividends, acquisitions, new indebtedness and changes in capital structure. The Company is also
required to maintain financial covenants related to capital expenditures and maintaining of minimum availability levels. The Company also maintains a $5.0 million senior subordinated note with interest payable quarterly at 12% per annum, maturing
September 30, 2004. As of June 28, 2003, the Company was not in compliance with the minimum availability or interest coverage ratio covenants in the revolving credit facility and the interest coverage ratio covenant in the senior subordinated note.



The Company reviews the adequacy of its provision for bad
debts on a regular basis, taking into consideration customer payment trends, accounts receivable balances that have been outstanding greater than 90 days, customer payment trends in the transportation sector, and the strength of the overall economy.
In fiscal 2003, the Company hired an outside collection agency that assisted in a detailed review of the Companys accounts receivable. As a result of the review, the Company noticed a deterioration in its various customer receivable accounts
and took a charge of $4.0 million.



Contractual Obligations and Available
Commercial Commitments



As of June 28, 2003, the
Company had no outstanding purchase commitments for capital improvements. The following table presents information regarding contractual obligations by fiscal year (amounts in thousands):



|                                                                                                                                                      |  | Payments Due         
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------
|                                                                                                                                                      |  | 2004                 
|Operating leases                                                                                                                                      |  | $                    
|Long-term debt                                                                                                                                        |  |                      
|                                                                                                                                                      |  |                      
|Total                                                                                                                                                 |  | $                    
|                                                                                                                                                      |  |                      
|(1)    Net of original issue discount of $398. Amount due at maturity is $5,000.                                                                     
|                                                                                                                                                     
|The following table presents information regarding available commercial commitments and their expiration dates by fiscal year (amounts in
thousands):
|                                                                                                                                                      | 
|                                                                                                                                                      |  | Commitment Expiration
|                                                                                                                                                      |  | 2004                 
|Line of credit                                                                                                                                        |  | $                    
|                                                                                                                                                      |  |                      

---

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



15



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##### Index to Financial Statements

Off-Balance Sheet Arrangements



As of the date of this Annual Report, the Company does not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on the Companys 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 the Company is a party, under which the Company has (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.



Risk Factors



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



The Company Could Face Significant Risks of Tax Authorities Classifying
Independent Contractors as Employees.    A significant number of the Companys drivers are currently independent contractors (meaning that they are not its employees). From time to time, federal and state taxing
authorities have sought to assert that independent contractor drivers in the same-day transportation and transportation industries are employees. The Company does not pay or withhold federal or state employment taxes with respect to drivers who are
independent contractors. Although the Company believes that the independent contractors the Company utilize are not employees under existing interpretations of federal and state laws, the Company cannot guarantee that federal and state authorities
will not challenge this position or that other laws or regulations, including tax laws and laws relating to employment and workers compensation, will not change. If the IRS were to successfully assert that the Companys independent
contractors are in fact its employees, the Company would be required to pay withholding taxes, extend additional employee benefits to these persons and could be required to pay penalties or be subject to other liabilities as a result of incorrectly
classifying employees. If drivers are deemed to be employees rather than independent contractors, the Company could be required to increase their compensation since they may no longer be receiving commission-based compensation. Any of the foregoing
possibilities could increase the Companys operating costs and have a material adverse effect on its business, financial condition and results of operations.



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



The Company Needs Additional Capital to Fund its Operating Plan.    Achieving the Companys 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 SG&A platform. To date, the Company has primarily relied upon debt and
equity investments to fund these activities. If its strategy requires additional funding, the Company will continue to seek the required additional financing from lenders or through the issuance of additional equity; however, there can be no
assurance that this funding can be obtained.



The
Companys Revolving Credit Facility Matures on January 28, 2004.    If the Company cannot successfully refinance the revolving credit facility upon maturity, it will be required to raise capital through the



16



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##### Table of Contents

##### Index to Financial Statements

issuance of additional debt or equity securities or sales of some or all of its assets in order to meet the repayment obligations under the facility. There
can be no assurance that the Company will be able to raise such capital or that the terms for raising such capital would be acceptable to it.



ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



The Companys operations are not currently subject to material market risks for interest rates, foreign currency rates, or other market price risks.
However, the Company has revolving debt of $39.0 million at June 28, 2003 that is subject to variable interest rates. A one percent change in the interest rate would result in an impact of $390,000 on interest expense.



17



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##### Table of Contents

##### Index to Financial Statements

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Consolidated Financial Statements



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



18



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##### Table of Contents

##### Index to Financial Statements

Report of Independent Auditors



The Board of
Directors and Shareholders

Velocity Express Corporation and Subsidiaries



We have audited the accompanying consolidated balance sheets of Velocity Express Corporation and subsidiaries as of June 28, 2003 and June
29, 2002, and the related consolidated statements of operations, cash flows and shareholders equity (deficit) for each of the three years in the period ended June 28, 2003. Our audits also included the financial statement schedule listed in
the Index at Item15(a). These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.



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



In our opinion, the
consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Velocity Express Corporation and subsidiaries at June 28, 2003, and June 29, 2002, and the consolidated results of
their operations and their cash flows for each of the three years in the period ended June 28, 2003 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.



As discussed in Note 13 to the consolidated financial statements, the Companys recurring negative cash flows from operations and the ability to further fund
operations due to the Companys credit facilities expiring in January 2004 raise substantial doubt about its ability to continue as a going concern. Managements plans as to these matters are also described in Note 13. The financial
statements do not include any adjustments that might result from the outcome of this uncertainty.



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



LOGO

Ernst & Young LLP



Minneapolis, Minnesota

October 3,
2003



19



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##### Table of Contents

##### Index to Financial Statements

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except par value)



|                                                                                                                                                             |  | June 28,2003 |          |   | June 29,2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | -------- | - | ------------ | -
|ASSETS                                                                                                                                                       |  |              |          |   |              |  
|Current assets:                                                                                                                                              |  |              |          |   |              |  
|Cash                                                                                                                                                         |  | $            | 1,589    |   |              | $
|Accounts receivable, net of allowance of $2,300 and $2,250 at June 28, 2003 and June 29, 2002, respectively                                                  |  |              | 38,102   |   |              |  
|Accounts receivableother                                                                                                                                    |  |              | 2,681    |   |              |  
|Prepaid workers compensation and auto liability insurance                                                                                                   |  |              | 7,425    |   |              |  
|Other prepaid expenses                                                                                                                                       |  |              | 1,114    |   |              |  
|Other current assets                                                                                                                                         |  |              | 404      |   |              |  
|                                                                                                                                                             |  |              |          |   |              |  
|Total current assets                                                                                                                                         |  |              | 51,315   |   |              |  
|Property and equipment, net                                                                                                                                  |  |              | 9,810    |   |              |  
|Goodwill                                                                                                                                                     |  |              | 42,830   |   |              |  
|Deferred financing costs, net                                                                                                                                |  |              | 1,425    |   |              |  
|Other assets                                                                                                                                                 |  |              | 1,109    |   |              |  
|                                                                                                                                                             |  |              |          |   |              |  
|Total assets                                                                                                                                                 |  | $            | 106,489  |   |              | $
|                                                                                                                                                             |  |              |          |   |              |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                         |  |              |          |   |              |  
|Current liabilities:                                                                                                                                         |  |              |          |   |              |  
|Trade accounts payable                                                                                                                                       |  | $            | 19,389   |   |              | $
|Accrued insurance and claims                                                                                                                                 |  |              | 4,236    |   |              |  
|Accrued wages and benefits                                                                                                                                   |  |              | 4,896    |   |              |  
|Accrued legal and claims                                                                                                                                     |  |              | 3,730    |   |              |  
|Other accrued liabilities                                                                                                                                    |  |              | 340      |   |              |  
|Current portion of long-term debt                                                                                                                            |  |              | 39,143   |   |              |  
|                                                                                                                                                             |  |              |          |   |              |  
|Total current liabilities                                                                                                                                    |  |              | 71,734   |   |              |  
|Long-term debt                                                                                                                                               |  |              | 4,602    |   |              |  
|Accrued insurance and claims                                                                                                                                 |  |              | 7,703    |   |              |  
|Shareholders equity:                                                                                                                                        |  |              |          |   |              |  
|Preferred stock, $0.004 par value, 50,000 shares authorized 13,615 and 13,568 shares issued and outstanding at June 28, 2003 and
June 29, 2002, respectively |  |              | 64,422   |   |              |  
|Preferred warrants, 1,042 outstanding at June 28, 2003 and June 29, 2002                                                                                     |  |              | 7,600    |   |              |  
|Common stock, $0.004 par value, 150,000 shares authorized 5,388 and 3,663 shares issued and outstanding at June 28, 2003 and June
29, 2002, respectively     |  |              | 22       |   |              |  
|Stock subscription receivable                                                                                                                                |  |              | (38      | ) |              |  
|Additional paid-in-capital                                                                                                                                   |  |              | 65,882   |   |              |  
|Accumulated deficit                                                                                                                                          |  |              | (115,375 | ) |              |  
|Foreign currency translation                                                                                                                                 |  |              | (63      | ) |              |  
|                                                                                                                                                             |  |              |          |   |              |  
|Total shareholders equity                                                                                                                                   |  |              | 22,450   |   |              |  
|                                                                                                                                                             |  |              |          |   |              |  
|Total liabilities and shareholders equity                                                                                                                   |  | $            | 106,489  |   |              | $
|                                                                                                                                                             |  |              |          |   |              |  



SEE ACCOMPANYING
NOTES.



20



---

##### Table of Contents

##### Index to Financial Statements

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)



|                                                                       |  | June 28,2003 |         |   | June 29,2002 |   |         | June 30,2001 | 
|---------------------------------------------------------------------- |  | ------------ | ------- | - | ------------ | - | ------- | ------------ | 
|Revenue                                                                |  | $            | 307,138 |   |              | $ | 342,727 |              | 
|Cost of services                                                       |  |              | 241,136 |   |              |   | 264,766 |              | 
|                                                                       |  |              |         |   |              |   |         |              | 
|Gross profit                                                           |  |              | 66,002  |   |              |   | 77,961  |              | 
|Operating expenses:                                                    |  |              |         |   |              |   |         |              | 
|Occupancy                                                              |  |              | 13,019  |   |              |   | 13,071  |              | 
|Selling, general and administrative                                    |  |              | 61,970  |   |              |   | 62,969  |              | 
|Restructuring charge                                                   |  |              |        |   |              |   |        |              | 
|                                                                       |  |              |         |   |              |   |         |              | 
|Total operating expenses                                               |  |              | 74,989  |   |              |   | 76,040  |              | 
|                                                                       |  |              |         |   |              |   |         |              | 
|Income (loss) from operations                                          |  |              | (8,987  | ) |              |   | 1,921   |              | 
|Other income (expense):                                                |  |              |         |   |              |   |         |              | 
|Interest expense                                                       |  |              | (2,971  | ) |              |   | (12,577 | )            | 
|Common stock warrant charge                                            |  |              |        |   |              |   | (1,048  | )            | 
|Other                                                                  |  |              | (301    | ) |              |   | 1,225   |              | 
|                                                                       |  |              |         |   |              |   |         |              | 
|Net loss                                                               |  | $            | (12,259 | ) |              | $ | (10,479 | )            | 
|                                                                       |  |              |         |   |              |   |         |              | 
|Net loss applicable to common shareholders                             |  | $            | (15,609 | ) |              | $ | (20,357 | )            | 
|                                                                       |  |              |         |   |              |   |         |              | 
|Basic and diluted net loss per share                                   |  | $            | (3.39   | ) |              | $ | (5.82   | )            | 
|                                                                       |  |              |         |   |              |   |         |              | 
|Basic and diluted weighted average number of common shares outstanding |  |              | 4,606   |   |              |   | 3,500   |              | 
|                                                                       |  |              |         |   |              |   |         |              | 





SEE ACCOMPANYING NOTES.



21



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##### Table of Contents

##### Index to Financial Statements

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)

(Amounts in thousands)



|                                                                                                 |  | Series BPreferred Stock |  | Series CPreferred Stock |        | Series DPreferred Stock |       |        | Series FPreferred Stock |        |  | Series GPreferred Stock |       
|------------------------------------------------------------------------------------------------ |  | ----------------------- |  | ----------------------- | ------ | ----------------------- | ----- | ------ | ----------------------- | ------ |  | ----------------------- | ------
|                                                                                                 |  | Shares                  |  | Amount                  |        | Shares                  |       | Amount |                         | Shares |  |                         | Amount
|Balance at July 1, 2000                                                                          |  |                        |  | $                       |       |                         |      |        | $                       |       |  |                        |       
|Value of preferred stock conversion feature                                                      |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Accretion of Series B Redeemable Preferred Stock to its redemption value                         |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Adjustments to Series B redeemable preferred stock and Series B and C warrants                   |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Stock options exercised                                                                          |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Warrants exercised                                                                               |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Common Stock warrant                                                                             |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Common Stock warrants issued for services rendered                                               |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Issuance of common stock as litigation settlement                                                |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Net loss                                                                                         |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Foreign currency translation                                                                     |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|                                                                                                 |  |                         |  |                         |        |                         |       |        |                         |       
|Comprehensive loss                                                                               |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|                                                                                                 |  |                         |  |                         |        |                         |       |        |                         |        |  |                         |       
|Balance at June 30, 2001                                                                         |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Beneficial conversion of Bridge Notes                                                            |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Beneficial conversion of Subscription notes                                                      |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Value of Common Warrants issued in connection with sale of Series F Preferred                    |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Accretion of Series B Redeemable Preferred Stock to its redemption value                         |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Accretion of Series D Redeemable Preferred Stock to its redemption value                         |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Adjustments to Series C and D warrants to fair value                                             |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Reclassification of Preferred instruments to Shareholders' Equity after redemption right waivers |  | 2,807                   |  |                         | 24,304 |                         | 2,000 |        |                         | 13,600 |  | 1,895                   |       
|Payments against stock subscription receivable                                                   |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Common Stock warrants issued for services rendered                                               |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Options issued for services rendered                                                             |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Stock option exercises                                                                           |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Warrant exercises                                                                                |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Issuance of Series G Convertible Preferred Stock                                                 |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Offering costs                                                                                   |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Conversion of Series D to Common Stock                                                           |  |                        |  |                         |       |                         |      |        |                         |       |  | (65                     | )     
|Conversion of Series F to Common Stock                                                           |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Net loss                                                                                         |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|                                                                                                 |  |                         |  |                         |        |                         |       |        |                         |       
|Foreign currency translation                                                                     |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Comprehensive loss                                                                               |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|                                                                                                 |  |                         |  |                         |        |                         |       |        |                         |        |  |                         |       
|Balance at June 29, 2002                                                                         |  | 2,807                   |  |                         | 24,304 |                         | 2,000 |        |                         | 13,600 |  | 1,830                   |       
|Payments against stock subscription receivable                                                   |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Stock option expense                                                                             |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Common Stock warrants issued for services rendered                                               |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Warrant exercises                                                                                |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Offering costs                                                                                   |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Issuance of Series H Convertible Preferred Stock                                                 |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Value of Common Warrants issued in connection with sale of Series H Preferred                    |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Beneficial conversion of Series H Preferred Stock                                                |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Value of Common Warrants issued in connection with sale of Series H Preferred                    |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Conversion of Series D to Common Stock                                                           |  |                        |  |                         |       |                         |      |        |                         |       |  | (313                    | )     
|Conversion of Series F to Common Stock                                                           |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Net loss                                                                                         |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|Foreign currency translation                                                                     |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|                                                                                                 |  |                         |  |                         |        |                         |       |        |                         |       
|Comprehensive loss                                                                               |  |                        |  |                         |       |                         |      |        |                         |       |  |                        |       
|                                                                                                 |  |                         |  |                         |        |                         |       |        |                         |        |  |                         |       
|Balance at June 28, 2003                                                                         |  | 2,807                   |  | $                       | 24,304 |                         | 2,000 |        | $                       | 13,600 |  | 1,517                   |       
|                                                                                                 |  |                         |  |                         |        |                         |       |        |                         |        |  |                         |       

SEE ACCOMPANYING NOTES.



