Form 10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

10-Q 1 d10q.htm FORM 10-Q Form 10-Q

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON DC 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 27, 2008

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File No. 0-28452

VELOCITY EXPRESS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

87-0355929

(State or other jurisdiction

of incorporation)

(IRS Employer

Identification No.)

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

Westport, Connecticut 06880

(Address of Principal Executive Offices including Zip Code)

(203) 349-4160

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See definitions of “large accelerated filer”, “accelerated filer”, or “smaller reporting company in Rule 12b-2 of the Exchange Act (check one):

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

As of November 7, 2008, there were 3,409,488 shares of common stock of the registrant issued and outstanding.

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

INDEX TO FORM 10-Q

September 27, 2008


		Page
PART I.	FINANCIAL INFORMATION	3

ITEM 1.	Financial Statements

	Consolidated Balance Sheets as of September 27, 2008 and June 28, 2008	3

	Consolidated Statements of Operations for the Three Months Ended September 27, 2008 and September 29, 2007	4

	Condensed Consolidated Statement of Shareholders’ Deficit and Comprehensive Loss for the Three Months Ended September 27, 2008	5

	Consolidated Statements of Cash Flows for the Three Months Ended September 27, 2008 and September 29, 2007	6

	Notes to Condensed Consolidated Financial Statements	7

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	24

ITEM 4T.	Controls and Procedures	24

PART II.	OTHER INFORMATION	26

ITEM 1.	Legal Proceedings	26

ITEM 1A.	Risk Factors	27

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37

ITEM 3.	Defaults Upon Senior Securities	37

ITEM 4.	Submission of Matters to a Vote of Security Holders	37

ITEM 5.	Other Information	37

ITEM 6.	Exhibits	37

SIGNATURES		38

PART I.

ITEM 1.

FINANCIAL STATEMENTS.

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Amounts in thousands, except par value)


	September 27, 2008			June 28, 2008

ASSETS
Current assets:
Cash	$	4,356		$	4,240
Accounts receivable, net of allowance of $1,385 and $1,724 at September 27, 2008 and June 28, 2008 respectively		24,031			25,126
Accounts receivable - other		1,086			815
Prepaid insurance		1,827			1,635
Other prepaid expenses and other current assets		814			720

Total current assets		32,114			32,536
Property and equipment, net		6,722			6,981
Goodwill		35,138			35,138
Intangible assets, net		20,800			21,333
Deferred financing costs, net		1,887			2,164
Other assets		3,804			3,797

Total assets	$	100,465		$	101,949


LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Trade accounts payable	$	28,260		$	26,533
Accrued wages and benefits		3,808			4,078
Accrued legal and claims		2,561			4,102
Accrued insurance and claims		2,922			3,075
Accrued interest		4,671			5,708
Related party liabilities		16			52
Other accrued liabilities		1,431			1,705
Revolving line of credit		8,014			7,942
Current portion of long-term debt		1,114			1,152

Total current liabilities		52,797			54,347
Long-term debt, less current portion		56,877			46,498
Accrued insurance and claims		535			538
Other long-term liabilities		3,840			4,992

Total liabilities		114,049			106,375
Commitments and contingencies
Shareholders’ deficit:
Preferred stock, $0.004 par value, 299,515 shares authorized 11,944 and 11,763 shares issued and outstanding at September 27, 2008 and June 28, 2008, respectively		69,868			68,750
Common stock, $0.004 par value, 700,000 shares authorized 3,372 and 2,893 shares issued and outstanding at September 27, 2008 and June 28, 2008, respectively		13			11
Stock subscription receivable		(170	)		(170	)
Additional paid-in-capital		394,424			393,318
Accumulated deficit		(477,358	)		(466,081	)
Accumulated other comprehensive loss		(361	)		(254	)

Total shareholders’ deficit		(13,584	)		(4,426	)

Total liabilities and shareholders’ deficit	$	100,465		$	101,949

See notes to condensed consolidated financial statements

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Amounts in thousands, except per share data)


	Three Months Ended
	September 27, 2008			September 29, 2007
Revenue	$	72,573		$	93,307
Cost of services		52,862			70,167
Depreciation		495			301

		53,357			70,468


Gross profit		19,216			22,839
Operating expenses:
Occupancy		4,393			4,630
Selling, general and administrative		14,313			18,509

		18,706			23,139
Integration costs		—			501
Restructuring charges		—			274
Asset impairments		15			—
Depreciation and amortization		811			1,476

Total operating expenses		19,532			25,390

Loss from operations		(316	)		(2,551	)
Other income (expense):
Interest expense, net		(9,016	)		(4,872	)
Other		(7	)		1

Loss before income taxes		(9,339	)		(7,422	)
Income taxes		—			100

Net loss	$	(9,339	)	$	(7,522	)

Net loss applicable to common shareholders	$	(11,278	)	$	(11,144	)

Basic and diluted net loss per share	$	(3.45	)	$	(4.22	)

Weighted average common stock shares outstanding used in the basic and diluted net loss per share calculation		3,272			2,642

See notes to condensed consolidated financial statements

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ DEFICIT AND COMPREHENSIVE LOSS

Unaudited

(Amounts in thousands)


	Series M Preferred Stock			Series N Preferred Stock			Series O Preferred Stock			Series P Preferred Stock			Series Q Preferred Stock
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount
Balance at June 28, 2008	4,063	$	14,335	764	$	2,694	90	$	355	1,995	$	4,983	4,851	$	46,383

Issuance of Common Stock	—		—	—		—	—		—	—		—	—		—
Offering costs	—		—	—		—	—		—	—		—	—		—
Issuance of preferred stock for dividends paid-in-kind	62		227	13		48	2		8	32		107	73		728
Preferred Stock PIK dividends earned	—		—	—		—	—		—	—		—	—		—
Beneficial conversion of preferred stock	—		—	—		—	—		—	—		—	—		—
Net loss	—		—	—		—	—		—	—		—	—		—
Foreign currency translation	—		—	—		—	—		—	—		—	—		—
Comprehensive loss	—		—	—		—	—		—	—		—	—		—

Balance at September 27, 2008	4,124	$	14,562	777	$	2,742	92	$	363	2,027	$	5,090	4,924	$	47,111

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ DEFICIT AND COMPREHENSIVE LOSS (CONTINUED)

Unaudited

(Amounts in thousands)


	Total Preferred Stock			Common Stock			Stock Subscription Receivable			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total
	Shares	Amount		Shares	Amount		Stock Subscription Receivable			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total
Balance at June 28, 2008	11,763	$	68,750	2,893	$	11	$	(170	)	$	393,318		$	(466,081	)	$	(254	)	$	(4,426	)

Issuance of Common Stock	—		—	479		2		—			299			—			—			301
Offering costs	—		—	—		—		—			(14	)		—			—			(14	)
Issuance of preferred stock for dividends paid-in-kind	181		1,118	—		—		—			(1,118	)		—			—			—
Preferred Stock PIK dividends earned	—		—	—		—		—			871			(871	)		—			—
Beneficial conversion of preferred stock	—		—	—		—		—			1,068			(1,068	)		—			—
Net loss	—		—	—		—		—			—			(9,339	)		—			(9,339	)
Foreign currency translation	—		—	—		—		—			—			—			(107	)		(107	)

Comprehensive loss	—		—	—		—		—			—			—			—			(9,446	)

Balance at September 27, 2008	11,944	$	69,868	3,372	$	13	$	(170	)	$	394,424		$	(477,358	)	$	(361	)	$	(13,584	)

See notes to condensed consolidated financial statements

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands)


	Three Months Ended
	September 27, 2008			September 29, 2007
OPERATING ACTIVITIES
Net loss	$	(9,339	)	$	(7,522	)
Adjustments to reconcile net loss to net cash flows provided by (used in) operating activities:
Depreciation and amortization of intangibles		1,306			1,777
Accretion of interest and amortization of debt issue costs		5,336			2,501
Stock option and warrant expense		—			86
Reversal of allowance for doubtful accounts, trade		(45	)		—
Asset impairments		15			—
Loss on debt extinguishment		7			—
Loss on the sale of assets		—			9
Change in operating assets and liabilities:
Accounts receivable		1,185			329
Other current assets		(561	)		1,477
Other assets		(7	)		157
Accounts payable		1,658			(3,000	)
Accrued liabilities		1,026			(3,667	)

Cash provided by (used in) operating activities		574			(7,853	)
INVESTING ACTIVITIES
Proceeds from sale of assets		—			157
Purchases of property and equipment		(246	)		(511	)

Cash used in investing activities		(246	)		(354	)
FINANCING ACTIVITIES
Proceeds from revolving credit facility, net		72			1,485
Payments of notes payable and long-term debt		(284	)		(256	)
Proceeds from issuance of common stock, net		—			3,580

Cash (used in) provided by financing activities		(212	)		4,809

Net change in cash		116			(3,398	)

Cash, beginning of period		4,240			14,418

Cash, end of period	$	4,356		$	11,020

See notes to condensed consolidated financial statements

VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

1. DESCRIPTION OF BUSINESS

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

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The condensed consolidated financial statements included herein have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, all adjustments consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company as of September 27, 2008 and the results of its operations and its cash flows for the three months ended September 27, 2008 and September 29, 2007, have been included. The results of operations for the three months ended September 27, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending June 27, 2009. Certain information in footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.

These consolidated financial statements should be read in conjunction with the financial statements for the year ended June 28, 2008, and the footnotes thereto, included in the Company’s Report on Form 10-K, as amended, filed with the Securities and Exchange Commission for such fiscal year. In connection with the preparation of such consolidated financial statements for the years ended June 28, 2008 and June 30, 2007, due to resource constraints, a material weakness is evident to management regarding the Company’s inability to simultaneously close the books on a timely basis each month and generate all the necessary disclosures for inclusion in its filings with the Securities and Exchange Commission. A material weakness is a significant deficiency in one or more of the internal control components that alone or in the aggregate precludes the Company’s internal controls from reducing to an appropriately low level the risk that material misstatements in its financial statements will not be prevented or detected on a timely basis.

Principles of Consolidation

The condensed 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.

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.

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 its accounts receivable is limited due to the wide variety of customers to which the Company’s services are

sold and the dispersion of those services across many industries and geographic areas. The Company has two customers that accounted for 22.4% and 10.6% of its revenues for the three months ended September 27, 2008 and one customer that accounted for 15.2% of its revenues for the three months ended September 29, 2007, respectively. No other customers have revenues in excess of 10%. The Company performs credit evaluation procedures on its customers and generally does not require collateral on its accounts receivable. An allowance for doubtful accounts is reviewed periodically based on the Company’s historical collection experience, current trends, credit policy and a percentage of accounts receivable by aging category. At September 27, 2008 the Company had two customers that accounted for 12.5% and 11.0% of the Company’s total trade accounts receivable, and at June 28, 2008, no single customer had an accounts receivable balance greater than 10% of the Company’s total trade accounts receivable.

