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 distribution, scheduled and expedited logistics services. Its customers are comprised of multi-location, blue chip customers in the healthcare, office products, financial services, commercial, retail & consumer products, 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 fiscal years ended 2008 and 2007 on an historical basis are as follows:

                                                Fiscal year ended:
                                          June 28, 2008     June 30, 2007
           Healthcare                              30.9 %            27.7 %
           Office Products                         27.8              24.8
           Financial services                      12.7              17.3
           Commercial                              11.1              11.2
           Retail and Consumer Products             8.8               7.4
           Transportation and logistics             6.9               8.4
           Energy                                   1.2               2.1
           Technology                               0.6               1.6

The Company had one customer that accounted for approximately 16% and 12% of our net revenues in fiscal 2008 and 2007, respectively. Subsequent to June 28, 2008, an acquisition increased our concentration with our largest customer from approximately 16% to approximately 20%. Our ten largest customers accounted for approximately 52% and 46% of our net revenues in fiscal 2008 and 2007, respectively. The increasing portion of business with our top ten customers is consistent with our business strategy to focus on large companies with local, time-definite deliveries in many regions nationwide to whom our consistent delivery standards and unified customer service across a national footprint are of greatest value.

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.

The Company had a net loss of $64.6 million for the fiscal year ended June 28, 2008, which includes a $46.7 million goodwill impairment charge and a $13.9 million gain on the extinguishment of debt, resulting in cash used in operating activities for the year of $11.3 million. For the three months ended June 28, 2008 the Company had a net loss of $39.4 million, which also included the $46.7 million goodwill impairment charge and the $13.9 million gain on the extinguishment of debt. In fiscal year 2008, the Company financed this operating cash flow deficit through use of cash reserves available at the beginning of the year, net proceeds of $3.6 million from issuance of common stock, $0.5 million from net borrowing under the revolving credit facility, and improvements in working capital management. See "-Liquidity and Capital Resources."

CD&L Acquisition & Related Transactions

On July 3, 2006, the Company and CD&L, entered into an agreement and plan of merger (the "Merger Agreement") to acquire CD&L. CD&L was another leading provider of time-definite logistics solutions. As a result of the merger, which closed on August 17, 2006, CD&L became a wholly owned subsidiary of the Company. Contemporaneously with the signing of the Merger Agreement, the Company:

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

• sold 4,000,000 shares of Series Q Convertible Preferred Stock, each of which was initially convertible into 9.0909 shares of common stock (the "Series Q Preferred Stock");

• repaid approximately $20.5 million of indebtedness owed to Bank of America, N.A.; and

• repaid approximately $5.8 million of indebtedness owed to BET Associates, LP.

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

• acquired the remaining 51% of CD&L's outstanding common stock;

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

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

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

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

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

Management believes that the acquisition of CD&L has benefited the Company in several ways. The combined company has increased its annual revenues from 2006 levels, and has approximately 3,500 independent contractor drivers operating from 127 locations in leading markets across the United States and Canada. In addition, the combination is proving to show the following strategic and financial benefits:

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

• superior customer service using our proprietary track and trace and electronic signature capture technology, which we believe is the industry's best service offering in the time definite delivery industry;

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

• a strengthening of our already excellent managerial team; and

• substantial costs savings through operational synergies and elimination of redundant expenses.

Recapitalization

On May 19, 2008, the holders of our senior secured notes due 2010 (the "Note Holders" of our "Senior Notes") consented to a Fourth Supplemental Indenture modifying the indenture governing the Senior Notes. The supplemental indenture
(1) allows for interest payments due in June 2008 and December 2008 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) requires issuance of an additional $7.8 million face value of the Senior Notes for a total of $86.0 million face value outstanding,
(5) increases the interest rate to 18%, (6) reduces the exercise price of the warrants originally issued with the Senior Notes in July 2006 by $16.21, from $17.56 to $1.35 per share, (7) requires the issuance of additional warrants equal to 15% of the common stock of the Company to holders at 105% VWAP (or $0.88 if greater) with a forced conversion feature at 150% of the initial conversion price, (8) replaces 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) waives 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 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 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 Senior Notes subject to the rights of the revolving credit facility provider, (14) reduces certain executive pay, and (15) provides for Note Holder representation on the Company's Board of Directors.

The substantial modification of the terms of the indenture has been accounted for as an extinguishment of the existing debt and the issuance of new debt. Consequently, the Modified Senior Notes together with the issuance of additional senior notes, additional warrants, and related transactions resulted in the Company recording a (non-cash) gain on the extinguishment of debt in the fourth quarter of 2008 of $13.9 million. The reduction in the warrant exercise price and issuance of new warrants triggered anti-dilution provisions in the Series M, Series N, Series O, Series P, and Series Q Convertible Preferred Stock that adjusted the applicable conversion prices of such preferred stock downward, and cause changes to the net loss applicable to common stockholders of $2.4 million from beneficial conversion features on Series N, Series O, Series P, and Series Q Convertible Preferred Stock. Such adjustment had a dilutive effect on our existing common stockholders.

Restructurings

Between 2006 and 2008, we implemented several restructurings which we believe have repositioned us for greater success in the future.

During the third quarter of fiscal 2006, we terminated 120 employees and revised our estimates of previously recorded restructuring costs and losses associated with excess facilities.