22



---

##### Table of Contents

##### Index to Financial Statements

|Series HPreferred Stock |  |        | Preferred StockWarrants |   | Common Stock |       | StockSubscription Receivable |   |        | AdditionalPaid-in Capital |        | Accumulated Deficit |   |    | ForeignCurrency Translation |   |     | Total | 
|----------------------- |  | ------ | ----------------------- | - | ------------ | ----- | ---------------------------- | - | ------ | ------------------------- | ------ | ------------------- | - | -- | --------------------------- | - | --- | ----- | 
|Shares                  |  | Amount |                         |   | Shares       |       | Amount                       |   | Shares |                           | Amount |                     |   |    |                             |  
|                       |  | $      |                        |   |              |      |                              | $ |       |                           | 3,280  |                     | $ | 13 |                             | $ |    |       | 
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                        |  |        |                         |   |              |       |                              |   |        |                          
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                        |  |        |                         |   |              |       |                              |   |        |                          
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                       |  |        |                        |   |              |      |                              |   |       |                           | 7      |                     |   |   |                             |   |    |       | 
|                       |  |        |                        |   |              |      |                              |   |       |                           | 22     |                     |   |   |                             |   |    |       | 
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                        |  |        |                         |   |              |       |                              |   |        |                          
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                        |  |        |                         |   |              |       |                              |   |        |                          
|                       |  |        |                        |   |              |      |                              |   |       |                           | 120    |                     |   | 1  |                             |   |    |       | 
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                        |  |        |                         |   |              |       |                              |   |        |                           |        |                     |   |    |                             |   |     |       | 
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                        |  |        |                         |   |              |       |                              |   |        |                           |        |                     |   |    |                             |   |     |       | 
|                       |  |        |                        |   |              |      |                              |   |       |                           | 3,429  |                     |   | 14 |                             |   |    |       | 
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                        |  |        |                         |   |              |       |                              |   |        |                          
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                        |  |        |                         |   |              |       |                              |   |        |                          
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                        |  |        |                         |   |              |       |                              |   |        |                          
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                        |  |        |                         |   |              |       |                              |   |        |                          
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                        |  |        |                         |   |              |       |                              |   |        |                          
|                       |  |        |                        |   |              | 1,042 |                              |   | 7,600  |                           |       |                     |   |   |                             |   | (90 | )     | 
|                        |  |        |                         |   |              |       |                              |   |        |                          
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   | 72  |       | 
|                        |  |        |                         |   |              |       |                              |   |        |                          
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                       |  |        |                        |   |              |      |                              |   |       |                           | 54     |                     |   |   |                             |   |    |       | 
|                       |  |        |                        |   |              |      |                              |   |       |                           | 2      |                     |   |   |                             |   |    |       | 
|                        |  |        |                         |   |              |       |                              |   |        |                          
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   | (8  | )     | 
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                       |  |        |                        |   |              |      |                              |   |       |                           | 153    |                     |   | 1  |                             |   |    |       | 
|                       |  |        |                        |   |              |      |                              |   |       |                           | 25     |                     |   |   |                             |   |    |       | 
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                        |  |        |                         |   |              |       |                              |   |        |                           |        |                     |   |    |                             |   |     |       | 
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                        |  |        |                         |   |              |       |                              |   |        |                           |        |                     |   |    |                             |   |     |       | 
|                       |  |        |                        |   |              | 1,042 |                              |   | 7,600  |                           | 3,663  |                     |   | 15 |                             |   | (26 | )     | 
|                        |  |        |                         |   |              |       |                              |   |        |                          
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   | 18  |       | 
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                        |  |        |                         |   |              |       |                              |   |        |                          
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                       |  |        |                        |   |              |      |                              |   |       |                           | 200    |                     |   | 1  |                             |   |    |       | 
|                       |  |        | (386                    | ) |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                        |  |        |                         |   |              |       |                              |   |        |                          
|500                     |  |        | 5,000                   |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   | (30 | )     | 
|                        |  |        |                         |   |              |       |                              |   |        |                          
|                       |  |        | (1,505                  | ) |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                        |  |        |                         |   |              |       |                              |   |        |                          
|                       |  |        | 875                     |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                        |  |        |                         |   |              |       |                              |   |        |                          
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                       |  |        |                        |   |              |      |                              |   |       |                           | 820    |                     |   | 4  |                             |   |    |       | 
|                       |  |        |                        |   |              |      |                              |   |       |                           | 705    |                     |   | 2  |                             |   |    |       | 
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                        |  |        |                         |   |              |       |                              |   |        |                           |        |                     |   |    |                             |   |     |       | 
|                       |  |        |                        |   |              |      |                              |   |       |                           |       |                     |   |   |                             |   |    |       | 
|                        |  |        |                         |   |              |       |                              |   |        |                           |        |                     |   |    |                             |   |     |       | 
|500                     |  | $      | 3,984                   |   |              | 1,042 |                              | $ | 7,600  |                           | 5,388  |                     | $ | 22 |                             | $ | (38 | )     | 
|                        |  |        |                         |   |              |       |                              |   |        |                           |        |                     |   |    |                             |   |     |       | 







23



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##### Table of Contents

##### Index to Financial Statements

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)



|                                                                                  |  | Year ended   |        
|--------------------------------------------------------------------------------- |  | ------------ | -------
|                                                                                  |  | June 28,2003 |        
|OPERATING ACTIVITIES                                                              |  |              |        
|Net loss                                                                          |  | $            | (12,259
|Adjustments to reconcile net loss to net cash flows used in operating activities: |  |              |        
|Depreciation                                                                      |  |              | 3,608  
|Amortization                                                                      |  |              | 988    
|Equity instruments issued in lieu of payment for services received                |  |              | 78     
|Stock option expense                                                              |  |              | 239    
|Non-cash interest expense                                                         |  |              | 342    
|Other                                                                             |  |              | 26     
|Gain on sale of assets                                                            |  |              |       
|Gain on retirement of equipment                                                   |  |              | (11    
|Non-cash portion of merger and restructuring charge                               |  |              |       
|Change in operating assets and liabilities:                                       |  |              |        
|Accounts receivable                                                               |  |              | 714    
|Other current assets                                                              |  |              | 5,070  
|Other assets                                                                      |  |              | (146   
|Accounts payable                                                                  |  |              | 258    
|Accrued liabilities                                                               |  |              | (6,706 
|                                                                                  |  |              |        
|Cash used in operating activities                                                 |  |              | (7,799 
|INVESTING ACTIVITIES                                                              |  |              |        
|Proceeds from sale of assets                                                      |  |              | 11     
|Purchases of property and equipment                                               |  |              | (2,474 
|Notes receivable                                                                  |  |              |       
|Other                                                                             |  |              | 221    
|                                                                                  |  |              |        
|Cash used in investing activities                                                 |  |              | (2,242 
|FINANCING ACTIVITIES                                                              |  |              |        
|Borrowings under revolving credit agreement, net                                  |  |              | 4,473  
|Payments on acquisition notes                                                     |  |              |       
|Proceeds from issuance of preferred stock, net                                    |  |              | 4,615  
|Proceeds from notes payable and long-term debt                                    |  |              |       
|Proceeds from issuance of common stock, net                                       |  |              | 400    
|Debt financing costs                                                              |  |              | (562   
|                                                                                  |  |              |        
|Cash provided by financing activities                                             |  |              | 8,926  
|                                                                                  |  |              |        
|Net decrease in cash and cash equivalents                                         |  |              | (1,115 
|                                                                                  |  |              |        
|Cash and cash equivalents, beginning of year                                      |  |              | 2,704  
|                                                                                  |  |              |        
|Cash and cash equivalents, end of year                                            |  | $            | 1,589  
|                                                                                  |  |              |        
|Supplemental Disclosures of Cash Flow Information:                                |  |              |        
|Cash paid during period for interest                                              |  | $            | 2,478  
|Noncash Investing and Financing Activities:                                       |  |              |        
|Conversion of Series D Preferred to common stock                                  |  | $            | 2,500  
|Value of Common Warrants issued in connection with sale of Series H Preferred     |  |              | 3,980  
|Conversion of Series F Preferred to common stock                                  |  |              | 1,540  
|Conversion of Bridge Notes to Series D Preferred                                  |  |              |       
|Conversion of Subscription Notes to Series D preferred                            |  |              |       
|Common stock issued as litigation settlement                                      |  |              |       



SEE ACCOMPANYING
NOTES.



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##### Index to Financial Statements

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements



---



1.    DESCRIPTION OF BUSINESS



Velocity Express Corporation (formerly known as United Shipping &
Technology, Inc.) and its subsidiaries (collectively, the Company) are engaged in the business of providing same-day 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 and thus additional disclosures under Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures About Segments of an
Enterprise and Related Information, are not required.



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



2.    SIGNIFICANT
ACCOUNTING POLICIES



Basis of Presentation



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



Fiscal Year



The Companys fiscal year ends the Saturday closest to June 30th. Each quarter consists of a 13-week period ending on a Saturday. In fiscal years consisting of 53 weeks, the final quarter will consist of 14 weeks. Fiscal 2003, 2002 and 2001 each consisted of 52
weeks.



Use of Estimates



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



Revenue Recognition



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



Concentrations of Credit Risk



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



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##### Index to Financial Statements

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements (continued)



---



its customers and generally does not require collateral on its accounts receivable. An allowance for doubtful accounts is reviewed periodically based on
managements evaluation of collectibility, historical experiences, and other economic factors.



Cash Equivalents



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



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 40 years or the life of the lease and are three to seven years for furniture, equipment and vehicles.



Long-Lived Assets



The Company reviews long-lived 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.



Goodwill



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



Deferred Financing Costs



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



Income Taxes



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



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##### Index to Financial Statements

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements (continued)



---



Foreign Currency Translation and Transactions



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



Comprehensive Income



The Company follows the provisions of SFAS No. 130, Reporting Comprehensive Income, which establishes standards for reporting and display of
comprehensive income and its components. Comprehensive income (loss) is net earnings (loss) plus certain other items that are recorded directly to shareholders equity. For the Company, comprehensive income represents net income adjusted for
foreign currency translation adjustments. Comprehensive income is disclosed in the consolidated statement of shareholders equity.



Stock Plans and Awards



The Company follows Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for its employee stock
options. Pro forma net earnings and earnings per share are presented in Note 8 as if the Company had adopted SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure.



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



|                                                                                                               |  | 2003                                    |         |   | 2002 |   |         | 2001 | 
|-------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ------- | - | ---- | - | ------- | ---- | 
|                                                                                                               |  | (In thousands, except pershare amounts) |        
|Net loss applicable to common shareholders, as reported                                                        |  | $                                       | (15,609 | ) |      | $ | (20,357 | )    | 
|Add: Stock-based employee compensation expense included in reported net loss applicable to common shareholders |  |                                         | 127     |   |      |   |        |      | 
|Deduct: Stock-based compensation expense determined under fair value method for all awards                     |  |                                         | (1,696  | ) |      |   | (409    | )    | 
|                                                                                                               |  |                                         |         |   |      |   |         |      | 
|Pro forma                                                                                                      |  | $                                       | (17,178 | ) |      | $ | (20,766 | )    | 
|                                                                                                               |  |                                         |         |   |      |   |         |      | 
|Basic and diluted loss per common share:                                                                       |  |                                         |         |   |      |   |         |      | 
|As reported                                                                                                    |  | $                                       | (3.39   | ) |      | $ | (5.82   | )    | 
|                                                                                                               |  |                                         |         |   |      |   |         |      | 
|Pro forma                                                                                                      |  | $                                       | (3.73   | ) |      | $ | (5.93   | )    | 
|                                                                                                               |  |                                         |         |   |      |   |         |      | 



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##### Index to Financial Statements

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements (continued)



---



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



|                          |  | 2003 |   |  | 2002 |   |  | 2001 |  
|------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|Expected dividend yield   |  | 0    | % |  | 0    | % |  | 0    | %
|Expected stock volatility |  | 118  | % |  | 115  | % |  | 121  | %
|Risk-free interest rate   |  | 2.8  | % |  | 2.5  | % |  | 4.0  | %
|Expected life of options  |  | 3    |   |  | 3    |   |  | 5    |  





The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of highly subjective assumptions. Because the Companys employee stock options have characteristics significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the existing models may not necessarily provide a reliable single measure of the fair value of its employee stock options. Under
the forgoing assumptions, the weighted-average fair value of each option granted during fiscal year 2003, 2002 and 2001 was $1.32, $3.95, and $7.95, respectively.



Reclassifications



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



New Accounting Pronouncements



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



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



The Company
adopted FASB Interpretation (FIN) No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, in fiscal 2003. FIN No. 45 provides guidance on the recognition and
disclosure of certain types of guarantees, including product warranties. The adoption of this standard did not have a material impact on the Companys consolidated financial statements.



In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities(FIN No. 46), which requires the consolidation of variable interest entities. FIN No. 46 is applicable to financial statements issued by the Company beginning in fiscal 2004. However, disclosures are required if the
Company expects to consolidate any variable interest entities. The Company does not expect its consolidated financial results to be impacted by this standard.



28



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##### Index to Financial Statements

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements (continued)



---



3.    ACQUISITION



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



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



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



4.    RESTRUCTURING



In connection with the acquisition of Velocity, management implemented a plan to involuntarily terminate approximately 100 employees and to consolidate
certain facilities. Approximately $3.9 million in anticipated costs relating to such items was included in the acquisition cost allocation. As of June 28, 2003, approximately $3.9 million in costs (primarily related to severance payments and lease
terminations) has been charged against the reserve and no amounts related to such plan have been included in the determination of net loss for the year.



In fiscal 2001, the Company took a restructuring charge of $7.1 million consisting of $2.2 million related to severance costs associated with a workforce
reduction of 234 full-time employees, $3.3 million for rental costs associated with the termination of building leases and location rationalization costs, and $1.6 million for the write-off of equipment. As of June 28, 2003, $7.1 million in costs
have been charged against the reserve.



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##### Index to Financial Statements

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements (continued)



---



5.    PROPERTY AND EQUIPMENT



Property and equipment consist of the following:



|                                     |  | June 28,2003           |        |   | June 29,2002 |  
|------------------------------------ |  | ---------------------- | ------ | - | ------------ | -
|                                     |  | (Amounts in thousands) |       
|Land                                 |  | $                      | 194    |   |              | $
|Buildings and leasehold improvements |  |                        | 1,395  |   |              |  
|Furniture, equipment and vehicles    |  |                        | 15,765 |   |              |  
|                                     |  |                        |        |   |              |  
|                                     |  |                        | 17,354 |   |              |  
|Less accumulated depreciation        |  |                        | (7,544 | ) |              |  
|                                     |  |                        |        |   |              |  
|Total                                |  | $                      | 9,810  |   |              | $
|                                     |  |                        |        |   |              |  



6.    GOODWILL



Goodwill represents the excess of the purchase price over
the estimated fair value of the net tangible assets acquired in business combinations. Management periodically reviews goodwill for impairment and assesses whether significant events or changes in business circumstances indicate that the carrying
value of goodwill may not be recoverable. An impairment loss would be recorded in the period such determination is made. Accumulated amortization at June 28, 2003 and June 29, 2002 was $9.4 million. Effective with fiscal 2002, the Company has
adopted SFAS No. 142, Goodwill and Other Intangible Assets and therefore no longer amortizes goodwill. Since the Companys adoption of SFAS No. 142, there have been no changes to recorded goodwill.



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



|                                                        |  | June 28,2003                                    |         |   | June 29,2002 |   |         | June 30,2001 | 
|------------------------------------------------------- |  | ----------------------------------------------- | ------- | - | ------------ | - | ------- | ------------ | 
|                                                        |  | (Amounts in thousands, except pershare amounts) |        
|Net loss applicable to common shareholders, as reported |  | $                                               | (15,609 | ) |              | $ | (20,357 | )            | 
|Add back goodwill amortization                          |  |                                                 |        |   |              |   |        |              | 
|                                                        |  |                                                 |         |   |              |   |         |              | 
|Adjusted net loss applicable to common shareholders     |  | $                                               | (15,609 | ) |              | $ | (20,357 | )            | 
|                                                        |  |                                                 |         |   |              |   |         |              | 
|Basic and diluted net loss per share:                   |  |                                                 |         |   |              |   |         |              | 
|Net loss applicable to common shareholders, as reported |  | $                                               | (3.39   | ) |              | $ | (5.82   | )            | 
|Effect of goodwill amortization                         |  |                                                 |        |   |              |   |        |              | 
|                                                        |  |                                                 |         |   |              |   |         |              | 
|Adjusted net loss applicable to common shareholders     |  | $                                               | (3.39   | ) |              | $ | (5.82   | )            | 
|                                                        |  |                                                 |         |   |              |   |         |              | 



7.    LONG-TERM
DEBT



Long-term debt consists of the following:



|                         |  | June 28,2003          |         |   | June 29,2002 |  
|------------------------ |  | --------------------- | ------- | - | ------------ | -
|                         |  | (Amounts inthousands) |        
|Revolving note           |  | $                     | 38,961  |   |              | $
|Senior subordinated note |  |                       | 4,602   |   |              |  
|Other                    |  |                       | 182     |   |              |  
|                         |  |                       |         |   |              |  
|                         |  |                       | 43,745  |   |              |  
|Less current maturities  |  |                       | (39,143 | ) |              |  
|                         |  |                       |         |   |              |  
|Total                    |  | $                     | 4,602   |   |              | $
|                         |  |                       |         |   |              |  



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##### Index to Financial Statements

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements (continued)



---



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



|Fiscal year: |  |   |       
|------------ |  | - | ------
|2004         |  | $ | 39,143
|2005         |  |   | 4,602 
|             |  |   |       
|             |  | $ | 43,745
|             |  |   |       



On January 25, 2002,
the Company entered into a new revolving credit facility with Fleet Capital Corporation, which replaced the credit facility with GE Capital. Borrowings under the revolving note are limited to the lesser of $40 million or an amount based on a defined
portion of receivables. Interest is payable monthly at a rate of prime plus 1.25% (5.25% at June 28, 2003), or, at the Companys election, at LIBOR plus 3%. Further, the Company has the ability to lower these margins by 0.5% over the remainder
of the agreement provided it meets certain conditions as defined in the agreement. As of June 28, 2003, the Company has 81% of the facility under LIBOR contracts at interest rates ranging from 4.25% to 4.375%.In addition, the Company is
required to pay a commitment fee of 0.375% on unused amounts of the total commitment, as defined in the agreement. The facility matures January 2004.