Comprehensive Loss

Comprehensive loss was $9.6 million and $7.7 million for the three months ended September 27, 2008 and September 29, 2007, respectively. The difference between net loss and comprehensive loss in each respective period relates to foreign currency translation adjustments. All assets and liabilities of foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at the balance sheet date. The resulting translation adjustments are recorded as foreign currency translation adjustments, a component of Accumulated other comprehensive loss within the Shareholders’ deficit section of the Consolidated Balance Sheets. Income and expense items are translated at average exchange rates for the period.

Reverse Stock Split

Shareholder approval was granted for a 1 – for – 15 reverse stock split at the shareholders’ meeting held on December 6, 2007. Such reverse stock split became effective at open of trading on December 7, 2007. All share amounts presented reflect the reverse stock split.

Earnings Per Share

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

The following table presents a reconciliation of the numerators and denominators of basic and diluted net loss per share:


	Three Months Ended
	September 27, 2008			September 29, 2007
	*(Amounts in thousands, except per share data)*
Numerator:
Net loss	$	(9,339	)	$	(7,522	)
Beneficial conversion feature for Series N Preferred		(53	)		(154	)
Beneficial conversion feature for Series O Preferred		(6	)		(61	)
Beneficial conversion feature for Series P Preferred		(78	)		(194	)
Beneficial conversion feature for Series Q Preferred		(931	)		(1,913	)
Series M Preferred dividends paid-in-kind		(223	)		(312	)
Series N Preferred dividends paid-in-kind		(48	)		(62	)
Series O Preferred dividends paid-in-kind		(6	)		(42	)
Series P Preferred dividends paid-in-kind		(107	)		(171	)
Series Q Preferred dividends paid-in-kind		(487	)		(713	)

Net loss applicable to common shareholders	$	(11,278	)	$	(11,144	)

Denominator for basic and diluted loss per share:
Weighted average common stock shares outstanding		3,272			2,642

Basic and Diluted Loss Per Share	$	(3.45	)	$	(4.22	)

The following table presents securities that could be converted into common shares and potentially dilute basic earnings per share in the future. In the three-month periods ended September 27, 2008 and September 29, 2007, the potentially dilutive securities were not included in the computation of diluted loss per share because to do so would have been antidilutive:


	September 27, 2008	September 29, 2007
	*(Amounts in thousands)*
Stock options	28	28
Common stock warrants	1,905	1,932
Convertible preferred stock:
Series M Convertible Preferred	652	520
Series N Convertible Preferred	123	123
Series O Convertible Preferred	16	68
Series P Convertible Preferred	484	352
Series Q Convertible Preferred	3,903	2,917

	7,110	5,939

New Accounting Pronouncements

In September 2006, the FASB issued SFAS No.157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. We adopted the provisions of SFAS 157 as of June 29, 2008. The adoption of SFAS 157 did not have a material impact on our financial condition.

In February 2007 the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value at specific election dates. SFAS 159’s objective is to improve financial reporting by reducing both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS 159 requires companies to provide additional information that will help users of financial statements to more easily understand the effect of the Company’s choice to use fair value on its earnings. SFAS 159 also requires companies to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. The new standard does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in SFAS 157, and SFAS 107, Disclosures about Fair Value of Financial Instruments. The Company has not elected to measure any assets or liabilities at fair value that are not already measured at fair value under existing standards.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”). SFAS 141(R) requires most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at “full fair value.” The statement applies to all business combinations, including combinations among mutual enterprises. SFAS 141(R) requires all business combinations to be accounted for by applying the acquisition method and is effective for periods beginning on or after December 15, 2008, with early adoption prohibited.

3. RESTRUCTURING LIABILITIES

A summary of the restructuring liabilities and the activity for the period ended September 27, 2008 is as follows (amounts in thousands):


	Restructuring Liabilities June 28, 2008		Restructuring Costs		Payments			Adjustments and Changes in Estimates		Restructuring Liabilities September 27, 2008
Employee termination benefits	$	7	$	—	$	(3	)	$	—	$	4
Lease termination costs		514		—					—		514

	$	521	$	—	$	(3	)	$	—	$	518

4. DEBT

Revolving Credit Facility

Borrowings under the revolving credit agreement with Wells Fargo Foothill (“Wells”) bear interest at a rate equal to, at the borrowers’ option, either a base rate, or a LIBOR rate plus an applicable margin of 6.00%. The base rate is the rate of interest announced from time to time by Wells Fargo Bank, N.A. as the prime rate. The Company’s borrowing rate at September 27, 2008 was 8.5%. The Company had no additional available borrowings. The revolving credit agreement, as amended, matures on the earlier of: (i) the date that is 90 days prior to the earliest date on which the principal amount of any of the Modified Senior Notes is scheduled to become due and payable under the Indenture (as defined below) or (ii) December 22, 2011.

The revolving credit agreement, as amended, contains a number of customary covenants that, among other things, restrict the borrowers’ and guarantors’ ability to incur additional debt, create liens on assets, sell assets, pay dividends, engage in mergers and acquisitions, change the business conducted by the borrowers or guarantors, make capital expenditures and engage in transactions with affiliates. The revolving credit agreement, as amended, also includes specified financial covenants requiring the borrowers to achieve a minimum EBITDA (as defined in the amended revolving credit agreement), measured at the end of each fiscal month, not to exceed minimum levels of driver pay and purchased transportation measured as a percentage of revenue, and to certify compliance on a monthly basis. In connection with the revolving credit agreement, as amended, the Company also entered into a security agreement whereby the Company’s obligations under the revolving credit agreement are secured by substantially all of the assets of each borrower and each guarantor subject to the rights of the holders of the Modified Senior Notes.

The Company did not meet the minimum driver pay and purchased transportation covenant for the four three-week periods ended July 11, 2008, August 15, 2008, September 12, 2008, and October 17, 2008. Wells, in its capacity as agent and lender under the amended credit agreement, granted the Company waivers dated October 14, 2008 and November 12, 2008 (see Note 8 – Liquidity).

Long Term Debt

Long-term debt consists of the following:


	September 27, 2008			June 28, 2008
	*(Amounts in thousands)*
Senior Notes, net of discount of $35,379 and $40,482, respectively	$	55,887		$	45,543
Capital leases		1,967			1,969
Other		137			138

		57,991			47,650
Less current maturities		(1,114	)		(1,152	)

Total Long Term Debt	$	56,877		$	46,498

Modified Senior Notes

The Company is accreting the difference between the carrying amount of the Modified Senior Notes ($55.9 million and $45.5 million at September 27, 2008 and June 28, 2008, respectively) and their face value ($91.3 million and $86.0 million at September 27, 2008 and June 28, 2008, respectively) over the remaining term using the effective interest method. Total accretion in the three month period ended September 27, 2008 was $5.1 million.

The Modified Senior Notes bear interest at an annual rate of 18% at September 27, 2008. They may be redeemed at the Company’s option after June 30, 2009, upon payment of the then applicable redemption price. The Company may also redeem up to 35% of the aggregate principal amount of the Modified Senior Notes with proceeds derived from the sale of Velocity capital stock. The Company may also redeem Modified Senior Notes with proceeds derived from the exercise of warrants subject to specified limits. In each instance, the optional redemption price is 106% if the redemption occurs between June 30, 2007 and June 29, 2009; and 100% if the redemption occurs thereafter.

A second supplemental indenture, dated December 22, 2006, prohibits the payment of mandatory redemption of Original Senior Notes if there are outstanding obligations under the revolving credit facility, as amended.

On July 25, 2007, the Company entered into a third supplemental indenture modifying the indenture governing the Original Senior Notes. An allonge to the existing Senior Notes raised the interest rate payable on the Notes from 12.0% to 13.0%.

(“VWAP”) not less than the current market of $0.88 on the date the agreement was reached, (4) required issuance of an additional $7.8 million face value of the Senior Notes for a total of $86.0 million face value then outstanding at May 19, 2008, (5) increased the interest rate to 18%, (6) reduced the exercise price of the warrants originally issued with the Original Senior Notes in July 2006 by $16.21, from $17.56 to $1.35 per share, (7) required the issuance of additional warrants equal to 15% of the common stock of the Company to holders at $0.88 per share (which was the greater of 105% VWAP or $0.88) with a forced conversion feature at 150% of the initial conversion price, (8) replaced existing financial covenants with a $3.0 million minimum cash covenant, and $26.0 million minimum cash plus accounts receivable covenant, and a minimum quarterly EBITDA covenant, (9) waived the Note Holders’ right of first refusal to replace the Wells Fargo Foothill revolving credit facility, (10) defines the terms under which replacement financing for the Company’s revolving credit facility is permitted, (11) commits any and all proceeds from certain litigation to prepayment of the Modified Senior Notes subject to the rights of the revolving credit facility provider, (12) permits the sale or licensing of the Company’s technology for use outside of North America, with certain proceeds or revenue from such sale or licensing committed to prepayment of the Modified Senior Notes subject to the rights of the revolving credit facility provider, (13) permits the sale of certain non-core business units with certain proceeds from such sales committed to prepayment of the Modified Senior Notes subject to the rights of the revolving credit facility provider, (14) reduced certain executive pay, and (15) provides for Note Holder representation on the Company’s Board of Directors.

On June 30, 2008, the Company issued $5.3 million face value of Modified Senior Notes and 377,154 shares of common stock as settlement of interest accrued on the Modified Senior Notes in accordance with the Fourth Supplemental Indenture.

5. AUTOMOBILE AND WORKERS COMPENSATION LIABILITIES

During the third quarter of fiscal year 2005 and concluding in December 2006, we changed our insurance program to policies with minimal or no deductibles from earlier periods when our policies had various higher deductible levels; and thus were partially self-insured for automobile and workers’ compensation claims incurred during that period. The Company is also partially self-insured through high deductible policies for cargo claims. Provisions for losses expected under these programs are recorded based upon the Company’s estimates of the aggregate liability for claims incurred and applicable deductible levels. These estimates include the Company’s actual experience based on information received from the Company’s insurance carriers and historical assumptions of development of unpaid liabilities over time. As of September 27, 2008 and September 29, 2007, the Company has deposits with its insurance carrier of zero and $0.4 million, respectively.

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

In January 2007, the Company began insuring its workers’ compensation risks through insurance policies with substantial deductibles and retains risk as a result of its deductibles related to such insurance policies. The Company’s deductible for workers’ compensation is $500,000 per loss with an annual aggregate stop loss of approximately $1,600,000. The Company accrues 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 accruals are established by management based upon the recommendations of third party administrators who perform a specific review of open claims, which include fully developed estimates of both reported claims and incurred but not reported claims, as of the balance sheet date. Actual claim settlements may differ materially from these estimated accrued amounts. As of September 27, 2008 and June 28, 2008, the Company has accrued approximately $1.4 million and $1.5 million for case reserves plus development reserves and estimated losses incurred, but not reported, respectively.

