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

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,     September 29,
                                              2008              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 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 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:

• 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;

• 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.

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,           September 29,
                                                               2008                    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 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 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

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.

. . .