The Companys accounts receivable have been pledged to secure borrowings under the revolving note. The Company is subject to certain restrictive
covenants, the more significant of which include limitations on dividends, acquisitions, new indebtedness in excess of $0.5 million and changes in capital structure. The Company is also required to maintain financial covenants related to capital
expenditures and maintaining of minimum availability levels. As of June 28, 2003, the Company was not in compliance with the minimum availability or interest coverage ratio covenants in the credit facility.



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



The senior subordinated note has interest payable quarterly at 12% per annum
and is due September 30, 2004. The note is subordinate to the revolving note. The initial carrying value of the senior subordinated note was reduced by $1.7 million for the fair value of the common stock warrant issued to the senior subordinated
lender. The unamortized discount was $0.4 million at June 28, 2003, and is being amortized over the remaining term of the note. The warrant has an exercise price of $6.71 per share and entitles the holder to acquire, in whole or in part, 674,540
shares of the Companys common stock, as adjusted to reflect certain anti-dilution rights as defined in the warrant purchase agreement. As of June 28, 2003, the Company was not in compliance with the interest coverage ratio covenant in the
senior subordinated note.



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VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements (continued)



---



8.    SHAREHOLDERS EQUITY



At June 28, 2003, the following shares of the Companys $0.004 par
value stock were authorized, issued and outstanding:



|                                     |  | AuthorizedShares |  | Issued andOutstanding atJune 28, 2003
|------------------------------------ |  | ---------------- |  | -------------------------------------
|Series H Convertible Preferred Stock |  | 500,000          |  | 500,000                              
|Series G Convertible Preferred Stock |  | 9,000,000        |  | 5,865,331                            
|Series F Convertible Preferred Stock |  | 1,200,000        |  | 926,442                              
|Series D Convertible Preferred Stock |  | 3,000,000        |  | 1,517,444                            
|Series C Convertible Preferred Stock |  | 5,000,000        |  | 2,000,000                            
|Series B Convertible Preferred Stock |  | 10,000,000       |  | 2,806,797                            
|Preferred stockundesignated         |  | 21,300,000       |  |                                     
|Common Stock                         |  | 150,000,000      |  | 5,388,184                            



Redemption Rights Waivers



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



Series H Convertible Preferred Stock



The Company while in the process of raising subordinated debt, authorized the issuance of up to $5.0 million of its Series H Convertible Preferred Stock
(Series H Preferred). The initial conversion price of the Series H Preferred was $1.00 per common share, and is convertible into the Companys common stock upon the later of shareholder approval or April 30, 2003. Both the
conversion price and the number of common shares into which the Series H Preferred is convertible are subject to adjustment in order to prevent dilution.



The Company sold 500,000 shares of Series H Preferred to investors for net proceeds of approximately $4.6 million. In connection with the sales of Series
H Preferred, the Company issued five-year warrants to purchase 2.5 million shares of common stock at an exercise price of $0.01 per share. The proceeds from the Series H Preferred were allocated based upon their relative fair values between the
warrants and the Series H Preferred resulting in an allocation of $1.5 million from Series H Preferred to additional paid in capital. The Series H Preferred was deemed to have contained a beneficial conversion amounting to $0.9 million which was
recognized as a deemed dividend to preferred shareholders.



The
Series H Preferred contained a call provision that provided the Company with the right to repurchase any or all of the shares of Series H Preferred at a purchase price of $1.00 per share of common stock until the expiration of the call provision on
April 30, 2003. If the Company did not call the Series H Preferred prior to the call date, the Company would be required to issue a warrant to purchase additional shares of common stock. The Company did not exercise its call right with respect to
the Series H Preferred prior to its expiration on April 30, 2003, and on May 1, 2003 issued 3.8 million warrants with a five-year term and an exercise price of $0.01 per share to the holders of the Series H Preferred. The fair value of these
warrants determined on the date of grant amounted to approximately $2.5 million and has been accounted for on the date of their issuance as a deemed dividend to the preferred shareholders which increased the accumulated deficit and additional paid
in capital.



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##### Index to Financial Statements

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements (continued)



---



Series G Convertible Preferred Stock



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



Series F Convertible Preferred Stock



During fiscal 2002, the Company issued 1,072,752 shares of Series F Preferred for net proceeds of approximately $11.3 million. The initial conversion
price of the Series F Preferred was $2.75, and, at the time of issuance, each share of Series F Preferred was convertible into four shares of the Companys common stock. Both the conversion price and the number of common shares into which the
Series F is convertible are subject to adjustment in order to prevent dilution. The Company also issued warrants to purchase 360,128 shares of common stock with an exercise price of $3.60 per share in connection with these sales. The warrants expire
between July and November of 2006. The fair value of the warrants as determined by an outside independent appraiser was determined to be approximately $0.3 million and was charged to accumulated deficit. At June 28, 2003, 926,442 shares of Series F
Preferred are outstanding.



Series D Convertible Preferred Stock



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



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



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



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



33



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##### Index to Financial Statements

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements (continued)



---



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



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



Series C Convertible Preferred Stock



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



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



Series B Convertible Preferred Stock



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



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



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



| |  |  | A warrant to purchase up to an aggregate of 452,901 shares of Series B Preferred at an exercise price of $9.00 per share, subject to adjustment in order to prevent
dilution. The fair value of this preferred
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Notes to Consolidated Financial Statements (continued)



---



| | warrant as determined by an outside independent appraiser was determined to be approximately $0.6 million at the date of shareholder approval. In exchange
for the Series C Warrants, the Company subsequently canceled this warrant.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A warrant to purchase an aggregate of 85,000 shares of the Companys common stock. The warrant becomes exercisable on a pro rata basis in the event and to the extent that any
of the 600,000 options granted under the Companys 2000 Stock Option Plan are exercised. The exercise price is equal to the lowest exercise price of the initially approved 2000 Plan options, subject to adjustment to prevent dilution. The fair
value of this warrant as determined by an outside independent appraiser was determined to be approximately $0.4 million at the date of shareholder approval. The warrant expires on May 31, 2004.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



Preferred Warrants



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



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



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



Common stock



During fiscal 2003, the Company issued 705,436 shares of common stock as a result of shareholder conversions of Series F Preferred and 820,145 shares of
common stock as a result of shareholder conversions of Series D Preferred.



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##### Index to Financial Statements

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements (continued)



---



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



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



Stock Options and Warrants



The Company currently sponsors the 1995 Stock Option
Plan, the 2000 Stock Option Plan and the 1996 Director Stock Option Plan. These plans provide for the issuance of up to 2,473,469 shares. Options may be granted to employees, directors and consultants. With the exception of the 2000 Stock Option
Plan, option prices are not less than the fair market value of the Companys common stock on the date of grant. In the case of the 2000 Stock Option Plan, non-statutory options may be granted at not less than 85% of the fair market value of the
Companys common stock on the date of grant. The majority of the options vest annually in equal amounts over a three-year period. The 2000 Stock Option Plan also allows for the issuance of performance shares or restricted stock. No restricted
stock or performance shares are outstanding as of June 28, 2003, June 29, 2002 or June 30, 2001.



The Company has 857,828 shares available for grants under the option plans at June 28, 2003.



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##### Index to Financial Statements

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements (continued)



---



A summary of the status of the Companys stock option plans as of June 28, 2003 and activity
during the three fiscal years then ended is presented below:



|                         |  | Options OutstandingUnder the Plan |   |  | Weighted-AverageExercise Price
|------------------------ |  | --------------------------------- | - |  | ------------------------------
|                         |  | ISO                               |   |  | Non-ISO                       
|Balance at July 1, 2000  |  | 440,302                           |   |  | 432,585                       
|Granted                  |  | 127,505                           |   |  | 39,000                        
|Exercised                |  | (7,193                            | ) |  |                              
|Forfeited                |  | (199,627                          | ) |  |                              
|                         |  |                                   |   |  |                               
|Balance at June 30, 2001 |  | 360,987                           |   |  | 471,585                       
|Granted                  |  | 497,849                           |   |  | 220,032                       
|Exercised                |  | (28,637                           | ) |  | (25,001                       
|Forfeited                |  | (217,605                          | ) |  | (111,000                      
|                         |  |                                   |   |  |                               
|Balance at June 29, 2002 |  | 612,594                           |   |  | 555,616                       
|Granted                  |  | 480,750                           |   |  |                              
|Forfeited                |  | (184,050                          | ) |  | (43,000                       
|                         |  |                                   |   |  |                               
|Balance at June 28, 2003 |  | 909,294                           |   |  | 512,616                       
|                         |  |                                   |   |  |                               



|Options Outstanding    |  | Options Exercisable
|---------------------- |  | -------------------
|Range ofExercisePrices |  | Number             
|$1.88    4.60         |  | 505,052            
|5.15    9.85          |  | 654,921            
|10.00  17.50          |  | 53,832             
|22.50  34.38          |  | 65,151             
|54.38                  |  | 142,954            
|                       |  |                    
|                       |  | 1,421,910          
|                       |  |                    



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 will be recognized as expense in
the statement of operations over the three-year vesting period of the options. Expense recognized in fiscal 2003 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 is being recognized in the statement of operations over the three-year vesting period of the options. Expense recognized
in fiscal 2003 and 2002 related to these stock options was $112,000 and $28,000, respectively.



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



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##### Index to Financial Statements

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements (continued)



---



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



A summary of the common stock warrants outstanding at June 28, 2003 is as follows:



|Common Stock Warrants Outstanding
|---------------------------------
|Range ofExercisePrices           
|$0.01    0.05                   
|1.87    3.60                    
|4.25  10.00                     
|10.75  21.25                    
|31.88  64.63                    
|                                 
|                                 
|                                 



In fiscal 2003, the
Company issued 30,000 common stock warrants at an exercise price of $3.08 per share and 10,000 common stock warrants at an exercise price of $8.25 per share to consultants in exchange for services rendered. The term of the warrants is five years.
The fair value of the warrants was approximately $78,000 and is included in compensation expense in the statement of operations.



Earnings Per Share



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



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##### Index to Financial Statements

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements (continued)



---



The following table presents a reconciliation of the numerators and denominators of basic and diluted
earnings per share for fiscal 2003, 2002 and 2001:



|                                                                                                   |  | Year Ended                                   |        
|-------------------------------------------------------------------------------------------------- |  | -------------------------------------------- | -------
|                                                                                                   |  | June 28,2003                                 |        
|                                                                                                   |  | (Amounts in thousands, except pershare data) |        
|Numerator                                                                                          |  |                                              |        
|Net loss                                                                                           |  | $                                            | (12,259
|Beneficial conversion feature                                                                      |  |                                              |       
|Adjustment of Common Warrants issued in connection with sale of Series F Preferred to market value |  |                                              |       
|Accretion of Series B Redeemable Preferred Stock to its redemption value                           |  |                                              |       
|Accretion of Series D Redeemable Preferred Stock to its redemption value                           |  |                                              |       
|Value of Common Warrants issued in connection with sale of Series H Preferred                      |  |                                              | (2,475 
|Beneficial conversion feature for Series H Preferred                                               |  |                                              | (875   
|Adjustment of Preferred Series B Warrants to market value                                          |  |                                              |       
|Adjustment of Preferred Series C Warrants to market value                                          |  |                                              |       
|Adjustment of Preferred Series D Warrants to market value                                          |  |                                              |       
|                                                                                                   |  |                                              |        
|Net loss applicable to common shareholders                                                         |  | $                                            | (15,609
|                                                                                                   |  |                                              |        
|Denominator for basic and diluted loss per share                                                   |  |                                              |        
|Weighted average shares                                                                            |  |                                              | 4,606  
|                                                                                                   |  |                                              |        
|Basic and Diluted Loss Per Share                                                                   |  | $                                            | (3.39  
|                                                                                                   |  |                                              |        



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



|                               |  | Year Ended            
|------------------------------ |  | ----------------------
|                               |  | June 28,2003          
|                               |  | (Amounts in thousands)
|Stock options                  |  | 19                    
|Common warrants                |  | 1,950                 
|Preferred warrants:            |  |                       
|Series C Convertible Preferred |  | 907                   
|Series D Convertible Preferred |  | 565                   
|Convertible preferred stock:   |  |                       
|Series B Convertible Preferred |  | 4,580                 
|Series C Convertible Preferred |  | 2,214                 
|Series D Convertible Preferred |  | 4,729                 
|Series F Convertible Preferred |  | 6,462                 
|Series G Convertible Preferred |  | 1,428                 
|Series H Convertible Preferred |  | 2,644                 
|                               |  |                       
|                               |  | 25,498                
|                               |  |                       



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VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements (continued)



---



9.    INCOME TAXES



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



|                                  |  | June 28,2003          |         |   | June 29,2002 |  
|--------------------------------- |  | --------------------- | ------- | - | ------------ | -
|                                  |  | (Amounts inthousands) |        
|Deferred tax assets:              |  |                       |         |   |              |  
|Net operating loss carry forwards |  | $                     | 38,572  |   |              | $
|Reserves, allowances and accruals |  |                       | 6,286   |   |              |  
|                                  |  |                       |         |   |              |  
|                                  |  |                       | 44,858  |   |              |  
|Deferred tax liabilities:         |  |                       | (5      | ) |              |  
|                                  |  |                       |         |   |              |  
|                                  |  |                       | 44,853  |   |              |  
|Valuation allowance               |  |                       | (44,853 | ) |              |  
|                                  |  |                       |         |   |              |  
|                                  |  | $                     |        |   |              | $
|                                  |  |                       |         |   |              |  



At June 28, 2003, the
Company had net operating loss carry forwards for income tax purposes of approximately $101.5 million, which expire 2005 through 2023. 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 $4.9 million, $5.3
million and $17.8 million in fiscal years 2003, 2002 and 2001, respectively, and resulted principally from net operating loss carry forwards.



10.    COMMITMENTS AND CONTINGENCIES



Lease Commitments



The Company leases equipment, vehicles, and buildings under non-cancelable leases. Future minimum lease commitments under non-cancelable leases as of June
28, 2003 were as follows (amounts in thousands):



|Fiscal year: |  |   |       
|------------ |  | - | ------
|2004         |  | $ | 10,124
|2005         |  |   | 7,023 
|2006         |  |   | 4,224 
|2007         |  |   | 3,160 
|2008         |  |   | 1,065 
|Thereafter   |  |   | 157   
|             |  |   |       
|             |  | $ | 25,753
|             |  |   |       



Rent expense was $15.5
million, $16.5 million and $23.1 million during the years ended June 28, 2003, June 29, 2002 and June 30, 2001, respectively.



Automobile and Workers Compensation Liabilities



The Company is partially self-insured for automobile, workers compensation and cargo claims. The Company has elected to retain a portion of expected
losses through the use of deductibles. Provisions for losses



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Notes to Consolidated Financial Statements (continued)



---



expected under these programs are recorded based upon the Companys estimates of the aggregate liability for claims incurred. These estimates include
the Companys actual experience based on information received from the Companys insurance carriers and historical assumptions of development of unpaid liabilities over time. The Company pre-funds this estimated liability on a monthly
basis based upon actuarial loss projections. As of June 28, 2003 and June 29, 2002, the Company has deposits recorded of $7.4 million and $11.9 million, respectively.



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



Litigation



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



11.    EMPLOYEE BENEFIT PLANS



The Company has defined contribution retirement plans (the
Plans) in accordance with Section 401(k) of the Internal Revenue Code. All full-time employees of the Company and its subsidiaries are eligible to participate in the Plans. Company contributions to these plans are discretionary. The
Company made no matching contributions for fiscal years 2003 or 2002, and contributed $1.2 million for fiscal year 2001.



12.    RELATED PARTY TRANSACTIONS



The Company has entered into service agreements with MCG Global, LLC and its related entities (MCG). Vincent A. Wasik, currently a shareholder
and Chairman of the Board, President and Chief Executive Officer of the Company, is an owner and principal of MCG, although he was neither a shareholder nor Chairman of the Board, President or Chief Executive Officer at the time the initial service
agreement was entered into. Under the agreements, MCG has provided services in connection with the Companys business that include the following matters: (1) management and consulting assistance with operations, debt structure, vendors and
contractual obligations; (2) negotiation and settlement of the Companys rights and obligations under the September 24, 1999 Merger Agreement under which the Company acquired Velocity; (3) assistance with all aspects of the Companys
replacement of its Senior Revolving Credit Facility held by GE Capital Corporation and mezzanine debt facility held by Bayview Capital Partners LP; and (4) services in connection with the Companys centralization of data platforms, cash and
lock-box management, consolidation of back office functions, technology initiatives and strategic planning.



In fiscal 2003, the Company issued $0.2 million of Series H Preferred as compensation for these services.