6. SHAREHOLDERS’ EQUITY

Common stock

During the three month period ended September 27, 2008, the Company issued 377,154 shares of common stock with a fair value of approximately $0.2 million to the Note Holders as settlement in part of accrued interest on the Modified Senior Notes.

Warrant Conversions

The Company redeemed approximately $0.1 million in face value of Modified Senior Notes as settlement of the exercise price from the exercise of 101,864 warrants in exchange for 101,864 shares of common stock. The warrants exercised by the holders of the Modified Senior Notes had exercise prices of $0.88 and $1.35 per warrant. The shares issued were recorded at their fair value of approximately $0.1 million resulting in a loss on debt extinguishment of approximately $7,000 which is recorded in other expense.

A summary of the status of the Company’s common stock warrants outstanding as of September 27, 2008 and activity during the three-month period then ended is presented below:


	Number of Warrants		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value (in thousands)
Warrants Outstanding Beginning of Period	2,006,728		$	3.80
Exercised	(101,864	)	$	0.97

Warrants outstanding and exercisable, September 27, 2008	1,904,864		$	3.97	2.17 years	$	6

7. COMMITMENTS AND CONTINGENCIES

Litigation

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

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

Consequently, on Friday, May 4, 2007, the Company filed suit against Office Depot in Superior Court of Kent County, Delaware. That suit seeks three separate forms of relief. The first claim is for almost $600,000 for unpaid invoices. The second claim is for approximately $3.1 million resulting from Office Depot’s failure to pay the minimums required of it pursuant to the agreements. The third claim is for damages resulting from the improper termination, including loss of contributions to the Company’s profit resulting from the alleged improper termination. The damages for the last claim assume that the improperly

cancelled agreements would have remained in effect at least another year. Office Depot filed its answer on July 18, 2007. Discovery is ongoing. There is no assurance the Company will be successful in pursuing this lawsuit, that Office Depot will not file a claim against us, or that the legal costs in doing so will outweigh any amounts received from Office Depot.

In January 2007, two Notices of Assessment seeking payroll taxes were issued by the California Employment Development Department (the “EDD”) against Velocity Express, Inc. The first Notice of Assessment covers the period July 1, 2003 to December 31, 2004. The second Notice of Assessment covers the period of January 1, 2005 to June 30, 2006. In February 2007, the Company filed a Petition for Reassessment disputing both assessments in their entirety and requesting that this matter be referred to an administrative law judge for resolution. The Company is currently in the process of researching and producing documents for use in connection with its Petition for Reassessment.

In connection with the CD&L acquisition, the Company assumed the defense of a class action suit filed in December, 2003 in the Superior Court of the State of California for the County of Los Angeles, seeking to certify a class of California based independent contractors from December 1999 to the present. The complaint seeks unspecified damages for various employment related claims, including, but not limited to overtime, minimum wage claims, and claims for unreimbursed business expenses. CD&L filed an Answer to their Complaint on or about January 2, 2004 denying all allegations. Plaintiff’s motion for Class Certification was granted in part and denied in part on January 28, 2007. During the quarter ended September 27, 2008, the Company recorded a benefit of approximately $1.0 million resulting from a change in the estimated settlement liability related to this matter. Discovery on this matter is ongoing.

Nine purported class action law suits were filed against the Company between December 2007 and July 2008. These suits, which were filed by a very small group of independent contractor drivers in six different states, seek unspecified damages for various unsubstantiated employment related claims. Velocity intends to vigorously defend these cases through trial if necessary and continues to reject all allegations of the Complaint as amended.

NASDAQ Compliance

The Company received notice on June 19, 2008 from the NASDAQ that it was not in compliance with the Marketplace Rule 4310(c)(4) regarding the minimum bid requirement for the continued listing of our common stock on the NASDAQ. We have a period of 180 days, until December 16, 2008, to attain compliance by maintaining a bid price of $1.00 for ten consecutive trading days. If we are unable to demonstrate bid price compliance by December 16, 2008, but are found to meet all other initial listing requirements for the NASDAQ, we may receive an additional 180-day compliance period. If we do not meet compliance requirements within the second 180-day period, NASDAQ will notify us that our common stock will be de-listed. Upon receiving this notice, we will file a current report on Form 8-K with the SEC disclosing that and related details.

The Company received another notice on September 5, 2008 from the NASDAQ that we are not in compliance with the Marketplace Rule 4310(c)(7) regarding the minimum market value of publicly held shares requirement for the continued listing of our common stock on the NASDAQ. If we are unable to demonstrate minimum market value compliance by December 4, 2008, NASDAQ will notify us that our common stock will be de-listed. Upon receiving this notice, we will file a current report on Form 8-K with the SEC disclosing that and related details.

On October 16, 2008, the NASDAQ implemented a temporary suspension of bid price and market value of publicly held shares requirements through Friday, January 16, 2009. The rules will be reinstated on Monday, January 19, 2009. On October 22, 2008, NASDAQ sent the Company two letters to inform management that it will remain at the same stage of the compliance period with regard to minimum bid price or minimum market value of publicly held shares, and upon reinstatement of the rules, it will retain the number of days remaining in its compliance period of 62 days and 50 days, respectively, extending the compliance period to March 23, 2009 and March 10, 2009, respectively.

to the NASDAQ staff on October 31, 2008, outlining a specific plan and timeline to achieve and sustain compliance based on the prospective global alliance transactions. If the NASDAQ determines the Company has not presented a plan that adequately addresses the stockholders’ equity issue, NASDAQ will provide written notice that the Company’s securities will be delisted. At that time, the Company has the right to appeal the decision to a NASDAQ Listing Qualifications Panel. There is no assurance that the NASDAQ staff will accept the Company’s plan of compliance. In the event the NASDAQ staff does not accept the Company’s plan, the Company intends to request an appeal hearing before the NASDAQ Listing Qualifications Panel.

Although we may regain compliance with the NASDAQ listing requirements, the negative publicity surrounding the receipt of these notices will likely have a material adverse effect on the price of our common stock, our ability to raise capital, whether debt or equity, in the future unless and until this situation is resolved, will likely cause a negative perception of, and confidence in, us by our investors, customers, vendors, creditors and employees. Although we believe we have done all that we can to maintain our NASDAQ listing, holders of our preferred stock and certain warrants may claim that we did not use our best efforts to maintain our NASDAQ listing. We cannot assure you that we will be successful in regaining compliance with NASDAQ’s listing requirements.

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

8. LIQUIDITY

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company reported significant recurring losses from operations over the past several years including in 2008 a loss of approximately $56.1 million, which includes a goodwill impairment charge of $46.7 million and a $13.9 million non-cash gain on the extinguishment of debt, and for the three months ended September 27, 2008 a loss of approximately $9.3 million. The Company also used cash in operating activities over the past several years, including $11.3 million in 2008. However, for the three months ended September 27, 2008, the Company generated $0.6 million in cash from operating activities. As of September 27, 2008 the Company has negative working capital of approximately $20.7 million and a deficiency in assets of $13.6 million. Further, the Company did not meet the minimum EBITDA levels and minimum driver pay and purchased transportation covenants contained in its credit agreement, as amended, at various times during fiscal 2008 and 2009. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. As described below, the Company is managing to an operating plan under which it expects to meet its expected cash needs and satisfy the covenants contained in the agreements governing its debt.

Wells, in its capacity as agent and lender under the credit agreement, as amended, granted the Company waivers and then entered into additional amendments to the credit agreement, two of which dated April 30, 2008 and May 19, 2008 provided for (1) an increase in LIBOR margin from 4.00% to 6.00% until trailing twelve month EBITDA equals $15.0 million, dropping to a 5.25% LIBOR margin when trailing twelve month EBITDA is greater than $15.0 million and dropping to 4.50% LIBOR margin when trailing twelve month EBITDA is greater than $20.0 million, (2) new financial reporting requirements, (3) revised minimum EDITDA levels and minimum Driver Pay/Purchased Transportation levels measured as percentages of revenue, (4) the requirement to have a special reserve against available borrowing starting at $1,000,000 and rising by $25,000 each week commencing on June 30, 2008 through November 30, 2008, by $37,500 per week from December 1, 2008 to February 28, 2009, by $50,000 per week from March 1, 2009 to May 31, 2009, and $62,500 per week from June 1, 2009 to December 31, 2009 or until the revolving credit facility is paid in full, and (5) defining certain milestones to achieve toward obtaining

replacement financing of the Company revolving credit facility. In the event these milestones are not achieved, the Company would be subject to additional fees of up to $500,000. The Company did not achieve the first milestone and incurred the first $250,000 fee in August 2008.

The Company again did not meet the covenant for minimum driver pay and purchased transportation cost as a percentage of revenue for the three-week periods ended July 11, 2008, August 15, 2008, September 12, 2008, and October 17, 2008. Wells, in its capacity as agent and lender under the amended credit agreement, granted the Company waivers dated October 14, 2008 and November 12, 2008 and entered into additional amendments to the credit agreement increasing the special reserve against available borrowing by a total of $87,500 during the quarter ending December 27, 2008.

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

•

improving gross margins by continued use our integrated route information database to: (1) identify and correct driver pay where our average driver settlement has exceeded competitive market norms for the work performed and (2) identify and implement opportunities to re-design local route structures to optimize the number of drivers retained to perform the contracted deliveries;

•

lower operating and SG&A expenses primarily by reducing headcount, and to a lesser degree, changing or eliminating services and the related costs associated with telecommunications, vehicle expenses, and miscellaneous other activities;

•

increasing profitable revenue growth from recently announced, existing and potential customers in targeted markets including new revenue derived from our expansion in the retail replenishment business;

•

continuing to manage working capital; and

•

replacing its current revolving facility with Wells. We have executed a letter of intent with the U.S. subsidiary of a European bank group, completed due diligence, received credit committee approval from the parent bank in Europe and executed a commitment letter on November 12, 2008 enabling us to begin final loan documentation.

In addition, the Company expects to further improve its cash position in fiscal 2009 with the payment of interest in-kind on its Modified Senior Notes, and the sale of its Canadian subsidiary

The Company believes that, based on its operating plan, results to date in fiscal 2009 and expected replacement of its revolving credit facility, it will have sufficient cash flow to meet its expected cash needs and satisfy the covenants contained in the agreements governing its debt (including any minimum EBITDA or other covenants under its expected replacement revolving credit facility) in the next twelve month period. The Company is factoring into its plan, among other things, the requirements under the Fourth Supplemental Indenture governing the Modified Senior Notes to maintain a minimum cash balance of $3.0 million. As of September 27, 2008, the Company had $4.4 million in cash with no available borrowings under its revolving credit facility. Although no assurances can be given, based on the current operating plan (including the related assumptions), recent results from operations, qualitative feedback from field management since September 27, 2008 and its expected replacement of its revolving credit facility, the Company believes it will be in compliance with its covenants, including those summarized above, and will continue to meet its obligations in the ordinary course of business as they become due through June 27, 2009.

