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. It operates 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 logistics solutions in the United States. Its customers are comprised of multi-location, blue chip customers primarily in the healthcare, retail, rapid replenishment sectors and recently in the postal consolidation area.

The Company's service offerings are divided into Small Package Delivery, Pallet Delivery, Dedicated Delivery, Express Delivery and Business to Postal DDU Delivery (B2DDU). All of these services are provided on the customer's schedule including very tight time definite delivery windows.

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 nine-month periods ended March 28, 2009 and March 29, 2008 were as follows:

                                             Nine Months Ended
                                      March 28, 2009   March 29, 2008
               Retail                          39.4%            35.6%
               Healthcare                      30.9%            30.9%
               Rapid Replenishment             16.8%            20.7%
               Financial Services              12.1%            12.8%
               Postal Consolidation             0.8%             0.0%

With the enactment of the Federal law known as Check 21, on October 28, 2004, financial services revenue has continued 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 and most recently the postal consolidation sector. 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 nine months ended March 28, 2009, the Company had a net loss of $30.4 million, and used cash from operations of $1.3 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 March 28, 2009 Compared to Three Months Ended March 29, 2008

Revenue for the quarter ended March 28, 2009 decreased $21.3 million or 26.0% to $60.8 million from $82.2 million for the quarter ended March 29, 2008. The decrease in revenue was the result of volume declines with continuing customers related to the slowing U.S. economy ($12.2 million), lower fuel surcharge reimbursement ($3.6 million), our planned exit from uneconomic customer contracts acquired with the CD&L merger ($4.9 million), other customer service stops ($4.9 million) and the continued migration of banking customers to the Check 21 scanning technology ($2.3 million). These negative changes were partly offset by new revenue from customer start-ups of $3.4 million and $3.3 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 March 28, 2009 was $42.9 million, a decrease of $18.3 million or 29.9% from $61.3 million for the quarter ended March 29, 2008. 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 routes where our average driver settlement exceeded competitive market norms for the work performed accounted for $2.3 million. Direct labor declined by $1.0 million, but increased as a percentage of revenue from 7.4% of revenue to 8.3% of revenue as the revenue mix shifted to more deliveries requiring sorting in our warehouses. Insurance expense declined $0.3 million primarily related to the decrease in claims experience and estimated development reserves related to reserves for auto liability; and cargo claims declined $0.6 million, partially due to improved reimbursements from responsible drivers, and insurance recoveries. The cost of uniforms declined by $0.2 million and there was another $0.3 million improvement in miscellaneous other costs. Offsetting these improvements was increased depreciation of $0.1 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 25.0% in the prior year quarter ended March 29, 2008 to 28.7% for the quarter ended March 28, 2009.

Occupancy expense for the quarter ended March 28, 2009 was $4.4 million, a decrease of $0.5 million from the quarter ended March 29, 2008 reflecting reduced rent expense ($0.3 million) and utility costs ($0.1 million), as well as lower repair and maintenance costs ($0.1 million).

Selling, general and administrative expenses for the quarter ended March 28, 2009 were $13.4 million or 22.0% of revenue, a decrease of $4.2 million or 23.7% as compared with $17.6 million or 21.4% of revenue for the quarter ended March 29, 2008. 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 the continuous recessionary volume declines cited earlier ($3.3 million), a benefit of $0.6 million resulting from a change in an estimated settlement liability in 2008, a favorable settlement of approximately $0.5 million, a decline in equipment and software of approximately $0.3 million, a $0.2 million reversal in reserve for bad debts, a decline in communication costs of approximately $0.1 million and a decrease in supplies of $0.1 million. Offsetting these improvements was an increase in legal fees of $1.1 million primarily related to representation in the Office Depot suit, the NICA, Inc. suit, and class action legal defense.

There were no restructuring charges for the quarter ended March 28, 2009 as compared to $0.2 million for the quarter ended March 29, 2008. The restructuring charges for the quarter ended March 29, 2008 were comprised of estimated severance costs associated with a workforce reduction plan.