In fiscal 2002, the Company granted a total of 245,000 warrants to purchase
common stock. 200,000 of the warrants are five-year common stock warrants with an exercise price of $2.00 per share. The fair value of the warrants was determined on the date of grant using the Black-Scholes option pricing model, assuming expected



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VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements (continued)



---



volatility of 121%, a risk-free interest rate of 4%, and expected life of five years. The remaining 45,000 warrants are five-year warrants, having an
exercise price of $8.10 per share, and were priced at fair market value on the date of grant based on the closing price of the Companys common stock as quoted on the Nasdaq system. Cash and warrant-based compensation for these services
amounted to $1.8 million in fiscal 2002.



13.    GOING
CONCERN



The accompanying consolidated financial
statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred an operating loss of
approximately $9.0 million and negative cash flow from operations of approximately $7.8 million for the year ended June 28, 2003. The Companys ability to continue to fund these operating losses and its ability to grow the business depends on
its ability to obtain additional sources of funds for working capital for fiscal 2004.



In conjunction with its revolving credit facility with Fleet Capital Corporation (Fleet) and its senior subordinated debt facility, the Company is subject to certain financial covenants with which it was
not in compliance as of June 28, 2003. The Company is in discussions with Fleet and the senior subordinated lender to obtain waivers for the violations. Additionally, the Company is raising up to $18.5 million in equity to support the extension of
the Fleet and the senior subordinated debt facilities through fiscal 2005. There is no assurance that waivers can be obtained or that the existing facilities can be extended.



The Companys operating plans include 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. The Company is dependent upon achieving certain revenue and expense targets in its financial plan for fiscal
2004. The Company expects to meet its financial projections for the next fiscal year and to continue to secure additional financing from its lenders or through the issuance of additional Company equity securities; however, there can be no assurance
that such funding can be obtained.



14.    QUARTERLY
FINANCIAL INFORMATION (unaudited)



Unaudited summarized
financial data by quarter for fiscal years 2003 and 2002 is as follows (in thousands, except per share data):



|                                                    |  | Three Months Ended |       
|--------------------------------------------------- |  | ------------------ | ------
|                                                    |  | September 28,2002  |       
|Revenue                                             |  | $                  | 77,918
|Gross profit                                        |  |                    | 17,910
|Income (loss) from operations                       |  |                    | 984   
|Net income (loss) applicable to common shareholders |  |                    | 158   
|Basic net income (loss) per share                   |  | $                  | 0.04  
|                                                    |  |                    |       
|Diluted net income (loss) per share                 |  | $                  | 0.01  
|                                                    |  |                    |       

---

|(1) |  | Includes charges in the fourth quarter associated with the valuation of certain accounts receivable of $4.0 million and various claims amounting to $1.9 million.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



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Notes to Consolidated Financial Statements (continued)



---



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



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



Not applicable.



ITEM 9A.    CONTROLS AND PROCEDURES



Evaluation of disclosure controls and procedures



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



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PART III.



ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



The directors and executive officers of the Company are as follows:



|Name                 |  | Age |  | Position                                                     
|-------------------- |  | --- |  | -------------------------------------------------------------
|Vincent A. Wasik     |  | 58  |  | Chairman of the Board, President and Chief Executive Officer 
|James Brown          |  | 39  |  | Director                                                     
|Douglas Hsieh        |  | 33  |  | Director                                                     
|Alex Paluch          |  | 47  |  | Director                                                     
|Jack F. Kemp         |  | 68  |  | Director                                                     
|Richard A. Kassar    |  | 56  |  | Director                                                     
|Leslie E. Grodd      |  | 57  |  | Director                                                     
|Mark E. Ties         |  | 38  |  | Chief Financial Officer and Treasurer                        
|Wesley C. Fredenburg |  | 52  |  | General Counsel and Secretary                                
|Victor A. Serri      |  | 48  |  | Senior Vice PresidentDriver Operations of Velocity Express  
|Drew Kronick         |  | 40  |  | Senior Vice President, National Accounts & Logistics Services



Vincent A.
Wasik.    Mr. Wasik was appointed as the Companys Chairman of the Board in August 2001 and was further appointed the Companys 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.    Mr. Brown was elected to the
Companys 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.



Douglas Hsieh.    Mr. Hsieh was appointed to the
Companys Board in January 2001. Mr. Hsieh has been a Principal at TH Lee Putnam Ventures since June 1999. From January 1998 until May 1999, Mr. Hsieh was at GE Equity, focusing on Internet and media-related investments. From 1994 until
December 1997, Mr. Hsieh was employed at Lehman Brothers as Assistant Vice President of Strategic Planning. Before that, he was a Financial Analyst with Dillon Read, Inc.



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



Jack F. Kemp.Mr. Kemp has served as a director
since November 2001. Mr. Kemp has been Co-Director of Empower America from 1993 to the present. Mr. Kemp served as a member of Congress for 18 years and as Secretary of Housing and Urban Development from February 1989 until January 1993. In 1996,
Mr. Kemp was the Republican candidate for Vice President of the United States. Mr. Kemp also serves as a director of Oracle Corporation, Hawk Corporation, and IDT Corporation.



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Richard A. Kassar.Mr. Richard Kassar was appointed to the Board in August
2002. Mr. Kassar has been employed as Senior Vice President and Chief Financial Officer of The Meow Mix Company since February 2002. From May 2001 to January 2002, he was self-employed as a consultant to venture capital firms, advising them
primarily on the acquisition of consumer brands. From December 1999 to May 2001, Mr. Kassar was employed as Co-President and Chief Financial Officer of Global Household Brands. From 1986 to December 1999, he was employed by Chock Full ONuts in
various positions, and most recently served as Senior Vice President and Chief Operating Officer.



Leslie E. Grodd.Mr. Leslie Grodd was appointed to the Board in January 2003. A Certified Public Accountant, Mr. Grodd has
been a Principal in the law firm of Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut since 1974. Prior to forming the law firm, 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. Mr. Grodd holds a Master of Business Administration
Degree from New York University, a Bachelor of Arts Degree from the University of Vermont and a Juris Doctor Degree from the St. Johns University School of Law.



Mark E. Ties.    Mr. Ties currently serves as the Companys Chief Financial Officer
and Treasurer. Mr. Ties joined the Company in April 2000 as its Vice President of Finance and served in that capacity until his appointment to CFO in January 2001. Mr. Ties has more than 13 years of financial experience, eight years of which have
been at the executive level in a number of companies in varied industries. Since 1998 and prior to joining the Company, Mr. Ties was a Manager and Senior Manager for Ernst & Young LLP in its entrepreneurial services and mergers and acquisitions
departments. From 1994 to 1998 Mr. Ties was the Chief Financial Officer of Progressive Beauty Enterprises, Inc., a regional distribution company. Prior to 1994 Mr. Ties was the corporate controller of MEI Salons, Inc. and prior to that he was a
senior auditor for Coopers & Lybrand LLP. Mr. Ties is a Certified Public Accountant.



Wesley C. Fredenburg.    Mr. Fredenburg was appointed General Counsel and Secretary in December 2000. Prior to joining the Company from February of 1997 until August 2000, Mr.
Fredenburg served as General Counsel for the Automotive Rental Group of AutoNation, Inc. From December 1995 until February 1997, Mr. Fredenburg served as the General Counsel of National Car Rental Systems, Inc. Prior to that, he was a partner in the
law firm of Crowe and Dunlevy.



Victor A.
Serri.Mr. Serri currently serves as the Companys Senior Vice President of Driver Operations. Mr. Serri joined Velocity Express in November 1998 as its Senior Vice President of Operations. Prior to that, from 1997 to
1998, Mr. Serri served as Senior Vice President with Cemex, a multinational construction materials company. Prior to that from 1995 to 1997, Mr. Serri was General Manger with Tarmac, a multinational construction materials company.



Andrew B. Kronick.    Mr. Kronick joined Velocity
Express in December 2001 as its Senior Vice President of National Accounts and Logistics Services. Most recently, from December 1999 to October 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 November 1995 to December 1999, he served as Corporate Vice President of Sales and Marketing of Consolidated Delivery & Logistics, a national provider of time-critical
logistics solutions, a company of which he was a founding member.



There is no family relationship between directors or executive officers of the Company.



Section 16(a) Beneficial Ownership Reporting Compliance



Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Companys directors and officers and the holders of 10% or more of the
Companys stock to file with the Securities and Exchange



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##### Index to Financial Statements

Commission initial reports of changes in ownership of equity securities of the Company. Based on the Companys review of copies of such reports received
by it, or written representations from reporting persons, the Company believes that during fiscal 2003, its directors, executive officers and holders of 10% or more of the Companys stock filed all reports on a timely basis except as follows:
Initial Statement of Beneficial Ownership was not timely filed for Mr. Grodd. Messrs. Brown and Hsieh each did not timely file one Form 4 related to the receipt of common warrants by TH Lee Putnam Ventures. TH Lee Putnam Ventures and affiliated
entities (TH Lee Putnam Ventures, LP, TH Lee Putnam Parallel Ventures, L.P., THLi Co Investment Partners, LLC and Blue Star I, LLC) did not timely file one Form 4 with respect to the receipt of common warrants. Richard Neslund did not timely file
four Form 4s with respect to one purchase of preferred stock and common warrants, two instances of changes in beneficial holdings as a result of antidilution adjustments to preferred stock, and one instance of the receipt of common warrants.



The Company believes the following holders of 10% or more of
the Companys stock have not filed Form 4s with respect to the following transactions: Bayview Capital Partners LP with respect to changes in beneficial holdings as a result of antidilution adjustments to the Bayview Warrant, and HomePoint
Corporation with respect to changes in beneficial holdings as a result of antidilution adjustments to preferred stock.



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##### Index to Financial Statements

ITEM 11.    EXECUTIVE COMPENSATION



The following table sets forth, for the fiscal years ended June 28, 2003, June 29, 2002 and June 30, 2001, the aggregate compensation paid or accrued with respect to the Companys Chief Executive Officer and up
to the four most highly compensated executive officers other than the Chief Executive Officer who were serving as executive officers as of June 28, 2003 (the Named Executive Officers), based upon salary and bonus earned by such executive
officers and individuals in fiscal 2003.



SUMMARY
COMPENSATION TABLE

ANNUAL COMPENSATION



|Name and Principal Position                                                    |      | Annual Compensation |        | Long-TermCompensationAwards
|------------------------------------------------------------------------------ | ---- | ------------------- | ------ | ---------------------------
|                                                                               | Year |                     | Salary |                            
|                                                                               |      |                     |        |                            
|Jeffry J. Parell Chief Executive Officer                                       |      | 200320022001        |        | $                          
|Victor A. Serri Senior Vice President of Driver Operations of Velocity Express |      | 200320022001        |        |                            
|Wesley C. Fredenburg General Counsel and Secretary                             |      | 200320022001        |        |                            
|Mark E. Ties Chief Financial Officer and Treasurer                             |      | 200320022001        |        |                            
|Andrew B. Kronick Senior Vice President of National Accounts & Logistics       |      | 200320022001        |        |                            

---

|(1) |  | For 2003, represents vehicle allowance for Messrs. Parell and Kronick. In 2002, includes $6,209 for vehicle allowance and $619 for premiums on a term life insurance policy for Mr.
Parell, a retention payment for Mr. Fredenburg agreed to upon the Company hiring Mr. Fredenburg in December 2000 as set forth in his employment contract, and vehicle allowance for Mr. Kronick. In 2001, represents vehicle allowance for Mr. Parell.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Represents stock options granted in the years shown with exercise prices equal to or not less than fair market value on the date of grant. No SARs were granted in such years. In
2002, 5,000 options granted to Mr. Parell, 5,000 options granted to Mr. Serri, 5,000 options granted to Mr. Fredenburg, and 5,000 options granted to Mr. Ties were granted outside the Companys 1995 or 2000 Stock Option Plans. For 2002, includes
options granted with the cancellation of a similar number of options. Options reissued for Messrs. Serri and Ties were 12,052 and 8,000, respectively. In 2001, in connection with their offers of employment with the Company, 50,000 options granted to
Mr. Parell and 20,000 options granted to Mr. Fredenburg were granted outside the Companys 1995 or 2000 Stock Option Plans.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The following table sets forth certain information regarding options to purchase shares of the
Companys common stock that were held by the Named Executive Officers in fiscal 2003. No such options were exercised during fiscal 2003.



AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR

AND FISCAL YEAR-END OPTION VALUES



|                     |  | Number of SharesUnderlying UnexercisedOptions atJune 28, 2003 |  | Value of UnexercisedIn-the-Money Options atJune 28, 2003
|-------------------- |  | ------------------------------------------------------------- |  | --------------------------------------------------------
|Name                 |  | Exercisable                                                   |  | Unexercisable                                           
|Jeffry J. Parell     |  | 148,333                                                       |  | 51,667                                                  
|Victor A. Serri      |  | 44,834                                                        |  | 12,167                                                  
|Wesley C. Fredenburg |  | 50,833                                                        |  | 19,167                                                  
|Mark E. Ties         |  | 78,000                                                        |  | 30,000                                                  
|Andrew B. Kronick    |  | 3,333                                                         |  | 6,667                                                   



COMPENSATION OF
DIRECTORS



Cash
Compensation.    The Company has not paid any cash compensation to a director in his or her capacity as a director and has no present plan to pay directors fees.



Stock Options and Restricted Stock.In February
1996, the Company adopted its 1996 Director Stock Option Plan. Until February 2002, each outside director was granted an option to purchase 3,000 shares of Common Stock for each year of service as a director. The term of each option granted under
the plan was five years and the exercise price per share for stock granted under the plan was 100% of the fair market value per share on the date on which the respective option was granted.



Effective February 2002 on an annual basis, each director was granted 4,000
options, and the Chairman of the Board was granted an additional 2,000 options. Audit and Executive Committee members were granted 2,000 options, Compensation Committee members were granted 1,000 options, and Executive IT Committee members were
granted 1,500 options. The chairperson of each committee received an additional 1,000 options. The term of each option granted under the plan was five years and the exercise price per share for stock granted under the plan was 100% of the fair
market value per share on the date on which the respective option was granted.



Effective September 2002, directors and committee members are granted, on an annual basis, shares of restricted stock as compensation for board and committee service. The shares will vest one year from the date of
grant of the restricted stock. Directors are awarded 4,000 shares, and the Chairman of the Board is granted an additional 2,000 shares. Audit and Executive Committee members are granted 2,000 shares, Compensation Committee members are granted 1,000
shares, and Executive IT Committee members are granted 1,500 shares. The chairperson of each committee receives an additional 1,000 shares.



In November 2001 upon his appointment to the Board of Directors, Mr. Kemp was granted 75,000 options from the 2000 Plan. The options were granted at an
exercise price of $6.00 per share and vest in equal installments over two years, with the first vesting occurring on the date of grant, and the remaining two vestings occurring on the one-year anniversary of the grant. The term of the options is ten
years.



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EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND

CHANGE IN CONTROL AGREEMENTS



The Company has employment contracts and severance agreements in effect with Jeffry J. Parell, its Chief Executive Officer, Victor A. Serri, its Senior
Vice President of Driver Operations, Wesley C. Fredenburg, its General Counsel and Secretary and Mark E. Ties, its Chief Financial Officer and Treasurer.



The Company and Mr. Parell were parties to an employment agreement dated October 16, 2000, as amended on November 7, 2002, governing his employment with
the Company. The agreement set forth Mr. Parells compensation level and eligibility for salary increases, bonuses, benefits and option grants under stock option plans. Pursuant to the agreement, Mr. Parells employment was voluntary and
could be terminated by the Company with two months prior written notice, and by Mr. Parell with four months written notice. If the Company terminates Mr. Parells employment without cause or upon the happening of other events set forth in his
employment agreement, Mr. Parell shall receive an amount equal to his base salary per month at the end of each of the eighteen months following the date of his termination. The Company could immediately terminate Mr. Parells employment for
cause upon written notice without any further obligation to Mr. Parell. The term of the original employment agreement was for two years, and the term of the amended agreement was also for two years, at which time, the agreement would automatically
renew for a six-month term, unless either Executive or Company provides the other with written notice of intention not to renew at least ninety days prior to the expiration of the initial term, and at least sixty days prior to the expiration of any
extension term. Effective July 28, 2003, Mr. Parell resigned his position with the Company.



The Company and Mr. Serri are parties to an employment agreement dated October 19, 1998 governing his employment with the Company. The agreement sets forth Mr. Serris compensation level and eligibility for
salary increases, bonuses, benefits and option grants under stock option plans. Pursuant to the agreement, Mr. Serris employment is voluntary and may be terminated by the Company or Mr. Serri with or without written notice. If the Company
terminates Mr. Serris employment without cause or upon the happening of other events set forth in his employment agreement, Mr. Serri shall receive an amount equal to his base salary per month at the end of each of the twelve months following
the date of his termination. The Company may immediately terminate Mr. Serris employment for cause upon written notice without any further obligation to Mr. Serri.



The Company and Mr. Fredenburg are parties to an employment agreement dated December 4, 2000, governing his employment with
the Company. The agreement sets forth Mr. Fredenburgs compensation level and eligibility for salary increases, bonuses, benefits and option grants under stock option plans. Pursuant to the agreement, Mr. Fredenburgs employment is
voluntary and may be terminated by the Company with or without written notice, or by Mr. Fredenburg with two months prior notice. If the Company terminates Mr. Fredenburgs employment without cause or upon the happening of other events set
forth in his employment agreement, Mr. Fredenburg shall receive an amount equal to his base salary per month at the end of each of the twelve months following the date of his termination. The Company may immediately terminate Mr. Fredenburgs
employment for cause upon written notice without any further obligation to Mr. Fredenburg.