Further, the Company will take additional actions if necessary to reduce expenses. In that case, the Company would need to amend, or seek one or more further waivers of, the minimum EBITDA covenant under the credit agreement, as amended, and the minimum cash requirement under the Fourth Supplemental Indenture. If the Company can not maintain compliance with its covenant requirements and can not obtain appropriate waivers and modifications, the lenders and bondholders may call the debt. If the debt is called, the Company would need to obtain new financing; there can be no assurance that the Company will be able to do so. If the Company is unable to achieve its operating plan and maintain compliance with its loan covenants and its debt is called, the Company will not be able to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that may result from the outcome of this uncertainty. For a discussion of these risks and related matters discussed above, see “Risk Factors.”

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

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

Overview

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

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

Our service offerings are divided into the following categories:

•

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

•

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

•

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

The Company’s customers represent a variety of industries and utilize our services across multiple service offerings. Revenue categories and percentages of total revenue for the quarters ended September 27, 2008 and September 29, 2007 were as follows:


	Three Months Ended
	September 27, 2008		September 29, 2007
Healthcare	30.4	%	29.9	%
Office products	29.0	%	27.4	%
Financial services	11.9	%	14.9	%
Retail and consumer products	11.5	%	6.5	%
Commercial	10.1	%	12.8	%
Transportation and logistics	5.4	%	6.8	%
Energy	1.2	%	1.0	%
Technology	0.5	%	0.7	%

With the enactment of the Federal law known as Check 21, on October 28, 2004, we anticipate that financial services revenue will continue to decline as financial institutions migrate to electronically scanned and processed checks, without the need to move the physical documents to the clearing institution. We expect to off-set this relative decline in revenue in the financial services industry with new revenue from our expansion in the retail replenishment business. In addition, we believe we will benefit from the growth in the healthcare industry within the United States, and be able to effectively leverage our broad coverage footprint and track-and-trace scanning capabilities to capitalize on this national growth industry.

For the three months ended September 27, 2008, the Company had a net loss of $9.5 million, but generated cash from operations of $0.7 million.

Critical Accounting Policies and Estimates

The Company’s discussion and analysis of financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company’s management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, the Company’s management evaluates its estimates, including those related to bad debts, goodwill, insurance reserves, income taxes, and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a discussion of the Company’s critical accounting policies, see the Company’s Annual Report on Form 10-K, as amended, for the year ended June 28, 2008.

Historical Results of Operations

Three Months Ended September 27, 2008 Compared to Three Months Ended September 29, 2007

Revenue for the quarter ended September 27, 2008 decreased $20.7 million or 22.2% to $72.6 million from $93.3 million for the quarter ended September 29, 2007. The decrease in revenue was the result of our planned exit from uneconomic customer contracts acquired with the CD&L merger ($9.1 million), other customer service stops ($9.1 million) the continued migration of banking customers to the Check 21 scanning technology ($2.6 million), volume declines with continuing customers related to the slowing U.S. economy ($4.4 million), and the loss of a significant bank customer in the second quarter of 2008 ($3.3 million). These negative changes were partly offset by new revenue from customer start-ups of $5.9 million and $19 million of volume growth by other continuing customers that are less affected by the slowing U.S. economy.

Cost of services for the quarter ended September 27, 2008 was $52.9 million, a decrease of $17.3 million or 24.7% from $70.2 million for the quarter ended September 29, 2007. The decrease in volume accounted for a decrease of $13.3 million in driver pay and purchased transportation and $0.2 million in vehicle expense, correcting a number of specific, predominantly legacy CD&L routes, where our average driver settlement exceeded competitive market norms for the work performed accounted for $2.0 million, and improvements in purchased transportation costs as a percentage of revenue accounted for $0.5 million. Direct labor declined by $0.7 million, but increased as a percentage of revenue from 6.6% of revenue to 7.6% of revenue as the revenue mix shifted to more deliveries requiring sorting in our warehouses. Communication and scanner expenses also declined by $0.4 million due to improved reimbursements from independent contractor drivers related to the rollout of V-Trac 5.0 scanners. Offsetting these improvements was increased depreciation of $0.2 million on the V-Trac 5.0 scanners acquired and deployed to the field, and the related capitalized software development. As a result, gross margin increased from 24.5% in the prior year quarter to 26.5% for the quarter ended September 27, 2008.

Occupancy expense for the quarter ended September 27, 2008 were $4.4 million, a decrease of $0.2 million from the quarter ended September 29, 2007 reflecting closures of redundant facilities offset with increased costs for larger new facilities, occupied to accommodate anticipated volume growth.

Selling, general and administrative expenses for the quarter ended September 27, 2008 were $14.3 million or 19.7% of revenue, a decrease of $4.2 million or 22.7% as compared with $18.5 million or 19.8% of revenue for the quarter ended September 29, 2007. The decrease in SG&A for the quarter resulted primarily from a reduction in compensation, benefits, and travel expenses resulting from the two restructuring actions implemented during 2008 in response to the previously announced loss of the Company’s largest financial services customer and continued customer attrition ($3.2 million), and a benefit of $1.0 million resulting from a change in an estimated settlement liability in 2008.

Integration costs for the quarter ended September 29, 2007 were $0.5 million or 0.5% of revenue as the Company completed the integration of CD&L.

Restructuring charges for the quarter ended September 29, 2007 were $0.3 million or 0.3% of revenue. During the three month period ended September 29, 2007, in response to the previously announced loss of the Company’s largest financial services customer, the Company’s management commenced a restructuring plan which primarily included severance costs of approximately $0.2 million. There were no restructuring actions during the quarter ended September 27, 2008.

Depreciation and amortization for the quarter ended September 27, 2008 was $0.8 million or 1.1% of revenue, a decrease of $0.7 million or 45.1% as compared with $1.5 million or 1.6% of revenue for the quarter ended September 29, 2007, of which $0.6 million pertains to a decrease in depreciation as equipment becoming fully depreciated exceeded depreciation on newly acquired fixed assets, and $0.1 million pertains to a decrease in amortization expense, as the non-compete intangible assets became fully amortized.

Net interest expense for the quarter ended September 27, 2008 increased $4.1 million to $9.0 million from $4.9 million for the quarter ended September 29, 2007 resulting from a 6% higher interest rate on the Modified Senior Notes due 2010, an additional $7.8 million face value of Modified Senior Notes issued as consideration for the modification to the indenture governing the Original Senior Notes in May 2008 earning 18% interest, and an additional $5.3 million face value of Modified Senior Notes issued as settlement in-kind of interest accrued on the Senior Notes also earning 18% interest.

As a result of the above, the Company had a net loss of $9.3 million for the quarter ended September 28, 2008 compared to a net loss of $7.5 million in the quarter ended September 29, 2007.

Net loss applicable to common stockholders was $11.3 million for the quarter ended September 27, 2008 compared with $11.1 million for the quarter ended September 29, 2007. For September 27, 2008 quarter, the difference between net loss applicable to common stockholders and net loss relates to dividends

paid-in-kind on Series M, Series N, Series O, Series P and Series Q Convertible Preferred Stock, and the beneficial conversion associated with dividends paid-in-kind on Series N, Series O, Series P and Series Q Convertible Preferred Stock. In the quarter ended September 29, 2007, the difference between net loss applicable to common stockholders and net loss related to the beneficial conversion associated with the anti-dilution provisions of Series N, Series O, Series P, and Series Q Convertible Preferred Stock resulting from the modification of warrants, dividends paid-in-kind on Series M, Series N, Series O, Series P and Series Q Convertible Preferred Stock, and the beneficial conversion associated with dividends paid-in-kind on Series N, Series O, Series P and Series Q Convertible Preferred Stock.

Liquidity and Capital Resources

Overview

The Company again did not meet the covenant for minimum driver pay and purchased transportation cost as a percentage of revenue for the four three-week periods ended July 11, 2008, August 15, 2008, September 12, 2008, and October 17, 2008. Wells, in its capacity as agent and lender under the amended credit agreement, granted the Company waivers dated October 14, 2008 and November 12, 2008 and entered into additional amendments to the credit agreement increasing the special reserve against available borrowing by a total of $87,500 during the quarter ending December 27, 2008.

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

•

continuing to manage working capital; and

•

In addition, the Company expects to further improve its cash position in fiscal 2009 with the payment of interest in-kind on its Modified Senior Notes, and the sale of its Canadian subsidiary

As with any operating plan, there are risks associated with the Company’s ability to execute it, including the slowing economic environment in which it operates. Therefore, there can be no assurance that the Company will be able to satisfy the revised minimum EBITDA requirement or other applicable covenants to its lenders, or achieve the operating improvements described above, including the replacement of its revolving credit facility as contemplated by the current operating plan. If the Company is unable to execute this plan in general, it will need to find additional sources of cash not contemplated by the current operating plan and/or raise additional capital to sustain continuing operations as currently contemplated. Further, the Company will take additional actions if necessary to reduce expenses. In that case, the Company would need to amend, or seek one or more further waivers of, the minimum EBITDA covenant under the credit agreement, as amended, and the minimum cash requirement under the Fourth Supplemental Indenture. If the Company can not maintain compliance with its covenant requirements and can not obtain appropriate waivers and modifications, the lenders and bondholders may call the debt. If the debt is called, the Company would need to obtain new financing; there can be no assurance that the Company will be able to do so. If the Company is unable to achieve its operating plan and maintain compliance with its loan covenants and its debt is called, the Company will not be able to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that may result from the outcome of this uncertainty. For a discussion of these risks and related matters discussed above, see “Risk Factors.”

Operating Activities, Investing Activities & Financing Activities

During the quarter ended September 27, 2008, the net increase in cash was $0.1 million compared to a net decrease of $3.4 million during the quarter ended September 29, 2007. As reported in our consolidated statements of cash flows, the increase (decrease) in cash during the quarters ended September 27, 2008 and September 29, 2007 is summarized as follows (in thousands):


	Quarter Ended
	September 27, 2008			September 29, 2007
Net cash provided by (used in) operating activities	$	574		$	(7,853	)
Net cash used in investing activities		(246	)		(354	)
Net cash (used in) provided by financing activities		(212	)		4,809

Total increase (decrease) in cash	$	116		$	(3,398	)

Cash generated from operations was $0.6 million for the quarter ended September 27, 2008. This generation of cash was comprised of a net loss of $9.3 million offset by non-cash expenses of $6.6 million and working capital changes of $3.3 million. The increase in cash from working capital changes includes an decrease in accounts receivable of $1.2 million, and an increase in accounts payable and accrued expenses of $2.7 million partly offset by an increase of $0.6 million in prepaid insurance and other prepaid expenses.