Depreciation and amortization for the quarter ended March 28, 2009 was $0.7 million or 1.2% of revenue, a decrease of $0.7 million or 50.0% as compared with $1.5 million or 1.8% of revenue for the quarter ended March 29, 2008, of which $0.5 million pertains to a decrease in depreciation as equipment becoming fully depreciated exceeded depreciation on newly acquired fixed assets, and $0.2 million pertains to a decrease in amortization expense, as the non-compete intangible assets became fully amortized.

Net interest expense for the quarter ended March 28, 2009 increased $5.0 million to $10.0 million from $5.0 million for the quarter ended March 29, 2008 resulting from an increase of 6.0% in the interest rate on the Modified Senior Notes, 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, an additional $13.0 million face value of Modified Senior Notes issued as settlement in-kind of interest accrued on the Senior Notes also earning 18% interest, and an increase of 225 basis points in the interest rate on the revolving credit agreement with Burdale when compared to the interest rate on the revolving credit agreement with Wells for the same period last year.

Other expense for the quarter ended March 28, 2009 was $0.3 million and was comprised of deferred fees that were written off in conjunction with the repayment and extinguishment of the prior revolving credit facility.

As a result of the above, the Company had a net loss of $11.4 million for the quarter ended March 28, 2009 compared to a net loss of $8.8 million in the quarter ended March 29, 2008.

Net loss applicable to common stockholders was $13.7 million for the quarter ended March 28, 2009 compared with $10.6 million for the quarter ended March 29, 2008. For both quarters, 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.

Nine Months Ended March 28, 2009 Compared to Nine Months Ended March 29, 2008

Revenue for the nine months ended March 28, 2009 decreased $62.4 million or 23.9% to $199.1 million from $261.6 million for the nine months ended March 29, 2008. The decrease in revenue was the result of volume declines with continuing customers related to the slowing U.S. economy ($25.0 million), lower fuel surcharge reimbursement ($4.2 miilion), our planned exit from uneconomic customer contracts acquired with the CD&L merger ($24.4 million), other customer service stops ($21.4 million), the continued migration of banking customers to the Check 21 scanning technology ($7.2 million), and the loss of a significant bank customer in the second quarter of 2008 ($4.0 million). These negative changes were partly offset by new revenue from customer start-ups of $18.0 million and $5.8 million of volume growth by other continuing customers that are less affected by the slowing U.S. economy.

Cost of services for the nine months ended March 28, 2009 was $143.1 million, a decrease of $53.9 million or 27.3% from $196.9 million for the nine months ended March 29, 2008. The decrease in volume accounted for a decrease of $39.5 million in driver pay and purchased transportation and $0.5 million in vehicle expense. Correcting a number of specific routes where our average driver settlement exceeded competitive market norms for the work performed accounted for $6.1 million. Direct labor decreased by $2.4 million but increased as a percentage of revenue from 7.0% of revenue to 8.0% of revenue as the revenue mix shifted to more deliveries requiring sorting in our warehouses. Insurance expense declined $1.2 million primarily related to the decrease in claims experience and estimated development reserves related to reserves for workers' compensation and auto liability; decreased umbrella insurance premiums, and cargo claims declined $0.9 million, partially due to improved reimbursements from responsible drivers and insurance recoveries. Communication and scanner expenses also declined by $0.5 million partially due to improved reimbursements from independent contractor drivers related to the rollout of V-Trac 5.0 scanners ($0.4 million). Workforce acquisition costs also declined by $0.7 million primarily due to lower advertising ($0.3 million) and lower costs for uniforms ($0.3 million). Offsetting these improvements was increased depreciation of $0.4 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 24.4% in the prior year nine-month period to 27.5% for the nine-month period ended March 28, 2009.