The Company and Mr. Ties are parties to an employment agreement dated June 2001, governing his employment with the Company. The agreement sets forth Mr. Ties compensation level and eligibility for salary
increases, bonuses, benefits and option grants under stock option plans. Pursuant to the agreement, Mr. Ties employment is voluntary and may be terminated by the Company with or without written notice, or by Mr. Ties with two months prior
notice. If the Company terminates Mr. Ties employment without cause or upon the happening of other events set forth in his employment agreement, Mr. Ties shall receive an amount equal to his base salary per month at the end of each of the
twelve months following the date of his termination. The Company may immediately terminate Mr. Ties employment for cause upon written notice without any further obligation to Mr. Ties.



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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION



During fiscal 2003, the Compensation Committee of the board consisted of
James G. Brown, and Richard A. Kassar. For a portion of the year and until his resignation from the Board, Tim Becker was a member of the Compensation Committee. Neither Mr. Brown nor Mr. Kassar was at any time during fiscal 2003 or at any other
time, an officer or employee of the Company or any of its subsidiaries. Until his resignation from the Company in January 2001, Mr. Becker was the Companys Chief Financial Officer. No executive officer of the Company serves as a member of the
board of directors or compensation committee of any entity that has one or more executive officers serving as a member of the board or the compensation committee of the Company. Through his position as Managing Director of TH Lee Putnam Ventures,
L.P., James G. Brown had relationships with the Company requiring disclosure under Item 404 of SEC Regulation S-K. See Certain Relationships and Related Party Transactions.



COMPENSATION COMMITTEE REPORT



The following is the report of the compensation committee of the board describing compensation policies and rationales applicable to the Companys
executive officers with respect to the compensation paid to such executive officers for the fiscal year ended June 28, 2003.



Compensation Philosophy.    The philosophy of the Companys compensation committee regarding executive compensation is to
link executive pay to corporate performance. A significant portion of executive compensation is tied to the Companys success in meeting one or more specified performance goals and to appreciation in the Companys market valuation. The
goals of the compensation program are to attract and retain highly talented executives and to motivate them to high levels of performance, recognizing the different impact that various executives have on the achievement of corporate goals.



The key elements of the executive compensation are generally
base salary, annual bonus (dependent on corporate and individual performance) and stock options. The compensation committee approves compensation and pay levels as well as stock option grants to executive officers.



Base Salaries.    Base salaries for executive
officers are determined by evaluating the responsibilities of the position and the experience of the individual. Base salaries are reviewed annually, and are adjusted based upon performance contribution, management recommendation and market
conditions.



Bonus.    The
Companys executive officers are eligible for an annual cash bonus. Individual and corporate performance objectives are established at the beginning of each year, and eligible executives are assigned target bonus levels. In fiscal 2003, no
executive officers received bonus payments.



Stock
Options.    The purpose of the Companys stock option plans is to provide an additional incentive to certain employees of the Company to work to maximize stockholder value. Option grants with short-term vesting are used
to reward past performance while option grants with long-term vesting are awarded to encourage employees to take into account the long-term interests of the Company, align employees and shareholders interests, as well as to create a
valuable retention device for key employees. Stock options are typically granted at the time of hire, at the time of promotion or at the time of achievement of a significant corporate objective.



Compensation of Chief Executive Officer.    The
compensation committee approved the compensation of Jeffry Parell in 2003. The cash component of Mr. Parells compensation was increased during fiscal 2003 to $375,000. The compensation committee determined the Chief Executive Officers
compensation after considering the same factors used to determine the compensation of other executive officers. Effective July 28, 2003, Mr. Parell resigned his position with the Company.



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Summary.    It is the opinion of the compensation committee that the executive
compensation policies and programs in effect for the Companys executive officers provide an appropriate level of total remuneration that properly aligns the Companys performance and interests of the Companys shareholders with
competitive executive compensation in a balanced and reasonable manner.



COMPENSATION COMMITTEE



James G. Brown

Richard A. Kassar



Stock Performance Graph



In accordance with Exchange Act regulations, the following performance graph compares the cumulative total shareholder
return on the companys common stock to the cumulative total return on the Nasdaq Stock Market and a selected group of peer issuers over the same period. The peer issuers consist of Consolidated Delivery and Logistics, Inc. and Dynamex. The
graph assumes that the value of the investment in the Companys common stock and each index was $100 in 1998 and that all dividends were reinvested. The information contained in the performance graphs shall not be deemed to be soliciting
material or to be filed with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that the Company
specifically incorporates it by reference into such filing.



Comparison of 5 Year Cumulative Total Return

Assumes Initial Investment of $100

June 2003



LOGO



|Year |  | VelocityExpressCorporation |        | S&PSmallCap 600 |   | Nasdaq |  | Peer Group
|---- |  | -------------------------- | ------ | --------------- | - | ------ |  | ----------
|1998 |  | $                          | 100.00 |                 | $ | 100.00 |  | $         
|1999 |  |                            | 287.50 |                 |   | 97.69  |  |           
|2000 |  |                            | 800.00 |                 |   | 111.74 |  |           
|2001 |  |                            | 58.00  |                 |   | 124.17 |  |           
|2002 |  |                            | 61.00  |                 |   | 124.51 |  |           
|2003 |  |                            | 17.48  |                 |   | 120.07 |  |           



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ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



As of June 28, 2003, the Company had issued and outstanding 5,388,184 shares of Common Stock, 2,806,797 shares of Series B Preferred, 2,000,000 shares of
Series C Preferred, 1,517,444 shares of Series D Preferred, 926,442 shares of Series F Preferred, 5,865,331 shares of Series G Preferred, and 500,000 shares of Series H Preferred. The following tables contain certain information known to the Company
regarding beneficial ownership of its outstanding voting securities as of June 28, 2003, by (i) each person who is known to the Company to own beneficially more than five percent of each class of the Companys voting securities, (ii) each of
the Companys directors, (iii) each of the Companys executive officers, and (iv) all executive officers and directors as a group. Beneficial ownership listed in the tables below based on ownership of the Companys convertible
preferred shares reflects Common Stock equivalents. Each share of Common Stock is entitled to one vote. For purposes of voting as of June 28, 2003, each share of Series B Preferred was convertible into approximately 1.632 shares of Common Stock,
each share of Series C Preferred was convertible into approximately 1.107 shares of Common Stock, each share of Series D Preferred was convertible into 2.962 shares of Common Stock, and each share of Series F Preferred was convertible into 5.858
shares of Common Stock. Holders of the Series B Preferred, the Series C Preferred, the Series D Preferred and the Series F Preferred are entitled to one vote for each share of Common Stock issuable upon conversion of such preferred stock.



As of June 28, 2003, the conversion of the outstanding Series
G Preferred and the Series H Preferred are subject to shareholder approval, pursuant to Rule 13d-3(d)(1)(i), holders of Series G Preferred and Series H Preferred would not be deemed to be beneficial owners of the underlying Common Stock. On
September 18, 2003, the Companys shareholders approved the issuance of the Common Stock issuable upon conversion of the Series G Preferred and Series H Preferred.



Unless otherwise noted and subject to applicable community property laws, each person identified below has sole voting and
investment power with respect to such shares and the address of each person identified below is Velocity Express Corporation, 7803 Glenroy Road, Suite 200, Bloomington, Minnesota 55439. Beneficial ownership is determined in accordance with the rules
of the SEC and includes the class of capital stock identified on each table and securities convertible into or exercisable for the class of capital stock identified on each table owned by or for, among others, the spouse, children or certain other
relatives of such person as well as other securities as to which the person has or shares voting or investment power or has the right to acquire within 60 days of June 28, 2003.



Reference made herein to TH Lee Putnam Ventures (THLPV) includes TH Lee Putnam Ventures, L.P., TH Lee Putnam
Parallel Ventures, L.P., THLi Co Investment Partners, LLC, and Blue Star I, LLC.



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Common Stock



|Name and Address of Beneficial Owner                                                                             |  | BeneficiallyOwned |  | BeneficiallyOwned (1) |  
|---------------------------------------------------------------------------------------------------------------- |  | ----------------- |  | --------------------- | -
|                                                                                                                 |  |                  
|TH Lee Putnam Ventures (2)(6) 200 Madison Avenue, Suite 2225, New York, NY 10016                                 |  | 10,971,117        |  | 67.1                  | %
|                                                                                                                 |  |                  
|James G. Brown (3) 200 Madison Avenue, Suite 2225, New York, NY 10016                                            |  | 10,971,117        |  | 67.1                  | %
|                                                                                                                 |  |                  
|Douglas Hsieh (4) 200 Madison Avenue, Suite 2225, New York, NY 10016                                             |  | 10,971,117        |  | 67.1                  | %
|                                                                                                                 |  |                  
|Richard and Mabeth Neslund (5) 15210 Wayzata Boulevard, Wayzata, MN 55391                                        |  | 1,601,913         |  | 24.2                  | %
|                                                                                                                 |  |                  
|HomePoint Corporation (6)(7) c/o TenX Venture Partners, LLC 100 W. Elm Street, Suite 300, Conshohocken, PA 19428 |  | 1,110,297         |  | 17.1                  | %
|                                                                                                                 |  |                  
|Vincent A. Wasik (8)                                                                                             |  | 794,796           |  | 13.5                  | %
|                                                                                                                 |  |                  
|Alexander I. Paluch (9)                                                                                          |  | 792,109           |  | 12.8                  | %
|                                                                                                                 |  |                  
|Neuberger Berman, LLC (10) 666 Fifth Avenue, 34th Floor, New York, NY 10103                                      |  | 739,101           |  | 12.1                  | %
|                                                                                                                 |  |                  
|East River Ventures II, LP (11) 645 Madison Avenue, Ste 2200, New York, NY 10022                                 |  | 732,919           |  | 12.0                  | %
|                                                                                                                 |  |                  
|Bayview Capital Partners LP (12) 641 East Lake Street, Suite 230, Wayzata, MN 55391                              |  | 699,697           |  | 11.5                  | %
|                                                                                                                 |  |                  
|RS Investment Management Co. LLC 338 Market Street, Suite 200, San Francisco, CA 94111                           |  | 667,000           |  | 12.4                  | %
|                                                                                                                 |  |                  
|TenX Venture Partners, LLC (6)(13) 100 W. Elm Street, Suite 300, Conshohocken, PA 19428                          |  | 491,952           |  | 8.4                   | %
|                                                                                                                 |  |                  
|Robert McCullough (14) 455 Belvedere, Belvedere, CA 94920                                                        |  | 386,964           |  | 6.8                   | %
|                                                                                                                 |  |                  
|Perkins Capital Management, Inc. (15) 730 East Lake Street, Wayzata, MN 55391                                    |  | 307,429           |  | 5.4                   | %
|                                                                                                                 |  |                  
|Woodville LLC (16) 34 Peninsula Road, Dellwood, MN 55110                                                         |  | 281,890           |  | 5.0                   | %
|                                                                                                                 |  |                  
|Andrew K. Boszhardt, Jr. (17) 666 Fifth Avenue, 34th Floor, New York, NY 10103                                   |  | 281,885           |  | 5.0                   | %
|                                                                                                                 |  |                  
|Jeffry J. Parell (18)                                                                                            |  | 163,924           |  | 3.0                   | %
|                                                                                                                 |  |                  
|Andrew B. Kronick (19).                                                                                          |  | 116,085           |  | 2.1                   | %
|                                                                                                                 |  |                  
|Mark E. Ties (20).                                                                                               |  | 91,183            |  | 1.7                   | %
|                                                                                                                 |  |                  
|Wesley C. Fredenburg (21)                                                                                        |  | 80,522            |  | 1.5                   | %
|                                                                                                                 |  |                  
|Jack F. Kemp (22)                                                                                                |  | 50,000            |  |                       | *
|                                                                                                                 |  |                  
|Victor A. Serri (23)                                                                                             |  | 47,761            |  |                       | *
|                                                                                                                 |  |                  
|Richard A. Kassar                                                                                                |  | 7,000             |  |                       | *
|                                                                                                                 |  |                  
|Leslie E. Grodd                                                                                                  |  | 6,000             |  |                       | *
|                                                                                                                 |  |                  
|All directors and officers as a group (12 persons) (24)                                                          |  | 13,120,500        |  | 72.3                  | %



53



---

##### Table of Contents

##### Index to Financial Statements

---

|* |  | Represents less than 1%
|- |  | -----------------------

|(1) |  | Percentage of beneficial ownership is based on 5,388,184 shares of Common Stock outstanding as of June 28, 2003. Beneficial ownership based upon ownership of convertible preferred
stock reflects Common Stock equivalents on an as-if-converted basis. Common Stock issuable pursuant to outstanding warrants, stock options and convertible preferred stock is deemed outstanding for computing the percentage of the holders thereof, but
not for computing the percentage of any other person. More than one person may beneficially own the same shares.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes: (i) 2,521,478 shares issuable upon conversion of Series B Preferred owned by TH Lee Putnam Ventures, L.P., 1,860,766 shares issuable upon conversion of Series B Preferred
owned by TH Lee Putnam Parallel Ventures, L.P., 143,634 shares issuable upon conversion of Series B Preferred owned by THLi Co Investment Partners, LLC, and 54,555 shares issuable upon conversion of Series B Preferred owned by Blue Star I, LLC; (ii)
1,218,696 shares issuable upon conversion of Series C Preferred owned by TH Lee Putnam Ventures, L.P., 899,358 shares issuable upon conversion of Series C owned by TH Lee Putnam Parallel Ventures, L.P., 69,205 shares issuable upon conversion of
Series C Preferred owned by THLi Co Investment Partners, LLC, and 26,585 shares issuable upon conversion of Series C Preferred owned by Blue Star I, LLC; (iii) 503,008 shares issuable upon the exercise and conversion of warrants to purchase Series C
Preferred owned by TH Lee Putnam Ventures, L.P., 371,203 shares issuable upon the exercise and conversion of warrants to purchase Series C Preferred owned by TH Lee Putnam Parallel Ventures, L.P., 28,563 shares issuable upon the exercise and
conversion of warrants to purchase Series C Preferred owned by THLi Co Investment Partners, LLC, and 10,973 shares issuable upon the exercise and conversion of warrants to purchase Series C owned by Blue Star I, LLC; (iv) 1,465,910 shares issuable
upon conversion of Series D Preferred owned by TH Lee Putnam Ventures, L.P., 1,081,791 shares issuable upon conversion of Series D Preferred owned by TH Lee Putnam Parallel Ventures, L.P., 83,080 shares issuable upon conversion of Series D Preferred
owned by THLi Co Investment Partners, LLC, and 32,140 shares issuable upon conversion of Series D Preferred owned by Blue Star I, LLC; (v) 311,947 shares issuable upon the exercise and conversion of warrants to purchase Series D Preferred owned by
TH Lee Putnam Ventures, L.P., 230,206 shares issuable upon the exercise and conversion of warrants to purchase Series D Preferred owned by TH Lee Putnam Parallel Ventures, L.P., 17,681 shares issuable upon the exercise and conversion of warrants to
purchase Series D Preferred owned by THLi Co Investment Partners, LLC, and 6,838 shares issuable upon the exercise of warrants to purchase Series D Preferred owned by Blue Star I, LLC; (vi) 20,000 shares issuable upon the exercise of options to
purchase Common Stock issued to TH Lee Putnam Fund Advisors, L.P.; and (vii) 13,500 shares of restricted stock issued to TH Lee Putnam Ventures, L.P. Does not include 85,528 shares issuable upon exercise of warrants to purchase Common Stock owned by
TH Lee Putnam Ventures, L.P. and 73,573 shares issuable upon exercise of warrants to purchase Common Stock owned by TH Lee Putnam Parallel Ventures, L.P. (collectively the Common Warrants). The Common Warrants become exercisable only in
the event and to the extent that 600,000 options granted under the Companys 2000 Stock Option Plan are exercised, on a pro rata basis. TH Lee Putnam Parallel Ventures, L.P., THLi Co Investment Partners, LLC and Blue Star I, LLC are affiliates
of TH Lee Putnam Ventures.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Consists of shares beneficially owned by THLPV, for which Mr. Brown disclaims beneficial ownership.
|--- |  | ---------------------------------------------------------------------------------------------------

|(4) |  | Consists of shares beneficially owned by THLPV, for which Mr. Hsieh disclaims beneficial ownership.
|--- |  | ---------------------------------------------------------------------------------------------------

|(5) |  | Consists of 377,113 shares owned directly, 79,855 shares issuable pursuant to warrants and 1,144,945 shares issuable upon conversion of Series F Preferred.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | THLPV is the largest shareholder of HomePoint Corporation. TenX Venture Partners, LLC has an agreement to provide management services to HomePoint Corporation. A shareholder of
THLPV is a member of HomePoint Corporations board of directors.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Consists of shares issuable upon conversion of Series D Preferred.
|--- |  | ------------------------------------------------------------------

|(8) |  | Consists of (i) 105,460 shares owned directly, 23,438 shares issuable upon exercise of warrants, 399,398 shares issuable upon conversion of Series F Preferred, 12,500 shares
issuable upon exercise of options, and 9,000 shares of restricted stock owned directly by Mr. Wasik; and (ii) 200,000 shares and 45,000 shares issuable upon exercise of warrants owned by MCG USHP, LLC.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Consists of (i) 2,345 shares issuable upon exercise of warrants and 39,933 shares issuable upon conversion of Series F Preferred owned directly by Mr. Paluch; (ii) 40,625 shares
issuable upon exercise of warrants and 692,294 shares issuable upon conversion of Series F Preferred owned by East River Ventures II, LP; and (iii) 938 shares issuable upon exercise of warrants and 15,974 shares issuable upon conversion of Series F
Preferred owned by ERV Partners LLC.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