Cash used in investing activities was $0.2 million for the quarter ended September 27, 2008 and consisted of capital expenditures.

Cash used in financing activities for the quarter ended September 27, 2008 was $0.2 million. The primary use of cash was payments of notes payable and long-term debt, partly offset with net proceeds of $0.1 million additional borrowings from the revolving credit facility.

Revolving Credit Facility

Borrowings under the revolving credit agreement, as amended, bear interest at a rate equal to, at the borrowers’ option, either a base rate plus an applicable margin of 3.50%, or a LIBOR rate plus an applicable margin of 6.00%. The base rate is the rate of interest announced from time to time by Wells Fargo Bank, N.A. as the prime rate. The Company’s borrowing rate at September 27, 2008 was 8.5% and, in accordance with the terms of the agreement, the Company had no available borrowings. The revolving credit agreement, as amended, matures on the earlier of: (i) the date that is 90 days prior to the earliest date on which the principal amount of any of the Modified Senior Notes is scheduled to become due and payable under the Indenture (as defined below) or (ii) December 22, 2011.

The Company did not meet the minimum driver pay and purchased transportation covenant for the four three-week periods ended June 13, 2008, July 11, 2008, August 15, 2008, September 12, 2008, and October 17, 2008. Wells, in its capacity as agent and lender under the amended credit agreement, granted the Company waivers dated October 14, 2008 and November 12, 2008 and entered into additional amendments to the credit agreement increasing the special reserve against available borrowing by a total of $87,500 during the quarter ending December 27, 2008.

Modified Senior Notes

On May 19, 2008, the holders of our senior secured notes due 2010 (the “Note Holders” of our “Original Senior Notes”) consented to a Fourth Supplemental Indenture modifying the indenture governing the Original Senior Notes. The supplemental indenture (1) allows for interest payments due in June 2008 ($5.7 million) and December 2008 ($8.2 million) to be paid-in-kind, instead of cash, (2) allows for one half of the interest payments (9%) due in 2009 to be paid-in-kind, instead of cash, (3) at the option of holder, up to 50% of PIK interest to be paid in registered common shares at volume weighted average price (“VWAP”) not less than the current market of $0.88 on the date the agreement was reached, (4) required issuance of an additional $7.8 million face value of the Senior Notes for a total of $86.0 million face value then outstanding at May 19, 2008, (5) increased the interest rate to 18%, (6) reduced the exercise price of the warrants originally issued with the Original Senior Notes in July 2006 by $16.21, from $17.56 to $1.35 per share, (7) required the issuance of additional warrants equal to 15% of the common stock of the Company to holders at $0.88 per share (which was the greater of 105% VWAP or $0.88) with a forced conversion feature at 150% of the initial conversion price, (8) replaced existing financial covenants with a $3.0 million minimum cash covenant, and $26.0 million minimum cash plus accounts receivable covenant, and a minimum quarterly EBITDA covenant, (9) waived the Note Holders’ right of first refusal to replace the Wells Fargo Foothill revolving credit facility, (10) defines the terms under which replacement financing for the Company’s revolving credit facility is permitted, (11) commits any and all proceeds from certain litigation to prepayment of the Modified Senior Notes subject to the rights of the revolving credit facility provider, (12) permits the sale or licensing of the Company’s technology for use outside of North America, with certain proceeds or revenue from such sale or licensing committed to prepayment of the Modified Senior Notes subject to the rights of the revolving credit facility provider, (13) permits the sale of certain non-core business units with certain proceeds from such sales committed to prepayment of the Modified Senior Notes subject to the rights of the revolving credit facility provider, (14) reduced certain executive pay, and (15) provides for Note Holder representation on the Company’s Board of Directors.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable for smaller reporting companies.

ITEM 4T.

CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded,

processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of September 27, 2008. Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 27, 2008 because of the material weakness described below.

In connection with the preparation of our consolidated financial statements for the year ended June 28, 2008, due to resource constraints, a material weakness is evident to management regarding our inability to simultaneously close the books on a timely basis each month and generate all the necessary disclosure for inclusion in our filings with the Securities and Exchange Commission. A material weakness is a significant deficiency in one or more of the internal control components that alone or in the aggregate precludes our internal controls from reducing to an appropriately low level the risk that material misstatements in our financial statements will not be prevented or detected on a timely basis. This material weakness was still present at September 27, 2008.

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

Changes in Internal Controls over Financial Reporting

There has been no change in internal controls over financial reporting during the first quarter of fiscal 2009 that has materially affected, or is reasonably likely to affect, our internal controls over financial reporting.

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)as of September 27, 2008. Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of September 27, 2008, our disclosure controls and procedures are not effective, because of the material weakness described above, to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 are recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Inherent Limitations on Effectiveness of Controls

Our management, including our chief executive officer and chief financial officer, do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

PART II

ITEM 1.

LEGAL PROCEEDINGS.

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

From time to time, our independent contractor drivers are involved in accidents. We attempt to manage this risk by requiring our independent contractor drivers to maintain commercial motor vehicle liability insurance of at least $300,000 with a minimal deductible and by carrying additional liability insurance in our name totaling an additional $7.0 million. In addition, we perform extensive screening of all prospective drivers to ensure that they have acceptable driving records and pass a criminal background and drug tests, among other criteria. We believe our driver screening programs have established an important competitive advantage for us.

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

We review our litigation matters on a regular basis to evaluate the demands and likelihood of settlements and litigation related expenses. We have established reserves for litigation, which we believe are adequate.

In January 2007, two Notices of Assessment seeking payroll taxes were issued by the California Employment Development Department (“EDD”) against Velocity Express, Inc. The first Notice of Assessment covers the period July 1, 2003 to December 31, 2004. The second Notice of Assessment covers the period of January 1, 2005 to June 30, 2006. In February 2007, the Company filed a Petition for Reassessment disputing both assessments in their entirety and requesting that this matter be referred to an administrative law judge for resolution. The Company is currently in the process of researching and producing documents for use in connection with its Petition for Reassessment.

In connection with the CD&L acquisition, the Company assumed the defense of a class action suit filed in December 2003 in the Los Angeles Superior Court, seeking to certify a class of California based independent contractors from December 1999 to the present. The complaint seeks unspecified damages for various employment related claims, including, but not limited to overtime, minimum wage claims, and claims for unreimbursed business expenses. CD&L filed an Answer to the Complaint on or about January 2, 2004 denying all allegations. Plaintiff’s motion for Class Certification was granted in part and denied in part on January 28, 2007. Discovery on this matter is ongoing.

ITEM 1A.

RISK FACTORS

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

Risks Related to Our Business

We have received an opinion from our independent registered public accounting firm expressing doubt regarding our ability to continue as a going concern

Our independent registered public accounting firm noted in their report accompanying our financial statements as of and for the fiscal year ended June 28, 2008 that we have reported a significant net loss and use of cash from operating activities, and had a working capital deficiency of $21.8 million, and stated that those conditions raise substantial doubt about our ability to continue as a going concern. Additionally, the Company’s revolving credit facility, as amended, includes special reserve against available borrowing starting at $1,000,000 and rising by $25,000 each week commencing on June 30, 2008 through November 23, 2008, by $75,000 from November 24, 2008 to November 30, 2008, by $37,500 per week from December 1, 2008 to December 21, 2008, by $75,000 from December 22, 2008 to December 28, 2008, by $37,500 from December 29, 2008 to February 28, 2009, by $50,000 per week from March 1, 2009 to May 31, 2009, and $62,500 per week from June 1, 2009 to December 31, 2009 or until the revolving credit facility is paid in full. Management has developed a plan to continue operations which includes replacing the current revolving credit facility with a new facility that eliminates the special borrowing reserve of the current facility, further reductions in expenses to continue the positive EBITDA performance we have experienced since March 2008 and revenue growth from new customers in the retail industry. Although we believe we are well advanced in the approval process with a replacement lender, have successfully reduced expenses in the past and have received verbal commitments from prospective new retail customers, we cannot assure you that our plans to address these matters will be successful. This doubt about our ability to continue as a going concern could adversely affect our ability to obtain additional financing at favorable terms, if at all, as such an opinion may cause investors to have reservations about our long-term prospects, and may adversely affect our relationships with customers. If we cannot successfully continue as a going concern, our stockholders may lose their entire investment in us.

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

Our net losses applicable to common stockholders for the three-month periods ended September 27, 2008 and September 29, 2007, were $11.3 million and $11.1 million, respectively. The respective periods’ net losses were $9.3 million and $7.5 million. The increased amount of net losses applicable to common stockholders for such periods was caused by beneficial conversion charges of $1.1 million and $2.3 million, and preferred stock dividends paid-in-kind of $0.9 million and $1.3 million for each of the respective periods. Our net losses applicable to common stockholders for the fiscal years ended June 28, 2008 and June 30, 2007, were $76.6 million and $66.0 million, respectively. The respective periods’ net losses were $64.6 million and $39.5 million. The increased amount of net losses applicable to common stockholders for such periods was caused by beneficial conversion charges of $7.1 million and $21.2 million, and preferred stock dividends paid-in-kind of $4.9 million and $5.2 million for each of the respective periods. To achieve profitability, we will be required to pursue new revenue opportunities, effectively offset the impact of competitive pressures on pricing and freight volumes, and fully implement our technology initiatives and other cost-saving measures. We cannot assure you that we will ever achieve or sustain profitability or positive cash flow. If we cannot achieve or sustain profitability or positive cash flow, the market price of our common stock could decline significantly.

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

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

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

Our senior notes mature in 2010. We may not be able to refinance our senior notes or renew or refinance any new credit facility we may enter into, or any renewal or refinancing may occur on less favorable terms. If we are unable to refinance or renew our senior notes or any new credit facility, our failure to repay all amounts due on the maturity date would cause a default under the indenture or the applicable credit agreement. In addition, our interest expense may increase significantly if we refinance our senior notes, which bear interest at 18% per year, or any new credit facility, on terms that are less favorable to us than the existing terms of our senior notes or any new credit facility.

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

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

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

For the three-month period ended September 27, 2008 we had two customers that accounted for approximately 22.4% and 10.6% of our revenue and our top ten customers in aggregate account for approximately 56.5% of our revenue. The loss of one of our largest customers or some of the top ten customers or a material reduction in their purchases of our services, especially given the current downturn in economic conditions worldwide, could materially and adversely affect our business, financial condition, results of operations and cash flows.