Occupancy expense for the nine months ended March 28, 2009 was $12.6 million, a decrease of $1.4 million from the nine months ended March 29, 2008 reflecting a $0.4 million recovery from New York City related to the condemnation of one of our leased facilities, closures of redundant facilities offset with increased costs for larger new facilities, occupied to accommodate anticipated volume growth ($0.5 million), utility costs ($0.2 million), as well as lower repair and maintenance costs ($0.1 million).

Selling, general and administrative expenses for the nine months ended March 28, 2009 were $41.2 million or 20.7% of revenue, a decrease of $13.0 million or 24.0% as compared with $54.1 million or 20.7% of revenue for the nine months ended March 29, 2008. The decrease in SG&A 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 the continuous recessionary volume declines cited earlier ($9.8 million), a benefit of $1.6 million resulting from a change in an estimated settlement liability in 2008, two favorable settlements of approximately $0.9 million, a decline in communication costs of approximately $0.5 million, a decline in equipment and software of approximately $1.2 million, a decrease in consulting and other outside services ($0.6 million), a swing of $0.5 million in the reserve for bad debts, and a decrease in supplies of $0.4 million. Offsetting these improvements was an increase in legal fees of $2.2 million primarily related to representation in the Office Depot suit, the NICA suit, and class action legal defense.

Integration costs for the nine months ended March 29, 2008 were $0.5 million as the Company completed the integration of CD&L in the first quarter of fiscal 2008.

Restructuring charges for the nine months ended March 28, 2009 were $0.1 million, a decrease of $0.6 million as compared to $0.7 million for the nine months ended March 29, 2008. The decrease is comprised of revising the Company's estimates of previously recorded lease termination costs associated with prior period restructurings to a lesser degree in the current nine-month period as compared to the comparable nine-month period in the prior year plus approximately $0.2 million in severance costs included in the nine-month period ended March 29, 2008, in response to the previously announced loss of the Company's largest financial services customer. There were no individually significant restructuring actions during the nine months ended March 28, 2009, although the Company continuously adjusts its operating costs downward in conjunction with the lower revenue.

Depreciation and amortization for the nine months ended March 28, 2009 was $2.3 million or 1.2% of revenue, a decrease of $2.1 million or 48.0% as compared with $4.5 million or 1.7% of revenue for the nine months ended March 29, 2008, of which $1.5 million pertains to a decrease in depreciation as equipment becoming fully depreciated exceeded depreciation on newly acquired fixed assets, and $0.6 million pertains to a decrease in amortization expense, as the non-compete intangible assets became fully amortized.

Net interest expense for the nine months ended March 28, 2009 increased $14.1 million to $28.9 million from $14.8 million for the nine months ended March 29, 2008 resulting from an increase of 6% in the 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 $13.0 million face value of Modified Senior Notes issued as settlement in-kind of interest accrued on the Senior Notes also earning 18% interest, and an increase of 225 basis points in the interest rate on the revolving credit agreement with Burdale when compared to the interest rate on the revolving credit agreement with Wells for the same period last year.

Other expense for the nine months ended March 28, 2009 was $0.3 million and was comprised of deferred fees that were written off in conjunction with the repayment and extinguishment of the prior revolving credit facility.

As a result of the above, the Company had a net loss of $30.4 million for the nine months ended March 28, 2009 compared to a net loss of $25.2 million in the nine months ended March 29, 2008.

Net loss applicable to common stockholders was $36.8 million for the nine months ended March 28, 2009 compared with $32.5 million for the nine months ended March 29, 2008. For the March 28, 2009 nine-month period, 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 nine months ended March 29, 2008, 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 nine months ended March 28, 2009 a loss of approximately $30.4 million. The Company also used cash in operating activities over the past several years, including $11.3 million in fiscal 2008 and $1.3 million for the nine months ended March 28, 2009. As of March 28, 2009 the Company has negative working capital deficiency of approximately $22.7 million and a deficiency in assets of $34.0 million. Further, the Company did not meet the minimum Adjusted EBITDA levels required by its prior revolving credit agreement at various times during fiscal 2008 and 2009. The Company also did not meet its minimum quarterly trailing twelve months Adjusted EBITDA covenant for the period ended December 27, 2008, its minimum cash and cash equivalents requirement and its minimum cash, cash equivalents and qualified accounts receivable requirements contained in its Indenture and related supplements at various times during fiscal 2009. Additionally, the Company's current forecast projects that it will be unable to meet its June 2009 minimum Adjusted EBITDA covenants or make its June interest payment to the Note Holders, both of which could result in an event of default subject to the stay period as provided in the intercreditor agreement as described below. These conditions raise substantial doubt about the Company's ability to continue as a going concern.