54



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##### Table of Contents

##### Index to Financial Statements

|(10) |  | Consists of (i) 39,063 shares issuable upon exercise of warrants and 665,663 shares issuable upon conversion of Series F Preferred owned by Oscar Private Equity Investments, L.P.;
(ii) 18,750 shares issuable upon exercise of warrants owned by Oscar Investment Fund, LP; (iii) 6,250 shares issuable upon exercise of warrants owned by Oscar Opportunistic Fund, LLC; (iv) 3,125 shares issuable upon exercise of warrants owned by
Oscar Opportunistic Offshore Fund, Ltd.; and (v) 6,250 shares issuable upon exercise of warrants owned by Oscar Fund (Cayman) Limited. Oscar Investment Fund, LP, Oscar Opportunistic Fund, LLC, Oscar Opportunistic Offshore Fund, Ltd. and Oscar Fund
(Cayman) Limited are affiliates of Neuberger Berman, LLC.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) |  | Consists of 40,625 shares issuable upon exercise of warrants and 692,294 shares issuable upon conversion of Series F Preferred.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------

|(12) |  | Consists of shares issuable upon exercise of the Bayview Warrants.
|---- |  | ------------------------------------------------------------------

|(13) |  | Consists of 121,761 shares issuable upon exercise of a warrant and 370,191 shares issuable upon conversion of Series D Preferred.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------

|(14) |  | Consists of (i) 3,200 shares owned directly, 14,563 shares issuable upon exercise of warrants and 239,635 shares issuable upon conversion of Series F Preferred; (ii) 2,344 shares
issuable upon exercise of warrants and 39,939 shares issuable upon conversion of Series F Preferred owned by the Robert F. McCullough, Sr. Family Foundation; (iii) 45,000 shares owned directly by the McCullough Living Trust; and (iv) 2,344 shares
issuable upon exercise of warrants and 39,939 shares issuable upon conversion of Series F Preferred owned by the Robert F. McCullough, Sr. IRA.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(15) |  | Consists of (i) 20,000 shares owned directly, 20,875 shares issuable upon exercise of warrants, and 117,158 shares issuable upon conversion of Series F Preferred owned by Pyramid
Partners, LP; (ii) 5,157 shares issuable upon exercise of warrants and 87,867 shares issuable upon conversion of Series F Preferred owned by Union Bank & Trust Industricorp & Co., Inc FBO Twin City Carpenters Pension Plan; (iii) 1,719 shares
issuable upon exercise of warrants and 29,289 shares issuable upon conversion of Series F Preferred owned by Robert G. Allison; and (iv) 1,406 shares issuable upon exercise of warrants and 23,958 shares issuable upon conversion of Series F Preferred
owned by David M. Westrum. Pyramid Partners, LP, Union Bank & Trust Industricorp & Co., Inc FBO Twin City Carpenters Pension Plan, Robert G. Allison, and David M. Westrum are entities affiliated with Perkins Capital Management, Inc.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(16) |  | Consists of 15,625 shares issuable upon exercise of warrants and 266,265 shares issuable upon conversion of Series F Preferred.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------

|(17) |  | Consists of 15,626 shares issuable upon exercise of warrants and 266,259 shares issuable upon conversion of Series F Preferred.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------

|(18) |  | Consists of 1,500 shares owned directly, 148,333 shares issuable upon exercise of options, 782 shares issuable upon exercise of warrants and 13,309 shares issuable upon conversion
of Series F Preferred.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(19) |  | Consists of 3,333 shares issuable upon exercise of options, 6,250 issuable upon exercise of warrants and 106,502 shares issuable upon conversion of Series F Preferred.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(20) |  | Consists of 780 shares owned directly, 78,000 shares issuable upon exercise of options, 688 shares issuable upon exercise of warrants and 11,715 shares issuable upon conversion of
Series F Preferred.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(21) |  | Consists of 21,800 shares owned directly, 50,833 shares issuable upon exercise of options, 438 shares issuable upon exercise of warrants and 7,451 shares issuable upon conversion of
Series F Preferred.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(22) |  | Consists of shares issuable upon exercise of options.
|---- |  | -----------------------------------------------------

|(23) |  | Consists of 44,834 shares issuable upon exercise of options, 163 shares issuable upon exercise of warrants and 2,764 shares issuable upon conversion of Series F Preferred.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(24) |  | Consists of an aggregate of 129,540 shares of Common Stock, 22,000 shares of restricted stock, 421,937 shares issuable pursuant to presently exercisable options and warrants,
581,075 shares issuable upon conversion of Series F Preferred directly owned by directors and officers, 10,971,117 shares beneficially owned by THLPV (for which Messrs. Brown and Hsieh disclaim beneficial ownership) 732,919 shares beneficially owned
by East River Ventures II LP (for which Mr. Paluch disclaims beneficial ownership), 16,912 shares owned by ERV Partners LLC (for which Mr. Paluch disclaims beneficial ownership) and 245,000 shares beneficially owned by MCG USHP LLC.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



55



---

##### Table of Contents

##### Index to Financial Statements

Series B Preferred Stock



|Name and Address of Beneficial Owner                                          |  | Amount andNature ofBeneficialOwnership |  | PercentageOwned (1) |  
|----------------------------------------------------------------------------- |  | -------------------------------------- |  | ------------------- | -
|                                                                              |  |                                       
|TH Lee Putnam Ventures (2) 200 Madison Avenue, Suite 2225, New York, NY 10016 |  | 2,806,797                              |  | 100.0               | %
|                                                                              |  |                                       
|James G. Brown (3) 200 Madison Avenue, Suite 2225, New York, NY 10016         |  | 2,806,797                              |  | 100.0               | %
|                                                                              |  |                                       
|Douglas Hsieh (3) 200 Madison Avenue, Suite 2225, New York, NY 10016          |  | 2,806,797                              |  | 100.0               | %
|                                                                              |  |                                       
|Vincent A. Wasik                                                              |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|Alex Paluch                                                                   |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|Jeffry J. Parell                                                              |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|Jack F. Kemp                                                                  |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|Richard A. Kassar                                                             |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|Leslie E. Grodd                                                               |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|Victor A. Serri                                                               |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|Wesley C. Fredenburg                                                          |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|Mark E. Ties                                                                  |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|Andrew B. Kronick                                                             |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|All directors and executive officers as a group (12 persons) (3)              |  | 2,806,797                              |  | 100.0               | %

---

|(1) |  | Percentage of beneficial ownership is based on 2,806,797 of Series B Preferred outstanding as of June 28, 2003, which were convertible into an aggregate of 4,580,433 shares of
Common Stock. See Common Stock Security Ownership table. More than one person may beneficially own the same shares.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes 1,545,111 shares directly owned by TH Lee Putnam Ventures, L.P., 1,140,240 shares directly owned by TH Lee Putnam Parallel Ventures, L.P., 88,016 shares directly owned by
THLi Co Investment Partners, LLC, and 33,430 shares directly owned by Blue Star I, LLC.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Consists of shares beneficially owned by TH Lee Putnam Ventures, for which Messrs. Brown and Hsieh disclaim beneficial ownership.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------



56



---

##### Table of Contents

##### Index to Financial Statements

Series C Preferred Stock



|Name and Address of Beneficial Owner                                          |  | Amount andNature ofBeneficialOwnership |  | PercentageOwned (1) |  
|----------------------------------------------------------------------------- |  | -------------------------------------- |  | ------------------- | -
|                                                                              |  |                                       
|TH Lee Putnam Ventures (2) 200 Madison Avenue, Suite 2225, New York, NY 10016 |  | 2,825,484                              |  | 100.0               | %
|                                                                              |  |                                       
|James G. Brown (3) 200 Madison Avenue, Suite 2225, New York, NY 10016         |  | 2,825,484                              |  | 100.0               | %
|                                                                              |  |                                       
|Douglas Hsieh (3) 200 Madison Avenue, Suite 2225, New York, NY 10016          |  | 2,825,484                              |  | 100.0               | %
|                                                                              |  |                                       
|Vincent A. Wasik                                                              |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|Alex Paluch                                                                   |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|Jeffry J. Parell                                                              |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|Jack F. Kemp                                                                  |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|Richard A. Kassar                                                             |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|Leslie E. Grodd                                                               |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|Victor A. Serri                                                               |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|Wesley C. Fredenburg                                                          |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|Mark E. Ties                                                                  |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|Andrew B. Kronick                                                             |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|All directors and executive officers as a group (12 persons) (3)              |  | 2,825,484                              |  | 100.0               | %

---

|(1) |  | Percentage of beneficial ownership is based on 2,000,000 of Series C Preferred outstanding as of June 28, 2003, which were convertible into an aggregate of 2,213,844 shares of
Common Stock. See Common Stock Security Ownership table. More than one person may beneficially own the same shares.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes 1,100,978 shares owned directly and 454,420 shares issuable upon exercise of warrants owned by TH Lee Putnam Ventures, L.P., 812,485 shares owned directly and 335,347
shares issuable upon exercise of warrants owned by TH Lee Putnam Parallel Ventures, L.P., 62,520 shares owned directly and 25,804 shares issuable upon exercise of warrants owned by THLi Co Investment Partners, LLC and 24,017 shares owned directly
and 9,913 shares issuable upon exercise of warrants owned by Blue Star I, LLC.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Consists of shares beneficially owned by TH Lee Putnam Ventures, L.P., for which Messrs. Brown and Hsieh disclaim beneficial ownership.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------



57



---

##### Table of Contents

##### Index to Financial Statements

Series D Preferred Stock



|Name and Address of Beneficial Owner                                                                          |  | Amount andNature ofBeneficialOwnership |  | PercentageOwned (1) |  
|------------------------------------------------------------------------------------------------------------- |  | -------------------------------------- |  | ------------------- | -
|                                                                                                              |  |                                       
|TH Lee Putnam Ventures (2) 200 Madison Avenue, Suite 2225, New York, NY 10016                                 |  | 1,234,071                              |  | 71.2                | %
|                                                                                                              |  |                                       
|James G. Brown (3) 200 Madison Avenue, Suite 2225, New York, NY 10016                                         |  | 1,234,071                              |  | 71.2                | %
|                                                                                                              |  |                                       
|Douglas Hsieh (3) 200 Madison Avenue, Suite 2225, New York, NY 10016                                          |  | 1,234,071                              |  | 71.2                | %
|                                                                                                              |  |                                       
|HomePoint Corporation (4) c/o TenX Venture Partners, LLC 100 W. Elm Street, Suite 300, Conshohocken, PA 19428 |  | 374,906                                |  | 24.7                | %
|                                                                                                              |  |                                       
|TenX Venture Partners, LLC 100 W. Elm Street, Suite 300, Conshohocken, PA 19428                               |  | 125,000                                |  | 8.2                 | %
|                                                                                                              |  |                                       
|Vincent A. Wasik                                                                                              |  |                                       |  | 0                   | %
|                                                                                                              |  |                                       
|Alex Paluch                                                                                                   |  |                                       |  | 0                   | %
|                                                                                                              |  |                                       
|Jeffry J. Parell                                                                                              |  |                                       |  | 0                   | %
|                                                                                                              |  |                                       
|Jack F. Kemp                                                                                                  |  |                                       |  | 0                   | %
|                                                                                                              |  |                                       
|Richard A. Kassar                                                                                             |  |                                       |  | 0                   | %
|                                                                                                              |  |                                       
|Leslie E. Grodd                                                                                               |  |                                       |  | 0                   | %
|                                                                                                              |  |                                       
|Victor A. Serri                                                                                               |  |                                       |  | 0                   | %
|                                                                                                              |  |                                       
|Wesley C. Fredenburg                                                                                          |  |                                       |  | 0                   | %
|                                                                                                              |  |                                       
|Mark E. Ties                                                                                                  |  |                                       |  | 0                   | %
|                                                                                                              |  |                                       
|Andrew B. Kronick                                                                                             |  |                                       |  | 0                   | %
|                                                                                                              |  |                                       
|All directors and executive officers as a group (12 persons) (5)                                              |  | 1,234,071                              |  | 71.2                | %

---

|(1) |  | Percentage of beneficial ownership is based on 1,517,444 shares of Series D Preferred outstanding as of June 28, 2003, which were convertible into an aggregate of 4,493,962 shares
of Common Stock. See Common Stock Security Ownership table. More than one person may beneficially own the same shares.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes 560,144 shares owned directly and 119,199 shares issuable upon exercise of warrants owned by TH Lee Putnam Ventures, L.P., 413,367 shares owned directly and 87,965 shares
issuable upon exercise of warrants owned by TH Lee Putnam Parallel Ventures, L.P., 31,746 shares owned directly and 6,756 shares issuable upon exercise of warrants owned by THLi Co Investment Partners, LLC and 12,281 shares owned directly and 2,613
shares issuable upon exercise of warrants owned by Blue Star I, LLC.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Consists of shares beneficially owned by the TH Lee Putnam Ventures, for which Messrs. Brown and Hsieh disclaim beneficial ownership.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | THLi Co Investment Partners, LLC is the largest shareholder of HomePoint Corporation. TenX Venture Partners, LLC has an agreement to provide management services to HomePoint
Corporation. A shareholder of THLPV is a member of HomePoint Corporations board of directors.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Consists of shares beneficially owned by TH Lee Putnam Ventures, L.P., for which Messrs. Brown and Hsieh disclaim beneficial ownership.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------



58



---

##### Table of Contents

##### Index to Financial Statements

Series F Preferred Stock



|Name and Address of Beneficial Owner                                        |  | Amount andNature ofBeneficialOwnership |  | PercentageOwned (1) |  
|--------------------------------------------------------------------------- |  | -------------------------------------- |  | ------------------- | -
|                                                                            |  |                                       
|Richard Neslund 15210 Wayzata Boulevard, Wayzata, MN 55391                  |  | 195,453                                |  | 21.1                | %
|                                                                            |  |                                       
|Alex Paluch (2)                                                             |  | 127,725                                |  | 13.8                | %
|                                                                            |  |                                       
|East River Ventures II, LP 645 Madison Avenue, Ste 2200, New York, NY 10022 |  | 118,181                                |  | 12.8                | %
|                                                                            |  |                                       
|Neuberger Berman, LLC (3) 2666 Fifth Avenue, 34th Floor, New York, NY 10103 |  | 113,635                                |  | 12.3                | %
|                                                                            |  |                                       
|Vincent A. Wasik                                                            |  | 68,181                                 |  | 7.4                 | %
|                                                                            |  |                                       
|Robert McCullough (4) 455 Belvedere, Belvedere, CA 94920                    |  | 54,544                                 |  | 5.8                 | %
|                                                                            |  |                                       
|Andrew B. Kronick                                                           |  | 18,181                                 |  | 2.0                 | %
|                                                                            |  |                                       
|Jeffry J. Parell                                                            |  | 2,272                                  |  |                     | *
|                                                                            |  |                                       
|Mark E. Ties                                                                |  | 2,000                                  |  |                     | *
|                                                                            |  |                                       
|Wesley C. Fredenburg                                                        |  | 1,272                                  |  |                     | *
|                                                                            |  |                                       
|Victor A. Serri                                                             |  | 472                                    |  |                     | *
|                                                                            |  |                                       
|Jack F. Kemp                                                                |  |                                       |  | 0                   | %
|                                                                            |  |                                       
|Richard A. Kassar                                                           |  |                                       |  | 0                   | %
|                                                                            |  |                                       
|Leslie E. Grodd                                                             |  |                                       |  | 0                   | %
|                                                                            |  |                                       
|All directors and executive officers as a group (12 persons) (5)            |  | 220,103                                |  | 23.8                | %

---

|* |  | Represents less than 1%
|- |  | -----------------------

|(1) |  | Percentage of beneficial ownership is based on 926,442 shares of Series F Preferred outstanding as of June 28, 2003, which were convertible into an aggregate of 5,426,987 shares of
Common Stock. See Common Stock Security Ownership table. More than one person may beneficially own the same shares.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Consists of 6,817 shares owned directly, 118,181 shares owned by East River Ventures II, LP, and 2,727 shares owned by ERV Partners, LLC. Mr. Paluch is a General Partner of East
River Ventures II, LP and a Managing Member of ERV Partners, LLC. Mr. Paluch disclaims beneficial ownership of the shares held of record by each of East River Ventures II, LP and ERV Partners, LLC.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Consists of 113,635 shares owned by Oscar Private Equity Investments, LP. Oscar Private Equity Investments, LP, is an affiliate of Neuberger Berman, LLC.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Consists of 40,908 shares owned directly, 6,818 shares owned directly by the Robert F. McCullough Sr. Family Foundation, and 6,818 shares owned directly by the Robert F. McCullough
Sr. IRA.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Consists of (i) 99,195 shares owned directly by officers and directors; (ii) 118,181 shares owned by East River Ventures II, LP; and (iii) 2,727 shares owned by ERV Partners LLC for
which Mr. Paluch disclaims beneficial ownership.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