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

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

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

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

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U.S. business activity;

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economic factors affecting our significant customers;

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mergers and consolidations of existing customers;

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ability to purchase insurance coverage at reasonable prices;

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extreme weather conditions; and

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the levels of unemployment.

The operation of our business is dependent on the price and availability of fuel. Continued periods of high fuel costs may materially adversely affect our operating results.

Our operating results may be significantly impacted by changes in the availability or price of fuel for our transportation vehicles. Fuel prices have increased substantially since 2006. Although we are currently able to obtain adequate supplies of fuel, it is impossible to predict the price of fuel. Political disruptions or wars involving oil-producing countries, changes in government policy, changes in fuel production capacity, extreme weather conditions, environmental concerns and other unpredictable events may result in fuel supply shortages and additional fuel price increases in the future. We have historically had difficulty in recovering increased fuel costs from our customers and there can be no assurance that we will be able to fully recover increased fuel costs by passing these costs on to our customers in the future. In the event that we are unable to do so, our operating results will be adversely affected.

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

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

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

We utilize the services of approximately 4,025 drivers and messengers. From time to time, these persons are involved in accidents or other activities that may give rise to liability claims against us. We cannot assure you that claims against us will not exceed the applicable amount of our liability insurance coverage, that our insurer will be solvent at the time of settlement of an insured claim, that the liability insurance coverage held by our independent contractors will be sufficient or that we will be able to obtain insurance at acceptable levels and costs in the future. If we were to experience a material increase in the frequency or severity of accidents, liability claims, workers’ compensation claims, unfavorable resolutions of claims or insurance costs, our business, financial condition, results of operations and cash flows could be materially adversely affected.

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

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

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

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

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

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

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

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

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

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

The value of our goodwill and other intangible assets is significant relative to our total assets and stockholders equity. We review goodwill and other intangible assets for impairment during the fourth quarter of our fiscal year and at interim dates when events and circumstances warrant. During the fourth quarter of fiscal 2008, the Company recorded a $46.7 million goodwill impairment charge. Changes in business conditions or interest rates could materially impact our estimates of future operations and result in additional impairments. As such, we cannot assure you that there will not be additional material impairments of our goodwill and other intangible assets. If our goodwill or other intangible assets were to become further impaired, our results of operations could be materially and adversely affected.

We face trademark infringement and related risks.

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

We may face higher litigation and settlement costs than anticipated.

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

RISKS RELATED TO OUR CAPITAL STRUCTURE

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

We have a significant amount of debt outstanding. At September 27, 2008, we had $91.3 million in aggregate principal amount of debt outstanding, $8.0 million of revolving credit borrowings, with no available borrowings and with increasing additional blocks of availability scheduled over the next fifteen months, and $13.6 million of stockholders deficit. The degree to which we are leveraged could have important consequences for you, including:

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requiring us to dedicate a substantial portion of our cash flow from operations to make interest payments on our debt, approximately $7.7 million in fiscal 2009 and approximately $15.5 million in fiscal 2010, thereby reducing funds available for operations, future business opportunities and other purposes;

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

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

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

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

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

In addition, we may incur additional indebtedness in the future, subject to certain restrictions, exceptions and financial tests set forth in the indenture governing our senior notes. As of September 27, 2008, we were restricted from incurring additional debt under the terms of our indenture other than our credit facility, subject to the terms of the indenture and its supplements and our credit agreement, as amended.

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

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

The indenture and related supplements pursuant to which we issued our senior notes and the terms of our revolving credit facility as amended impose significant operating and financial restrictions on us. These restrictions limit or restrict among other things, our ability and the ability of certain of our subsidiaries to:

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incur additional debt and issue preferred stock;

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

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create liens;

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sell or otherwise dispose of certain assets, including capital stock of subsidiaries;

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enter into agreements that would restrict our subsidiaries’ ability to pay dividends, make loans or transfer assets to us;

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engage in transactions with affiliates;

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engage in sale and leaseback transactions;

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make capital expenditures;

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engage in business other than our current businesses;

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

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under certain circumstances, enter into a senior credit facility (or refinance any such facility) without first giving the holders of the senior notes a right of first refusal to provide such financing. On May 19, 2008 the holders of our senior secured notes due 2010 consented to waiving their right of first refusal, and to terms under which replacement financing for the Company’s revolving credit facility is permitted.

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

A breach of any of these covenants could result in an event of default, or possibly a cross-default or cross-acceleration of other debt that may be outstanding in the future. In that event, the holders of our then outstanding debt could allow the holders of that debt to declare all borrowings outstanding to be due and payable. In the event of a default under the indenture and related supplements or the revolving credit facility, as amended, the holders of the secured debt then outstanding could foreclose on the collateral pledged to secure our obligations under that debt, assets and capital stock pledged to them. The modified senior notes and borrowings under the credit agreement, as amended, are secured by a first-priority lien, subject to permitted liens, on collateral consisting of substantially all of our tangible and intangible assets.

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

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

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

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selling all or substantially all of our assets;

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materially changing our lines of business;

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

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

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

Our revolving credit facility, as amended, contains monthly minimum EBITDA and Minimum Driver Pay/Purchased Transportation requirements that may be difficult to attain.

The revolving credit facility agreement, as amended, contains specified levels of minimum EBITDA and minimum Driver Pay/Purchased Transportation requirements. Our ability to comply with these levels may be affected by events beyond our control.

The Company and its subsidiaries failed to achieve the minimum EBITDA levels contained in its credit agreement for the periods ended July 28, 2007, August 25, 2007, and December 29, 2007. Wells, in its capacity as agent and lender under the credit agreement granted the Company waivers and entered into amended agreements which were superseded by subsequent amendments.

The Company and its subsidiaries failed to achieve the minimum EBITDA levels contained in its amended credit agreement for the periods ended February 23, 2008, March 29, 2008 and April 26, 2008 and did not meet the Driver Pay/Purchased Transportation covenant for the two three-week periods ended March 14, 2008 and April 11, 2008. Wells, in its capacity as agent and lender under the amended credit agreement, granted the Company waivers and entered into two additional amended agreements. The terms of the tenth amendment dated April 30, 2008 included, among other things, (1) an increase in LIBOR margin from 4.00% to 6.00% until trailing twelve month EBITDA equals $15.0 million, dropping to a 5.25% LIBOR margin when trailing twelve month EBITDA is greater than $15.0 million and dropping to 4.50% LIBOR margin when trailing twelve month EBITDA is greater than $20.0 million, and (2) new financial reporting requirements. The terms of the eleventh amendment dated May 19, 2008 includes revised minimum EBITDA levels and minimum Driver Pay/Purchased Transportation percentages of revenue , revised levels of reserves against available borrowing increasing the reserve to $1,000,000 plus

an additional $100,000 each month commencing on July 1, 2008, increasing to $150,000 per month on December 1, 2008, to $200,000 per month on March 1, 20009, and $250,000 per month commencing in June 2009 until the revolving credit facility is paid in full, and defining certain milestones to achieve in an effort to obtain replacement financing of the Company revolving credit facility. In the event these milestones are not achieved, the Company would be subject to additional fees of up to $500,000. Velocity did not achieve the first milestone and incurred the first $250,000 fee in August 2008.

The Company did not meet the minimum driver pay and purchased transportation covenant for the four three-week periods ended June 13, 2008, July 11, 2008, August 15, 2008, September 12, 2008, and October 17, 2008. Wells, in its capacity as agent and lender under the amended credit agreement, granted the Company waivers dated October 14, 2008 and November 12, 2008. Although we believe we are well-advanced in the approval process with a replacement lender, given the current turmoil in the global credit markets among other factors, we cannot assure you we will be able to do so, or that we will be able to obtain or maintain additional waivers in the future if we are unable to maintain compliance with our debt covenants.

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

We will need to maintain certain financial and corporate governance qualifications to keep our securities listed on the NASDAQ Capital Market (“NASDAQ”). At various times in the past, we have received notices from NASDAQ that we would be de-listed due to a failure to maintain a minimum bid price of $1.00, failure to maintain a minimum market value of publicly held shares of $1,000,000 and failure to maintain a minimum of $2,500,000 in stockholders’ equity. In each instance, we have taken the actions required by NASDAQ to maintain continued listing, but we cannot assure you that we will at all times meet the criteria for continued listing.

We received a notice on June 19, 2008 from the NASDAQ that we are not in compliance with the Marketplace Rule 4310(c)(4) regarding the minimum bid requirement for the continued listing of our common stock on the NASDAQ. We have a period of 180 days, until December 16, 2008, to attain compliance by maintaining a bid price of $1.00 for ten consecutive trading days. If we are unable to demonstrate bid price compliance by December 16, 2008, but are found to meet all other initial listing requirements for the NASDAQ, we may receive an additional 180-day compliance period. If we do not meet compliance requirements within the second 180-day period, NASDAQ will notify us that our common stock will be de-listed. Upon receiving this notice, we will file a current report on Form 8-K with the SEC disclosing that and related details. Although we may regain compliance with the NASDAQ listing requirements, the negative publicity surrounding the receipt of this notice will likely have a material adverse effect on the price of our Common Stock, our ability to raise capital, whether debt or equity, in the future unless and until this situation is resolved and will likely cause a negative perception of, and confidence in, us by our investors, customers, vendors, creditors and employees. Further failing to maintain our NASDAQ listing will result in our breaching covenants made to holders of our preferred stock and certain warrants. We cannot assure you that we will be successful in regaining compliance with NASDAQ listing requirements.

We also received a notice on September 5, 2008 from the NASDAQ that we are not in compliance with the Marketplace Rule 4310(c)(7) regarding the minimum market value of publicly held shares requirement for the continued listing of our common stock on the NASDAQ. If we are unable to demonstrate minimum market value compliance by December 4, 2008, NASDAQ will notify us that our common stock will be de-listed. Upon receiving this notice, we will file a current report on Form 8-K with the SEC disclosing that and related details. Although we may regain compliance with the NASDAQ listing requirements, the negative publicity surrounding the receipt of this notice will likely have a material adverse effect on the price of our Common Stock, our ability to raise capital, whether debt or equity, in the future unless and until this situation is resolved and will likely cause a negative perception of, and confidence in, us by our investors, customers, vendors, creditors and employees. Further failing to maintain our NASDAQ listing will result in our breaching covenants made to holders of our preferred stock and certain warrants. We cannot assure you that we will be successful in regaining compliance with NASDAQ listing requirements.

The Company received a third notice on October 16, 2008 that the Company is no longer in compliance with Marketplace Rule 4310(c)(3) requiring the Company to maintain a minimum of $2,500,000 in stockholders’ equity. As provided in the NASDAQ rules, the Company submitted a response to the NASDAQ staff on October 31, 2008, outlining a specific plan and timeline to achieve and sustain compliance based on the prospective global alliance transactions. If the NASDAQ determines the Company has not presented a plan that adequately addresses the stockholders’ equity issue, NASDAQ will provide written notice that the Company’s securities will be delisted. At that time, the Company has the right to appeal the decision to a NASDAQ Listing Qualifications Panel. There is no assurance that the NASDAQ staff will accept the Company’s plan of compliance. In the event the NASDAQ staff does not accept the Company’s plan, the Company intends to request an appeal hearing before the NASDAQ Listing Qualifications Panel.