The Company did not meet its minimum quarterly trailing twelve months Adjusted EBITDA covenant for the period ended December 27, 2008, its minimum cash and cash equivalents requirement for the months ended October 25, 2008, November 22, 2008, and January 24, 2009, and its minimum cash, cash equivalents and qualified accounts receivable requirement contained in the Indenture and its supplements for the months ended October 25, 2008, November 22, 2008, December 27, 2008, January 24, 2009 and February 21, 2009.

The fifth supplemental indenture executed on March 13, 2009, among other things,
(1) waived the covenant violations noted above, (2) replaced certain existing financial covenants with a lower quarterly trailing twelve months Adjusted EBITDA covenant, a $20.0 million minimum cash plus accounts receivable covenant, and increased the limit on purchase money obligations and capital lease obligations to $2.75 million in the aggregate, (3) permitted the Company to enter into a $12.0 million revolving credit facility with Burdale, and (4) provides that the Company shall hire an investment banker to conduct a sale of all or substantially all of the Modified Senior Notes and/or the Company and/or the assets of the Company. The Note Holders were paid $0.5 million and will receive 50% of the first $2.0 million of net proceeds from certain litigations as consideration for their consent.

The Company did not meet its minimum cash and cash equivalents requirement for the months ended February 21, 2009 and March 28, 2009, contained in the Indenture and its supplements. Unless waived by the Note Holders, then following appropriate notice, such non-compliance constitute could constitute an event of default thirty (30) days after receipt of such notice, which also would trigger a cross-default under the Burdale revolving credit facility. Under the intercreditor agreement between the Trustee and Burdale, after receipt by Burdale of a written declaration of the Trustee on behalf of the Note Holders of such event of default, the Note Holders would be stayed an additional 150 days before being able to enforce their liens on a material portion of the collateral, subject to Burdale's rights.

The Company is also required to make the June and December 2009 interest payments to the Note Holders including payments of $4.5 million and $4.7 million in cash. If necessary, in order to facilitate the sales process mandated under the fifth supplemental indenture, the Company plans to solicit consents from the Bond Holders to defer or to waive the payment of interest that is due in cash. No assurance can be given that the Note Holders will be receptive to any such request. In the event the Company is unable to obtain the necessary waivers from the Note Holders and fails to pay the Note Holders the June 30, 2009 interest payment by July 30, 2009, the Trustee, on behalf of the Note Holders, or certain Note Holders may elect to declare the principal and interest outstanding under the Modified Senior Notes immediately due and payable and to notify Burdale of the same. Such event of default would trigger a cross-default under the Burdale revolving credit facility. Under the intercreditor agreement between the Trustee and Burdale, after receipt by Burdale of a written declaration of the Trustee on behalf of the Note Holders of such event of default, the Note Holders would be stayed 150 days before being able to enforce their liens on a material portion of the collateral, subject to Burdale's rights.

For 13 of the 41 days in the period from March 16, 2009 to May 6, 2009, borrowings under the Burdale revolving credit facility were permitted to exceed the maximum borrowings as calculated under the revolving credit agreement due to discretionary decreases in availability blocks by Burdale. On May 12, 2009, the Company entered into the first amendment to the revolving credit facility to, among other things, temporarily reduce the availability blocks and revise the minimum Adjusted EBITDA targets.

Under the Company's current operating plan, it expects 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 occupancy expenses, and to a lesser degree, changing or eliminating services and . . .