59



---

##### Table of Contents

##### Index to Financial Statements

Series G Preferred Stock



|Name and Address of Beneficial Owner                                          |  | Amount andNature ofBeneficialOwnership |  | PercentageOwned (1) |  
|----------------------------------------------------------------------------- |  | -------------------------------------- |  | ------------------- | -
|                                                                              |  |                                       
|TH Lee Putnam Ventures (2) 200 Madison Avenue, Suite 2225, New York, NY 10016 |  | 3,333,333                              |  | 56.8                | %
|                                                                              |  |                                       
|James G. Brown (3) 200 Madison Avenue, Suite 2225, New York, NY 10016         |  | 3,333,333                              |  | 56.8                | %
|                                                                              |  |                                       
|Douglas Hsieh (3) 200 Madison Avenue, Suite 2225, New York, NY 10016          |  | 3,333,333                              |  | 56.8                | %
|                                                                              |  |                                       
|John Kennedy 2100 First National Ctr., Oklahoma City, OK 73102                |  | 500,000                                |  | 8.5                 | %
|                                                                              |  |                                       
|Mike Samis 2100 First National Ctr., Oklahoma City, OK 73102                  |  | 500,000                                |  | 8.5                 | %
|                                                                              |  |                                       
|Andrew K. Boszhardt, Jr. 2666 Fifth Avenue, 34th Floor, New York, NY 10103    |  | 300,000                                |  | 5.1                 | %
|                                                                              |  |                                       
|MCG Global LLC One Morningside Drive N., Ste 200, Westport, CT 06880          |  | 293,333                                |  | 5.0                 | %
|                                                                              |  |                                       
|Vincent A. Wasik (4)                                                          |  | 293,333                                |  | 5.0                 | %
|                                                                              |  |                                       
|Mark E. Ties                                                                  |  | 40,000                                 |  |                     | *
|                                                                              |  |                                       
|Alex Paluch                                                                   |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|Jack F. Kemp                                                                  |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|Richard A. Kassar                                                             |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|Leslie E. Grodd                                                               |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|Jeffry J. Parell                                                              |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|Victor A. Serri                                                               |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|Wesley C. Fredenburg                                                          |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|Andrew B. Kronick                                                             |  |                                       |  | 0                   | %
|                                                                              |  |                                       
|All directors and executive officers as a group (12 persons) (5)              |  | 3,666,666                              |  | 62.5                | %

---

|* |  | Represents less than 1%
|- |  | -----------------------

|(1) |  | Percentage of beneficial ownership is based on 5,865,331 shares of Series G Preferred outstanding as of June 28, 2003, which were convertible into an aggregate of 1,427,541 shares
of Common Stock. Since the conversion of the Series G Preferred is subject to shareholder approval, pursuant to Rule 13d-3(d)(1)(i), holders of Series G Preferred would not be deemed to be beneficial owners of the underlying Common Stock. More than
one person may beneficially own the same shares.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes 1,832,167 shares directly owned by TH Lee Putnam Ventures, L.P., 1,355,183 shares directly owned by TH Lee Putnam Parallel Ventures, L.P., 103,488 shares directly owned by
THLi Co Investment Partners, LLC, and 42,495 shares directly owned by Blue Star I, LLC.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Consists of shares beneficially owned by TH Lee Putnam Ventures, for which Messrs. Brown and Hsieh disclaim beneficial ownership.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Consists of 293,333 shares owned directly by MCG Global, LLC. Mr. Wasik is the founder and a principal of MCG Global, LLC.
|--- |  | --------------------------------------------------------------------------------------------------------------------------

|(5) |  | Consists of (i) 40,000 shares owned directly by officers and directors; (ii) 3,333,333 shares owned by THLPV, for which Messrs. Brown and Hsieh disclaim beneficial ownership; and
(iii) 293,333 shares owned by MCG Global, LLC.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Series H Preferred Stock



|Name and Address of Beneficial Owner                                                     |  | Amount andNature ofBeneficialOwnership |  | PercentageOwned (1) |  
|---------------------------------------------------------------------------------------- |  | -------------------------------------- |  | ------------------- | -
|                                                                                         |  |                                       
|TH Lee Putnam Ventures (2) 200 Madison Avenue, Suite 2225, New York, NY 10016            |  | 196,900                                |  | 39.4                | %
|                                                                                         |  |                                       
|James G. Brown (3) 200 Madison Avenue, Suite 2225, New York, NY 10016                    |  | 196,900                                |  | 39.4                | %
|                                                                                         |  |                                       
|Douglas Hsieh (3) 200 Madison Avenue, Suite 2225, New York, NY 10016                     |  | 196,900                                |  | 39.4                | %
|                                                                                         |  |                                       
|Jess S. Morgan & Company, Inc. 5750 Wilshire Boulevard, Suite 590, Los Angeles, CA 90036 |  | 62,500                                 |  | 12.5                | %
|                                                                                         |  |                                       
|Richard Neslund 15210 Wayzata Boulevard, Wayzata, MN 55391                               |  | 50,000                                 |  | 10.0                | %
|                                                                                         |  |                                       
|Vincent A. Wasik (4)                                                                     |  | 48,950                                 |  | 9.8                 | %
|                                                                                         |  |                                       
|Alex Paluch (5)                                                                          |  | 35,250                                 |  | 6.6                 | %
|                                                                                         |  |                                       
|East River Ventures II, LP 645 Madison Avenue, Ste 2200, New York, NY 10022              |  | 32,500                                 |  | 6.5                 | %
|                                                                                         |  |                                       
|Southern Cross Capital LLC 33 Riverside Avenue, Fifth Floor, Westport, CT 06880          |  | 25,000                                 |  | 5.0                 | %
|                                                                                         |  |                                       
|Woodville LLC 34 Peninsula Road, Dellwood, MN 55110                                      |  | 25,000                                 |  | 5.0                 | %
|                                                                                         |  |                                       
|Jeffry J. Parell                                                                         |  | 1,500                                  |  |                     | *
|                                                                                         |  |                                       
|Mark E. Ties                                                                             |  | 900                                    |  |                     | *
|                                                                                         |  |                                       
|Wesley C. Fredenburg                                                                     |  | 900                                    |  |                     | *
|                                                                                         |  |                                       
|Jack F. Kemp                                                                             |  |                                       |  | 0                   | %
|                                                                                         |  |                                       
|Richard A. Kassar                                                                        |  |                                       |  | 0                   | %
|                                                                                         |  |                                       
|Leslie E. Grodd                                                                          |  |                                       |  | 0                   | %
|                                                                                         |  |                                       
|D. Brad Frederiksen                                                                      |  |                                       |  | 0                   | %
|                                                                                         |  |                                       
|Victor A. Serri                                                                          |  |                                       |  | 0                   | %
|                                                                                         |  |                                       
|All directors and executive officers as a group (12 persons) (6)                         |  | 284,400                                |  | 56.9                | %

---

|* |  | Represents less than 1%
|- |  | -----------------------

|(1) |  | Percentage of beneficial ownership is based on 500,000 shares of Series H Preferred outstanding as of June 28, 2003, which were convertible into an aggregate of 5,000,000 shares of
Common Stock. Since the conversion of the Series H Preferred is subject to shareholder approval, pursuant to Rule 13d-3(d)(1)(i), holders of Series H Preferred would not be deemed to be beneficial owners of the underlying Common Stock. More than one
person may beneficially own the same shares.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes 108,809 shares directly owned by TH Lee Putnam Ventures, L.P., 79,079 shares directly owned by TH Lee Putnam Parallel Ventures, L.P., 6,488 shares directly owned by THLi Co
Investment Partners, LLC, and 2,524 shares directly owned by Blue Star I, LLC.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(3) |  | Consists of shares beneficially owned by TH Lee Putnam Ventures, for which Messrs. Brown and Hsieh disclaim beneficial ownership.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Consists of 29,850 shares owned directly and 19,100 shares owned by MCG Global, LLC.
|--- |  | ------------------------------------------------------------------------------------

|(5) |  | Consists of 2,000 shares owned directly, 32,500 shares owned by East River Ventures II, LP, and 750 shares owned by ERV Partners, LLC.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Consists of (i) 35,150 shares owned directly by officers and directors; (ii) 196,900 shares owned by THLPV, for which Messrs. Brown and Hsieh disclaim beneficial ownership; (iii)
19,100 shares owned by MCG Global, LLC; (iv) 32,500 shares owned by East River Ventures II, LP; and (v) 750 shares owned by ERV Partners, LLC.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Equity Compensation Plan Information



The Company maintains the 1995 Stock Option Plan (the 1995 Plan), the 2000 Stock Option Plan (the 2000 Plan) and the 1996 Director
Stock Option Plan (the 1996 Director Plan), pursuant to which it may grant equity awards to eligible persons. The shareholders of the Company have approved the 1995 Plan, the 2000 Plan and the 1996 Director Plan.



The following table sets for information about the Companys equity
compensation plans as of June 28, 2003. For more information about the Companys stock option plans, see Note 8 to the Consolidated Financial Statements.



|                                                               |  | Number of securities to beissued upon exercise ofoutstanding options, warrantsand rights |     |  | Weighted averageexercise price ofoutstanding options,warrants and rights |       | Number of securitiesremaining available for futureissuance |        
|-------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------- | --- |  | ------------------------------------------------------------------------ | ----- | ---------------------------------------------------------- | -------
|Equity compensation plans approved by security holders         |  | 1,421,910                                                                                | (1) |  | $                                                                        | 10.88 |                                                            | 857,828
|Equity compensation plans not approved by security holders (3) |  | 130,000                                                                                  |     |  |                                                                          | 17.45 |                                                            | NA     
|                                                               |  |                                                                                          |     |  |                                                                          |       |                                                            |        
|Total                                                          |  | 1,551,910                                                                                |     |  | $                                                                        | 11.43 |                                                            | 857,828
|                                                               |  |                                                                                          |     |  |                                                                          |       |                                                            |        

---

|(1) |  | 192,793 to be issued under the 1995 Plan; 1,211,117 to be issued under the 2000 Plan; and 18,000 to be issued under the 1996 Director Plan.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | 50,613 remaining under the 1995 Plan; 708,215 remaining under the 2000 Plan; and 99,000 remaining under the 1996 Director Plan.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Includes (i) 95,000 non qualified stock options that were issued in October and November 2000 to certain executive officers in connection with their offers of employment with the
Company and vest ratably over three years; (ii) 20,000 non-qualified stock options issued in October 2001 to certain executive officers and vest ratably over two years on each six-month anniversary of the date of grant; and (iii) 15,000 non
qualified stock options issued to a consultant in exchange for services provided in 1999 which option vested on the date of grant. All non-plan options were issued with exercise prices equal to the fair market value of the Companys stock on
the dates of grant.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



Transactions with Management and Others



Issuance of Series H Convertible Preferred Stock



Pursuant to Stock Purchase Agreements entered into during October and November 2002 and February 2003, the Company issued 500,000 shares of Series H Convertible Preferred Stock (Series H Preferred) for $10.00 per share for net
proceeds of $4.6 million. Of the total proceeds, $4.8 million was received in cash, and $241,000 was in exchange for services performed for the Company. The initial conversion price of the Series H Preferred was $10.00, and, at the time of issuance,
each share of Series H Preferred was convertible, upon shareholder approval, into ten shares of the Companys common stock. Additionally, no holder of the Series H Preferred Stock is permitted to request registration of the common stock
underlying the preferred until April 30, 2003. The Company sold the Series H Preferred to the following directors, officers and/or beneficial owners of 5% or more of any class of voting securities. TH Lee Putnam Ventures holds more than 5% of each
of Common Stock, Series B Preferred, Series C Preferred and Series D Preferred. Two of its executive officers are also serving on the Companys Board. Mr. Richard Neslund beneficially owns more than 5% of Common Stock and Series F Preferred.
MCG Global LLC beneficially owns more than 5% of Common Stock and Vincent Wasik, the founder and principal of MCG Global LLC and the Chairman of the Board and President and CEO owns more than 5% of Common Stock and Series F Preferred. Mr. Alex
Paluch is a member of the Board and also owns more than 5% of both Common Stock and Series F Preferred. East River Ventures II LP owns more than 5% of Common Stock and Series F Preferred and Woodville LLC owns more than 5% of Common Stock. Mr.
Parell is the Companys former Chief Executive Officer, Mr. Fredenburg is the Companys General Counsel and Secretary and Mr. Ties is the Companys Chief Financial Officer and Treasurer.



|Name of Beneficial Owner   |  | Number of Shares ofSeries H Preferred
|-------------------------- |  | -------------------------------------
|TH Lee Putnam Ventures (1) |  | 196,600                              
|Richard Neslund            |  | 50,000                               
|Vincent Wasik (2)          |  | 48,950                               
|Alex Paluch (3)            |  | 35,950                               
|East River Ventures II LP  |  | 32,500                               
|Woodville LLC              |  | 25,000                               
|MCG Global LLC             |  | 19,100                               
|Jeffry J. Parell           |  | 1,500                                
|Wesley C. Fredenburg       |  | 900                                  
|Mark E. Ties               |  | 900                                  

---

|(1) |  | Two of the Companys directors, Messrs. James G. Brown and Douglas Hsieh, are executive officers of TH Lee Putnam Ventures. Both Messrs. Brown and Hsieh disclaim beneficial
ownership of these shares.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes 19,100 shares owned directly by MCG Global, LLC. Mr. Wasik is the founder and a principal of MCG Global, LLC.
|--- |  | ----------------------------------------------------------------------------------------------------------------------

|(3) |  | Includes 32,500 shares owned by East River Ventures II LP and 750 shares owed by ERV Partners, LLC for which Mr. Paluch disclaims beneficial ownership. Mr. Paluch is a managing
partner in both entities.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Contracts and arrangements with MCG
Global, LLC



The Company has entered into service
agreements with MCG Global, LLC and its related entities (MCG). Vincent A. Wasik, currently a shareholder, Chairman of the Board, and President and Chief Executive Officer of the Company, is an owner and principal of MCG, although he was
not a shareholder, Chairman of the Board, President or Chief Executive Officer at the time the initial service agreement was entered into. Under the agreements, MCG has provided services in connection with Companys business that include the
following matters, (1) management and consulting assistance with operations, debt structure, vendors and contractual obligations, (2) negotiation and settlement of the Companys rights and obligations under the September 24,



63



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1999 Merger Agreement under which the Company acquired Velocity; (3) assistance with all aspects of the Companys replacement of its Senior Revolving
Credit Facility and mezzanine debt facility, and (4) services in connection with Companys centralization of data platforms, cash and lock-box management, consolidation of back office functions, technology initiatives and strategic planning. In
fiscal 2003, the Company issued $0.2 million of Series H Preferred as compensation for these services. In fiscal 2002, the Company granted a total of 245,000 warrants to purchase common stock. Cash and warrant-based compensation for these services
amounted to $1.8 million in fiscal 2002.



PART IV.



ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K



(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



IIValuation and Qualifying Accountsyears
ended June 28, 2003, June 29, 2002 and June 30, 2001.



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.



(4)    Reports on Form 8-K.



The Company filed one report on Form 8-K during the fiscal quarter ended
June 28, 2003, as follows:



| | (i) |  | Current Report on Form 8-K filed on May 14, 2003, relating to the issuance of a press release of Velocity Express Corporation reporting Velocity Express Corporations financial
results for the quarter ended March 29, 2003.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES



In accordance with
Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Minneapolis, state of Minnesota on October 14, 2003.