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

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

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

Our stock price is subject to fluctuation and volatility.

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

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

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

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

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

In conjunction with the Fourth Supplemental Indenture modifying the indenture governing our Senior Notes on May 19, 2008, we reduced the exercise price on the warrants held by the holders of our Original Senior Notes by $16.21, from $17.56 to $1.35 and issued new warrants to purchase approximately 0.4 million shares of the Company’s common stock, triggering anti-dilution provisions in our Series M, Series N, Series O, Series P, and the Series Q Convertible Preferred Stock that adjusted the applicable conversion prices of such preferred stock downward, and caused charges to the net loss applicable to common shareholders from beneficial conversion features embedded in the various preferred stock securities.

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

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

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

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

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

•

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

•

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

•

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

In addition, TH Lee Putnam Ventures, L.P. beneficially owned, as of October 1, 2008, approximately 26.7% (excludes other TH Lee funds) of our outstanding common stock on a fully diluted basis, which means it can influence matters requiring stockholder approval, including important corporate matters such as a change in control of our company.

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

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

Under Section 404 of the Sarbanes-Oxley Act, the SEC adopted rules requiring public companies to include a report of management on internal control over financial reporting in their annual reports. In accordance with recently issued guidelines from the SEC, we evaluated our internal controls over financial reporting in order for our management to ascertain that such internal controls are adequate and effective. There is a risk that going forward, we will not comply with all of the requirements imposed by the Act. Accordingly, we cannot assure you that we will not receive an adverse report on our assessment of our internal controls over financial reporting and/or the operating effectiveness of our internal controls over financial reporting from our independent registered public accounting firm in 2010. If we identify significant deficiencies or material weaknesses in our internal controls over financial reporting that we cannot remediate in a timely manner or we receive an adverse report from our independent registered public accounting firm with respect to our internal controls over financial reporting, investors and others may lose confidence in the reliability of our financial statements and our ability to obtain equity or debt financing could be adversely affected.

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

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

Not Applicable.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not Applicable

ITEM 5.

OTHER INFORMATION.

Not Applicable.

ITEM 6.

EXHIBITS.

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the Town of Westport, State of Connecticut on November 12, 2008.


VELOCITY EXPRESS CORPORATION.

By		/s/ Vincent A. Wasik
		VINCENT A. WASIK
		Chief Executive Officer

By		/s/ Edward W. Stone
		EDWARD W. STONE
		Chief Financial Officer

EXHIBIT INDEX


Exhibit Number		Description
2.1		Merger Agreement, dated September 8, 1999, by and among CEX Holdings, Inc., Corporate Express Delivery Systems, Inc., United Shipping & Technology, Inc. and United Shipping & Technology Acquisition Corp. (incorporated by reference from the Company’s Current Report on Form 8-K, filed October 8, 1999).

2.2		Amendment No. 1 to Merger Agreement, dated September 22, 1999, by and among CEX Holdings, Inc., Corporate Express Delivery Systems, Inc., United Shipping & Technology, Inc. and United Shipping & Technology Acquisition Corp. (incorporated by reference from the Company’s Current Report on Form 8-K, filed October 8, 1999).

2.3		Amendment No. 2 to Merger Agreement, Settlement and General Release Agreement, dated August 2, 2001, by and among Corporate Express, Inc., successor by merger to CEX Holdings, Inc., Velocity Express, Inc. f/k/a Corporate Express Delivery Systems, Inc., and United Shipping & Technology, Inc. (incorporated by reference from the Company’s Quarterly Report on Form 10-Q, filed November 13, 2001).

2.4		Agreement and Plan of Merger, dated July 3, 2006, by and among Velocity Express Corporation, CD&L Acquisition Corp., a wholly-owned subsidiary of Velocity Express Corporation, and CD&L, Inc., (incorporated by reference from the Company’s Current Report on Form 8-K, filed July 10, 2006).

3.1		Amended and Restated Certificate of Incorporation of Velocity Express Corporation (incorporated by reference from the Company’s Current Report on Form 8-K, filed February 16, 2005).

3.2		Certificate of Amendment of Certificate of Incorporation of Velocity Express Corporation dated October 20, 2006 (incorporated by reference from the Company’s Current Report on Form 8-K filed on July 10, 2006).

3.3		Amended and Restated Certificate of Incorporation of Velocity Express Corporation (incorporated by reference from the Company’s Quarterly Report on Form 10-Q, filed November 21, 2006).

3.4		Certificate of Designations, Preferences and Rights of Series N Convertible Preferred Stock (incorporated by reference from the Company’s Current Report on Form 8-K, filed May 4, 2005).

3.5		Certificate of Designations, Preferences and Rights of Series O Convertible Preferred Stock (incorporated by reference from the Company’s Current Report on Form 8-K, filed July 26, 2005).

3.6		Certificate of Designations, Preferences and Rights of Series P Convertible Preferred Stock (incorporated by reference from the Company’s Current Report on Form 8-K, filed October 20, 2005).

3.7		Certificate of Designations, Preferences and Rights of Series Q Convertible Preferred Stock (incorporated by reference from the Company’s Current Report on Form 8-K, filed on July 6, 2006).

3.8		Amended Certificate of Designation of Series Q Convertible Preferred Stock (incorporated by reference from the Company’s Current Report on Form 8-K, filed on July 6, 2006).

3.9		Certificate of Amendment to Amended and Restated Certificate of Incorporation (incorporated by reference from the Company’s Current Report on Form 8-K, filed September 14, 2006).

3.10		Bylaws of Velocity Express Corporation (incorporated by reference from the Company’s Current Report on Form 8-K, filed January 9, 2002). 3.11 Certificate of Amendment to Amended and Restated Certificate of Incorporation (incorporated by reference from the Company’s Current Report on Form 8-K, filed December 6, 2007).

4.1		Specimen form of common stock certificate (incorporated by reference from the Company’s Annual Report on Form 10-K, filed September 27, 2002).

4.2		Indenture, dated July 3, 2006, between Velocity Express Corporation and Wells Fargo Bank, N.A., as trustee, with respect to the Company’s 12% Senior Secured Notes due 2010 (incorporated by reference from the Company’s Current Report on Form 8-K, filed July 10, 2006).


Exhibit Number		Description
4.3		Supplemental Indenture, dated as of August 17, 2006, among the Company, Wells Fargo Bank, N.A., as trustee, and the Subsidiary Guarantors named thereto (incorporated by reference from the Company’s Quarterly Report on Form 10-Q, filed February 13, 2007).

4.4		Second Supplemental Indenture dated as of December 22, 2006 among the Company, Wells Fargo Bank, N.A., as Trustee and the subsidiaries named thereto (incorporated by reference from our Current Report on From 8-K filed on December 27, 2006).

4.5		Third Supplemental Indenture, dated July 25, 2007 (incorporated by reference from the Company’s Current Report on Form 8-K filed on July 25, 2007).

4.6		Security Agreement, dated July 3, 2006, by Velocity Express Corporation and the Subsidiary Guarantors named therein, to and in favor of Wells Fargo Bank, N.A., as trustee (incorporated by reference from the Company’s Current Report on Form 8-K, filed July 10, 2006).

4.7		Form of Warrant issued together with the 12% Senior Secured Notes due 2010 (incorporated by reference from the Company’s Current Report on Form 8-K, filed July 10, 2006).

4.8		Form of Warrant issued in connection with services (incorporated by reference from the Company’s Current Report on Form 8-K, filed July 10, 2006).

4.9		Form of Common Stock Warrant between Velocity Express Corporation and management, dated February 12, 2004 (incorporated by reference from the Company’s Quarterly Report on Form 10-Q, filed May 11, 2004).

4.10		Registration Rights Agreement, dated July 3, 2006, between Velocity Express Corporation and the Investors named therein with respect to the Series Q Convertible Preferred Stock (incorporated by reference from the Company’s Current Report on Form 8-K, filed July 10, 2006).

4.11		Registration Rights Agreement, dated December 21, 2004, between Velocity Express Corporation and the Investors named therein with respect to the Series M Convertible Preferred Stock (incorporated by reference from the Company’s Current Report on Form 8-K, filed December 27, 2004).

4.12		Registration Rights Agreement, dated April 28, 2005, between Velocity Express Corporation and the Investors named therein with respect to the Series N Convertible Preferred Stock (incorporated by reference from the Company’s Current Report on Form 8-K, filed May 4, 2005).

4.13		Registration Rights Agreement, dated July 18, 2005, between Velocity Express Corporation and the Investors named therein with respect to the Series O Convertible Preferred Stock (incorporated by reference from the Company’s Current Report on Form 8-K, filed July 26, 2005).

4.14		Registration Rights Agreement, dated October 14, 2005, between Velocity Express Corporation and the Investors named therein with respect to the Series P Convertible Preferred Stock (incorporated by reference from the Company’s Current Report on Form 8-K, filed October 20, 2005).

4.15		Amendment No. 1 to the Registration Rights Agreement, dated October 19, 2006, between Velocity Express Corporation and the Investors named therein with respect to the Series Q Convertible Preferred Stock (incorporated by reference from the Company’s Quarterly Report on Form 10-Q, filed February 13, 2007).

4.16		Amendment No. 1 to the Registration Rights Agreement, dated October 19, 2006, between Velocity Express Corporation and the Investors named therein with respect to the Series M Convertible Preferred Stock (incorporated by reference from the Company’s Quarterly Report on Form 10-Q, filed February 13, 2007).

4.17		Amendment No. 1 to the Registration Rights Agreement, dated October 19, 2006, between Velocity Express Corporation and the Investors named therein with respect to the Series N Convertible Preferred Stock (incorporated by reference from the Company’s Quarterly Report on Form 10-Q, filed February 13, 2007).


Exhibit Number		Description
4.18		Amendment No. 1 to the Registration Rights Agreement, dated October 19, 2006, between Velocity Express Corporation and the Investors named therein with respect to the Series O Convertible Preferred Stock (incorporated by reference from the Company’s Quarterly Report on Form 10-Q, filed February 13, 2007).

4.19		Amendment No. 1 to the Registration Rights Agreement, dated October 19, 2006, between Velocity Express Corporation and the Investors named therein with respect to the Series P Convertible Preferred Stock (incorporated by reference from the Company’s Quarterly Report on Form 10-Q, filed February 13, 2007).