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

During fiscal 2008, in response to the previously announced loss of the Company's largest financial services customer and continued customer attrition, the Company's management commenced two restructuring plans,

both of which primarily included staff reductions totaling approximately 200 employees resulting in severance costs totaling approximately $0.3 million. In addition, the Company reversed previously recorded costs by approximately $0.4 million for revisions in the Company's estimates of previously recorded costs associated with prior period restructurings as well as the cost of maintaining the utilities in these vacated facilities as contractually obligated.

Factors Affecting Future Results of Operations

Our revenues consist primarily of charges to customers for delivery services and weekly or monthly charges for recurring services, such as facilities management. Sales are recognized when the service is performed. The revenue and profit for a particular service is dependent upon a number of factors, including size and weight of articles transported, distance transported, special handling requirements, requested delivery time and local market conditions. Generally, articles of greater weight transported over longer distances and those that require special handling produce higher revenue. Beginning in the second fiscal quarter we began to notice a slowdown in the rate of revenue growth with continuing customers which evolved into actual volume declines in the third and fourth fiscal quarters. We do not believe these customers have shifted business away from us to alternative suppliers but simply have fewer packages to be delivered to their customers.

We are continually engaged in bidding for additional contract work for a variety of new and existing customers. We believe our current pipeline of bidding activity remains robust, with potential customers that could generate annual billings of up to $170 million, although we cannot assure you that we will be successful in obtaining these clients. The activity is consistent across all geographic regions in which we operate. Full implementation of newly awarded contracts generally takes from thirty to ninety days.

Cost of services consists of costs relating directly to performance of our services, including driver and messenger costs, transportation services purchased from third parties, and costs to staff, equip and insure our warehouse facilities. Substantially all of the drivers we use are independent contractors who provide their own vehicles. As of June 28, 2008, we owned no motor vehicles in the United States and only four in Canada. Drivers and messengers are compensated based on a combination of the number of stops they make, the number of packages they deliver and/or a percentage of the delivery charge. Consequently, our driver, messenger and purchased transportation costs are variable in nature. We also employ workers in our own leased warehouse facilities and certain facilities owned by our customers. The salary and employee benefit costs related to them, such as payroll taxes and insurance, are also included in cost of sales.

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

During fiscal 2009, we plan to continue to invest in technologies that will increase our competitive advantage in the market by providing enhanced package tracking and increased productivity from both a frontline delivery and back office perspective. During fiscal years 2005 and 2006, we spent more than $5 million in the development and implementation of route management software solutions and package tracking technology that has proven to have a significant impact on reducing overall delivery cost and enhancing our ability to better manage our variable operating cost. During fiscal years 2007 and 2008, we spent $2.3 million in the further development of package tracking technology.

Critical Accounting Policies and Estimates

The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, goodwill, insurance

reserves, income taxes and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company's critical accounting policies are as follows:

Revenue Recognition

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

Allowance for Doubtful Accounts

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

Financial Instruments

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

Goodwill Impairment

Our goodwill is subjected to impairment testing, which requires us to estimate the fair value of our reporting unit and compare it to its carrying value. In order to determine the fair value of Velocity Express, we employed the Implied Enterprise Value technique based on our publicly traded stock price, an approach widely accepted in determining fair value for an enterprise. During the fourth quarter of fiscal 2008, the Company recorded a $46.7 million goodwill impairment charge.

Insurance Reserves

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

Following the acquisition of CD&L and until January 2007, the Company continued to insure workers' compensation risks for the workforce acquired from CD&L through insurance policies with substantial deductibles, and retains risk as a result of its deductibles related to such insurance policies. The Company's deductible for workers' compensation during this period is $500,000 per loss with an annual aggregate stop loss of approximately $1,600,000. The Company reserves the estimated amounts of uninsured claims and deductibles

related to such insurance retentions for claims that have occurred in the normal course of business. These reserves are established by management based upon the recommendations of third party administrators who perform a specific review of open claims, which include fully developed estimates of both reported claims and incurred but not reported claims, as of the balance sheet date. Actual claim settlements may differ materially from these estimated reserve amounts. In January 2007, the Company began insuring its entire workforce's workers' compensation risks through these insurance policies discussed above with substantial deductibles, and retains risk as a result of its deductibles related to such insurance policies. As of June 28, 2008, the Company has a liability of approximately $1.5 million for case reserves, development reserves, plus estimated losses incurred, but not reported.

Contingencies

We are involved in various legal proceedings and contingencies and have recorded liabilities for these matters in accordance with SFAS No. 5, Accounting for Contingencies ("SFAS No. 5"). SFAS No. 5 requires a liability to be recorded based on our estimate of the probable cost of the resolution of a contingency. The actual resolution of these contingencies may differ from our estimates. If a contingency were settled for an amount greater than the estimate, a future charge to operating results would result. Likewise, if a contingency were settled for an amount that is less than the estimate, a future credit to operating results would result. For more information, see Note 13 to our consolidated financial statements.

Results of Operations

The Company reports its financial results on a 52-53 week fiscal year basis. Under this basis, our fiscal year ends on the Saturday closest to June 30th. Fiscal years 2008 and 2007 all contained 52 weeks.

Year Ended June 28, 2008 Compared to Year Ended June 30, 2007

Revenue for 2008 decreased by $69.2 million or 16.9% to $340.9 million, from $410.1 million in 2007. The decrease in revenue for 2008 compared to 2007 was the result of our planned exit from uneconomic customer contracts acquired with the CD&L merger ($27.9 million), other customer service stops ($25.1 million) the continued migration of banking customers to the Check 21 scanning technology . . .