VELOCITY EXPRESS CORPORATIONBy

/S/    VINCENT A.
WASIKVincent A. WasikChairman of the Board President and Chief
Executive OfficerBy

/S/    MARK E.
TIESMark E. TiesChief Financial Officer and Treasurer (Principal Accounting and Financial Officer)




POWER OF ATTORNEY



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



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



|Signature                                 |  | Title                                                       |  | Date            
|----------------------------------------- |  | ----------------------------------------------------------- |  | ----------------
|                                          |  |                                                            
|/S/    VINCENT A.
WASIKVincent A. Wasik   |  | Chairman of the Board President and Chief Executive Officer |  | October 14, 2003
|                                          |  |                                                            
|/S/    JAMES
BROWNJames Brown             |  | Director                                                    |  | October 14, 2003
|                                          |  |                                                            
|/S/    DOUGLAS
HSIEHDouglas Hsieh         |  | Director                                                    |  | October 14, 2003
|                                          |  |                                                            
|/S/    ALEX
PALUCHAlex Paluch             |  | Director                                                    |  | October 14, 2003
|                                          |  |                                                            
|/S/    JACK F.
KEMPJack Kemp              |  | Director                                                    |  | October 14, 2003
|                                          |  |                                                            
|/S/    RICHARD A.
KASSARRichard A. Kassar |  | Director                                                    |  | October 14, 2003
|                                          |  |                                                            
|/S/    LESLIE E.
GRODDLeslie E. Grodd     |  | Director                                                    |  | October 14, 2003



65



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FINANCIAL STATEMENT SCHEDULES



VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

Schedule IIValuation and Qualifying Accounts

Fiscal Years 2003, 2002 and 2001

(Amounts in thousands)



|Column A                      |  | Column B                      |       | Column C                                   |   | Column D       |  | Column E               
|----------------------------- |  | ----------------------------- | ----- | ------------------------------------------ | - | -------------- |  | -----------------------
|Description                   |  | Balance atBeginning of Period |       | Additionscharged to cost,expenses,revenues |   | Deductions (1) |  | Balance atEnd of Period
|Accounts receivable reserves: |  |                               |       |                                            |   |                |  |                        
|2003                          |  | $                             | 2,250 |                                            | $ | 6,665          |  | $                      
|2002                          |  |                               | 1,160 |                                            |   | 3,165          |  |                        
|2001                          |  |                               | 2,575 |                                            |   | 513            |  |                        

---

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



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EXHIBIT INDEX



|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                       
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              | 
|2.1           |  | Merger Agreement by and among CEX Holdings, Inc., Corporate Express Delivery Systems, Inc., United Shipping & Technology, Inc. and United Shipping & Technology Acquisition
Corp., dated as of September 8, 1999 (incorporated by reference to the Companys Form 8-K, filed October 8, 1999).                                                                                    
|              | 
|2.2           |  | Amendment No. 1 to Merger Agreement by and among CEX Holdings, Inc., Corporate Express Delivery Systems, Inc., United Shipping & Technology, Inc. and United Shipping &
Technology Acquisition Corp., dated as of September 22, 1999 (incorporated by reference to the Companys 8-K, filed October 8, 1999).                                                                     
|              | 
|2.3           |  | Securities Purchase Agreement among United Shipping & Technology, Inc., TH Lee.Putnam Internet Partners, L.P. and TH Lee. Putnam Internet Parallel Partners, L.P., dated as of
May 15, 2000 (incorporated by reference to the Companys Form 8-K, filed June 2, 2000).                                                                                                            
|              | 
|2.4           |  | Securities Purchase Agreement among United Shipping & Technology, Inc., TH Lee.Putnam Internet Partners, L.P., TH Lee.Putnam Internet Parallel Partners, L.P., THLi
Coinvestment Partners LLC and Blue Star I, LLC, dated as of September 1, 2000 (incorporated by reference to the Companys Form 8-K, filed September 8, 2000).                                                 
|              | 
|2.5           |  | Amendment No. 2 to Merger Agreement, Settlement and General Release Agreement by and among Corporate Express, Inc., successor by merger to CEX Holdings, Inc., Velocity Express,
Inc. f/k/a Corporate Express Delivery Systems, Inc., and United Shipping & Technology, Inc. dated August 2, 2001 (incorporated by reference to the Companys Form 10-Q, filed November 13, 2001).
|              | 
|2.6           |  | Agreement and Plan of Merger by and between United Shipping & Technology, Inc., a Utah corporation, and Velocity Express Corporation, a Delaware corporation, dated as of
December 6, 2001 (incorporated by reference to the Companys Form 8-K, filed January 9, 2002).                                                                                                          
|              | 
|2.7           |  | Certificate of Merger of United Shipping & Technology, Inc. (a Utah corporation) into Velocity Express Corporation (a Delaware corporation) (incorporated by reference to the
Companys Form 10-K filed September 27, 2002).                                                                                                                                                      
|              | 
|3.1           |  | Amended and Restated Certificate of Incorporation of Velocity Express Corporation                                                                                                                                                                                                                                                                                                 
|              | 
|3.2           |  | Certificate of Amendment to Amended and Restated Certificate of Incorporation of Velocity Express Corporation (incorporated by reference to the Companys Form S-3/A, File No.
333-88568, filed June 3, 2002).                                                                                                                                                                    
|              | 
|3.3           |  | Certificate of Designation of Preferences and Rights of Series G Convertible Preferred Stock (incorporated by reference to the Companys Form 10-K filed September 27,
2002).                                                                                                                                                                                                     
|              | 
|3.4           |  | Certificate of Designation of Preferences and Rights of Series H Convertible Preferred Stock and Articles of Amendment to the Restated Articles of Incorporation (incorporated by
reference to the Companys Form 10-Q filed February 18, 2003).                                                                                                                                  
|              | 
|3.5           |  | Bylaws of Velocity Express Corporation (incorporated by reference to the Companys Form 8-K, filed January 9, 2002).                                                                                                                                                                                                                                                              
|              | 
|4.1           |  | Specimen form of the Companys Common Stock certificate (incorporated by reference to the Companys Statement on Form SB-2, File No. 333-01652C).                                                                                                                                                                                                                                 
|              | 
|4.2           |  | Specimen form of Velocity Express Corporation Common Stock Certificate (incorporated by reference to the Companys Form 8-K filed April 5, 2002).                                                                                                                                                                                                                                 
|              | 
|4.3           |  | Specimen form of Velocity Express Corporation Common Stock Certificate (incorporated by reference to the Companys Form 10-K filed September 27, 2002).                                                                                                                                                                                                                           
|              | 
|10.1          |  | 1996 Director Stock Option Plan, as amended (incorporated by reference to the Companys Form 10-QSB for the fiscal quarter ended January 1, 2000).                                                                                                                                                                                                                                



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|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                          
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              | 
|10.2          |  | 2000 Stock Option Plan (incorporated by reference to the Companys Definitive Schedule 14A filed on May 8, 2000).                                                                                                                                                                                                                                                    
|              | 
|10.3          |  | Exchange Agreement by and among United Shipping & Technology, Inc., UST Delivery Systems, Inc. and CEX Holdings, Inc., dated as of September 24, 1999 (incorporated by
reference to the Companys Form 8-K, filed October 8, 1999).                                                                                                                                  
|              | 
|10.4          |  | Note and Warrant Purchase Agreement by and among United Shipping & Technology, Inc., UST Delivery Systems, Inc. and Bayview Capital Partners LP, dated as of September 24, 1999
(incorporated by reference to the Companys Form 8-K, filed October 8, 1999).                                                                                                        
|              | 
|10.5          |  | Senior Subordinated Note by and among United Shipping & Technology, Inc., UST Delivery Systems, Inc. and Bayview Capital Partners LP, dated September 24, 1999 (incorporated by
reference to the Companys Form 8-K, filed October 8, 1999).                                                                                                                         
|              | 
|10.6          |  | Warrant to Purchase Common Stock of United Shipping & Technology, Inc. issued to Bayview Capital Partners LP, dated September 24, 1999 (incorporated by reference to the
Companys Form 8-K, filed October 8, 1999).                                                                                                                                                 
|              | 
|10.7          |  | Stock Purchase Warrant to Acquire Common Stock, issued May 31, 2000, granted by United Shipping & Technology, Inc. to TH Lee.Putnam Internet Partners, L.P. for up to 228,469
shares of Common Stock (incorporated by reference to the Companys Form 8-K, filed June 2, 2000).                                                                                      
|              | 
|10.8          |  | Stock Purchase Warrant to Acquire Common Stock, issued May 31, 2000, granted by United Shipping & Technology, Inc. to TH Lee.Putnam Internet Parallel Partners, L.P. for up to
196,531 shares of Common Stock (incorporated by reference to the Companys Form 8-K, filed June 2, 2000).                                                                             
|              | 
|10.9          |  | Stock Purchase Warrant to Acquire Series C Preferred Stock, issued September 1, 2000 by United Shipping & Technology, Inc. to TH Lee.Putnam Internet Partners, L.P. for 187,290
shares of Series C Preferred Stock at a price per share equal to $0.01 (incorporated by reference to the Companys Form 8-K, filed September 8, 2000).                               
|              | 
|10.10         |  | Stock Purchase Warrant to Acquire Series C Preferred Stock, issued September 1, 2000 by United Shipping & Technology, Inc. to TH Lee.Putnam Internet Partners, L.P. for 142,042
shares of Series C Preferred Stock at a price per share equal to $0.01 (incorporated by reference to the Companys Form 8-K, filed September 8, 2000).                               
|              | 
|10.11         |  | Stock Purchase Warrant to Acquire Series C Preferred Stock, issued September 1, 2000 by United Shipping & Technology, Inc. to THLi Coinvestment Partners, LLC for 10,598 shares
of Series C Preferred Stock at a price per share equal to $0.01 (incorporated by reference to the Companys Form 8-K, filed September 8, 2000).                                      
|              | 
|10.12         |  | Stock Purchase Warrant to Acquire Series C Preferred Stock, issued September 1, 2000 by United Shipping & Technology, Inc. to Blue Star I, LLC for 4,024 shares of Series C
Preferred Stock at a price per share equal to $0.01 (incorporated by reference to the Companys Form 8-K, filed September 8, 2000).                                                      
|              | 
|10.13         |  | Stock Purchase Warrant to Acquire Series C Preferred Stock, to be issued at the time of the Second Closing by United Shipping & Technology, Inc. to TH Lee.Putnam Internet
Partners, L.P. for 262,204 shares of Series C Preferred Stock at a price per share equal to $0.01 (incorporated by reference to the Companys Form 8-K, filed September 8, 2000).         
|              | 
|10.14         |  | Stock Purchase Warrant to Acquire Series C Preferred Stock, to be issued at the time of the Second Closing by United Shipping & Technology, Inc. to TH Lee.Putnam Internet
Parallel Partners, L.P. for 198,855 shares of Series C Preferred Stock at a price per share equal to $0.01 (incorporated by reference to the Companys Form 8-K, filed September 8, 2000).



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|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              | 
|10.15         |  | Stock Purchase Warrant to Acquire Series C Preferred Stock, to be issued at the time of the Second Closing by United Shipping & Technology, Inc. to THLi Coinvestment Partners
LLC for 14,837 shares of Series C Preferred Stock at a price per share equal to $0.01 (incorporated by reference to the Companys Form 8-K, filed September 8, 2000).                                                                                                                                                                                                       
|              | 
|10.16         |  | Stock Purchase Warrant to Acquire Series C Preferred Stock, to be issued at the time of the Second Closing by United Shipping & Technology, Inc. to Blue Star I, LLC for 5,634
shares of Series C Preferred Stock at a price per share equal to $0.01 (incorporated by reference to the Companys Form 8-K, filed September 8, 2000).                                                                                                                                                                                                                      
|              | 
|10.17         |  | Form of Warrant issued to Bayview Capital Partners LP as of May 2000 (incorporated by reference to the Companys Statement on Form 10-KSB for the fiscal year ended July 1,
2000).                                                                                                                                                                                                                                                                                                                                                                         
|              | 
|10.18         |  | Form of Warrant issued to Bayview Capital Partners LP as of July 2000 (incorporated by reference to the Companys Statement on Form 10-KSB for the fiscal year ended July 1,
2000).                                                                                                                                                                                                                                                                                                                                                                        
|              | 
|10.19         |  | Form of non-qualified stock option issued to employees as of June 2000 (incorporated by reference to the Companys Statement on Form 10-KSB for the fiscal year ended July 1,
2000).                                                                                                                                                                                                                                                                                                                                                                       
|              | 
|10.20         |  | Form of Stock Purchase Warrant to Acquire Preferred Stock dated January 4, 2001, issued by the Company to TH Lee.Putnam Internet Partners, L.P., TH Lee.Putnam Internet Parallel
Partners, L.P., THLi Coinvestment Partners LLC and Blue Star I, LLC (incorporated by reference to the Companys Current Report on Form 8-K, filed January 9, 2001).                                                                                                                                                                                                       
|              | 
|10.21         |  | Form of Stock Purchase Agreement to acquire Subscription Notes presently convertible into an aggregate 624,906 shares of Series D Preferred entered into during March 2001 between
the Company and TenX Venture Partners, LLC, HomePoint Corporation, Salah Al-Qahtani and AL-MAL Islamic Company (incorporated by reference to the Companys Form 8-K, filed May 21, 2001).                                                                                                                                                                               
|              | 
|10.22         |  | Form of Subscription Notes presently convertible into an aggregate 624,906 shares of Series D Preferred issued to TenX Venture Partners, LLC, HomePoint Corporation, Salah
Al-Qahtani and AL-MAL Islamic Company pursuant to Stock Purchase Agreements entered into during March 2001 (incorporated by reference to the Companys Form 8-K, filed May 21, 2001).                                                                                                                                                                                           
|              | 
|10.23         |  | Form of Warrant to purchase shares of Series D Preferred issued to entities affiliated with TH Lee.Putnam Internet Parallel Partners, L.P. on January 4, 2001 (incorporated by
reference to the Companys Form 8-K, filed May 21, 2001).                                                                                                                                                                                                                                                                                                                   
|              | 
|10.24         |  | Form of Subscription Note Purchase Agreement to purchase Series F Convertible Preferred Stock entered into between the Company and certain investors in July of 2001. (incorporated
by reference to the Companys Form 10-KSB for the year ended June 30, 2001).                                                                                                                                                                                                                                                                                           
|              | 
|10.25         |  | Form of Subscription Note issued in connection with the Companys Series F Convertible Preferred Stock financing in July of 2001. (incorporated by reference to the
Companys Form 10-KSB for the year ended June 30, 2001).                                                                                                                                                                                                                                                                                                                               
|              | 
|10.26         |  | Form of Warrant to purchase shares of Common Stock used in connection with the Companys Series F Convertible Preferred Stock financing in July of 2001. (incorporated by
reference to the Companys Form 10-KSB for the year ended June 30, 2001).                                                                                                                                                                                                                                                                                                        
|              | 
|10.27         |  | Third Amended and Restated Registration Rights Agreement dated as of July 2001, among the Company, TH Lee.Putnam Internet Partners, L.P., TH Lee.Putnam Internet Parallel Partners,
L.P., THLi Coinvestment Partners LLC, Blue Star I, LLC, RS Investment Management, Inc., Marshall T. Masko, Home Point Corporation, TenX Venture Partners, LLC, Al-Mal Islamic Company, Sheikh Salah A.H. Al-Qahtani and each Series F Convertible
Preferred Stock purchaser. (incorporated by reference to the Companys Form 10-KSB for the year ended June 30, 2001).



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##### Table of Contents

##### Index to Financial Statements

|ExhibitNumber |  | Description                                                                                                                                                                                                                              
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              | 
|10.28         |  | Employment Agreement between United Shipping & Technology, Inc. and Mark E. Ties dated June 2001. (incorporated by reference to the Companys Form 10-KSB/A for the year
ended June 30, 2001).                                           
|              | 
|10.29         |  | Employment Agreement between United Shipping & Technology, Inc. and Wesley C. Fredenburg dated December 4, 2000. (incorporated by reference to the Companys Form 10-KSB/A
for the year ended June 30, 2001).                            
|              | 
|10.30         |  | Contractor Services Agreement between United Shipping & Technology, Inc. and MCG Global, LLC dated May 15, 2001 (incorporated by reference to the Companys Form 10-Q
filed November 13, 2001).                                          
|              | 
|10.31         |  | Warrant to purchase up to 1,000,000 shares of Common Stock at a price of $0.40 per share issued by the Company to BLG Ventures, LLC dated August 23, 2001 (incorporated by
reference to the Companys Form 10-Q filed November 13, 2001).
|              | 
|10.32         |  | Loan and Security Agreement by and among Velocity Express, Inc. and related borrowers, and Fleet Capital Corporation dated as of January 25, 2002. (incorporated by reference to
the Companys Form 10-Q filed May 3, 2002).             
|              | 
|10.33         |  | Form of Incentive Stock Option Agreement between United Shipping & Technology, Inc., and management, dated October 29, 2001. (incorporated by reference to the Companys
Form 10-Q filed May 3, 2002).                                   
|              | 
|10.34         |  | Form of Stock Purchase Agreement to purchase Series G Convertible Preferred Stock entered into between the Company and certain investors on May 3, 2002. (incorporated by reference
to the Companys Form 10-K/A-2 filed July 28, 2003). 
|              | 
|10.35         |  | Employment Agreement between Corporate Express Delivery Systems (predecessor of Velocity Express, Inc.) and Victor A. Serri dated October 19, 1998 (incorporated by reference to
the Companys Form 10-K/A filed October 8, 2002).       
|              | 
|10.36         |  | Form of Stock Purchase Agreement to purchase Series H Convertible Preferred Stock (incorporated by reference to the Companys Form 10-Q filed May 16, 2003).                                                                             
|              | 
|10.37         |  | Form of Common Stock Warrant issued in connection with the Companys Series H Convertible Preferred Stock financing (incorporated by reference to the Companys Form 10-Q
filed February 18, 2003).                                      
|              | 
|21.1          |  | Subsidiaries                                                                                                                                                                                                                             
|              | 
|23.1          |  | Consent of Ernst & Young LLP                                                                                                                                                                                                             
|              | 
|31.1          |  | Section 302 Certification of CEO                                                                                                                                                                                                         
|              | 
|31.2          |  | Section 302 Certification of CFO                                                                                                                                                                                                         
|              | 
|32.1          |  | 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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