4.20		Stock Purchase Warrant to purchase up to 193,552 shares of common stock issued to TH Lee Putnam Ventures, L.P., TH Lee Putnam Parallel Ventures, L.P., THLi Coinvestment Partners, LLC and Blue Star I, LLC, dated December 21, 2004 (incorporated by reference from the Company’s Annual Report on Form 10-K, filed December 23, 2004).

4.21		Warrant to purchase up to 4,000 shares of common stock issued to BLG Ventures, LLC, dated August 23, 2001 (incorporated by reference from the Company’s Quarterly Report on Form 10-Q, filed November 13, 2001).

10.1		1995 Stock Option Plan (incorporated by reference from the Company’s Quarterly Report on Form 10-QSB, filed February 15, 2000).

10.2		1996 Director Stock Option Plan, as amended (incorporated by reference from the Company’s Quarterly Report on Form 10-QSB, filed February 15, 2000).

10.3		2000 Stock Option Plan (incorporated by reference from the Company’s Definitive Schedule 14A, filed May 8, 2000).

10.4		2004 Stock Incentive Plan (incorporated by reference from the Company’s Definitive Schedule 14A, filed January 31, 2005).

10.5		Form of non-qualified stock option issued to employees as of June 2000 (incorporated by reference from the Company’s Annual Report on Form 10-KSB, filed September 29, 2000).

10.6		Form of Incentive Stock Option Agreement, dated October 29, 2001, between United Shipping & Technology, Inc., and management (incorporated by reference from the Company’s Quarterly Report on Form 10-Q, filed May 3, 2002).

10.7		Employment Agreement, dated November 28, 2001, between Velocity Express, Inc. and Andrew B. Kronick (incorporated by reference from the Company’s Annual Report on Form 10-K, filed December 23, 2004).

10.8		Employment Agreement, dated March 6, 2006, between Velocity Express Corporation and Edward W. Stone, Jr. (incorporated by reference from the Company’s Current Report on Form 8-K, filed March 7, 2006).

10.9		Contractor Services Agreement, between Velocity Express Corporation and MCG Global, LLC (incorporated by reference from the Company’s Annual Report on Form 10-K, filed December 23, 2004).

10.10		Agency Agreement, dated May 25, 2004, between Velocity Express, Inc. and Peritas, LLC (incorporated by reference from the Company’s Annual Report on Form 10-K, filed December 23, 2004).

10.11		Reimbursement Agreement, dated June 29, 2006, between Velocity Express Corporation and TH Lee Putnam Ventures (incorporated by reference from the Company’s Current Report on Form 8-K, filed July 6, 2006).

10.12		Purchase Agreement for 12% Senior Secured Notes and Warrants, dated July 3, 2006, between Velocity Express Corporation, the guarantors and purchasers named therein (incorporated by reference from the Company’s Current Report on Form 8-K/A, filed September 19, 2006).


Exhibit Number		Description
10.13		Unit Purchase Agreement, dated July 3, 2006, by and among Velocity Express Corporation, the guarantors named therein and Exeter Capital Partners IV, L.P. (incorporated by reference from the Company’s Current Report on Form 8-K, filed July 10, 2006).

10.14		Stock Purchase Agreement, dated as of July 3, 2006, for Series Q Preferred Stock, between Velocity Express Corporation and the Purchasers named therein (incorporated by reference from the Company’s Current Report on Form 8-K/A, filed September 19, 2006)].

10.15		Stock Purchase Agreement to purchase up to 500,000 additional shares of Series Q Convertible Preferred Stock, dated August 17, 2006, between Velocity Express Corporation and the purchasers named therein (incorporated by reference from the Company’s Current Report on Form 8-K, filed August 23, 2006).

10.16		Series A Preferred Stock and Warrant Purchase Agreement, dated as of July 3, 2006, by and between Velocity Express Corporation and BNP Paribas (incorporated by reference from the Company’s Current Report on Form 8-K filed on July 10, 2006).

10.17		Series A Preferred Stock, Common Stock and Warrant Purchase Agreement (Note and Warrant Consideration), dated as of July 3, 2006, by and between Velocity Express Corporation and Exeter Capital Partners IV, L.P. (incorporated by reference from the Company’s Current Report on Form 8-K filed on July 10, 2006)

10.18		Series A Preferred Stock, Common Stock and Warrant Purchase Agreement (Share Consideration), dated as of July 3, 2006, by and between Velocity Express Corporation and Exeter Capital Partners IV, L.P. (incorporated by reference from the Company’s Current Report on Form 8-K filed on July 10, 2006)

10.19		Series A Convertible Subordinated Debenture Purchase Agreement, dated as of July 3, 2006, by and between Velocity Express Corporation and each of the other parties thereto (incorporated by reference from the Company’s Current Report on Form 8-K filed on July 10, 2006).

10.20		Settlement Agreement and Mutual Release, dated December 2005, by and among Velocity Express, Inc., formerly known as Corporate Express Delivery Systems, Velocity Express Corporation, Banc of America Commercial Finance Corporation, Banc of America Leasing & Capital, LLC, John Hancock Life Insurance Company, Hancock Mezzanine Partners, L.P., Charles F. Short, III, Sidewinder Holdings, Ltd. and Sidewinder, N.A., Ltd. (incorporated by reference from the Company’s Current Report on Form 8-K, filed December 13, 2005).

10.21		Security Agreement, dated December 22, 2006, among the Company, Wells Fargo Foothill, Inc. and the Subsidiary Guarantors named thereto (incorporated by reference from our Current Report on Form 8-K filed on December 27, 2006).

10.22		Intercompany Subordination Agreement dated, as of December 22, 2006, among the Company, the Subsidiary Guarantors named thereto and Wells Fargo Foothill, Inc. (incorporated by reference from our Current Report on Form 8-K filed on January 5, 2007).

10.23		Contribution Agreement, dated as of December 22, 2006, among the Company and the Subsidiary Guarantors named thereto (incorporated by reference from our Current Report on Form 8-K/A filed on January 5, 2007).

10.24		Intercreditor Agreement, dated as of December 22, 2006, among the Company, the Subsidiary Guarantors named thereto, Wells Fargo Bank, N.A., as trustee, and Wells Fargo Foothill, Inc. (incorporated by reference from our Current Report on Form 8-K/A filed on January 5, 2007).

10.25		Credit Agreement, dated as of December 22, 2006, among the Company, the Subsidiary Guarantors named thereto, Wells Fargo Foothill, Inc., as arranger and administrative agent, and the several banks and other financial institutions or entities from time to time parties to the Credit Agreement (incorporated by reference from our Current Report on From 8-K filed on December 27, 2006).


Exhibit Number		Description
10.26		Waiver to Credit Agreement, dated as of May 14, 2007, by and among Velocity Express Corporation, the lenders party thereto and Wells Fargo Foothill, Inc., as arranger and administrative agent (incorporated by reference from the Company’s Quarterly Report on Form 10-Q, filed May 15, 2007).

10.27		Amendment No. 6, dated May 25, 2007, to Credit Agreement dated as of December 22, 2006, among Velocity Express Corporation, the subsidiaries thereof party thereto, Wells Fargo Foothill, Inc., as arranger and administrative agent, and the several lenders from time to time party thereto (incorporated by reference from the Company’s Annual Report on Form 10-K, filed on October 15, 2007).

10.28		Amendment No. 7, dated July 13, 2007, to Credit Agreement dated as of December 22, 2006, among Velocity Express Corporation, the subsidiaries thereof party thereto, Wells Fargo Foothill, Inc., as arranger and administrative agent, and the several lenders from time to time party thereto (incorporated by reference from the Company’s Current Report on Form 8-K filed on July 31, 2007).

10.29		Amendment No. 8, dated October 15, 2007, to Credit Agreement dated as of December 22, 2006, among Velocity Express Corporation, the subsidiaries thereof party thereto, Wells Fargo Foothill, Inc., as arranger and administrative agent, and the several lenders from time to time party thereto (incorporated by reference from the Company’s Annual Report on Form 10-K, filed October 15, 2007).

10.30		Amendment No. 9, dated February 12, 2008, to Credit Agreement dated as of December 22, 2006, among Velocity Express Corporation, the subsidiaries thereof party thereto, Wells Fargo Foothill, Inc., as arrange and administrative agent, and the several lenders from time to time party thereto (incorporated by reference from the Company’s Quarterly Report on Form 10-Q, filed on May 20, 2008).

10.31		Waiver and Tenth Amendment, dated April 30, 2008, to Credit Agreement dated as of December 22, 2006, among Velocity Express Corporation, the subsidiaries thereof party thereto, Wells Fargo Foothills, Inc., as arranger and administrative agent, and the several lenders from time to time party thereto (incorporated by reference from the Company’s Quarterly Report on Form 10-Q, filed on May 20, 2008).

10.32		Waiver and Eleventh Amendment dated May 19, 2008, to Credit Agreement dated as of December 22, 2006, among Velocity Express Corporation, the subsidiaries thereof party thereto, Wells Fargo Foothill, Inc., as arranger and administrative agent, and the several lenders from time to time party thereto (incorporated by reference from the Company’s Current Report on Form 8-K, filed on May 23, 2008).

10.33		Fourth Supplemental Indenture dated as of May 19, 2008, to Indenture dated as of July 3, 2006, as amended by the First Supplemental Indenture dated as of August 17, 2006, the Second Supplemental Indenture dated as of December 22, 2006 and the Third Supplemental Indenture dated as of July 25, 2007, among Velocity Express Corporation, the subsidiaries thereof party thereto, and Wilmington Trust Company, as successor trustee to Wells Fargo Bank, N.A. as Trustee (incorporated by reference from the Company’s Current Report on Form 8-K, filed on June 12, 2008).

10.34		Form of Velocity Express Corporation Senior Secured Note Due 2010 (incorporated by reference from the Company’s Current Report on Form 8-K, filed on June 12, 2008).

10.35		Registration Rights Agreement dated May 19, 2008, between Velocity Express Corporation and the Investors named therein with respect to the Senior Secured Note Due 2010 (incorporated by reference from the Company’s Current Report on Form 8-K, filed June 12, 2008).

10.36		Waiver dated October 14, 2008, to Credit Agreement dated as of December 22, 2006, among Velocity Express Corporation, the subsidiaries thereof party thereto, Wells Fargo Foothill, Inc., as arranger and administrative agent, and the several lenders from time to time party thereto (incorporated by reference from the Company’s Annual Report on Form 10-K/A, filed October 27, 2008).


Exhibit Number		Description
21.1		Subsidiaries (incorporated by reference from the Company’s Annual Report on Form 10-K, filed October 15, 2007).

31.1*		Section 302 Certification of CEO.

31.2*		Section 302 Certification of CFO.

32.1*		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Filed as an exhibit on this Quarterly Report of Velocity Express Corporation on Form 10-Q for the period ended September 27, 2008.