Definitive Proxy Statement

You are cordially invited to attend the Special Meeting of Stockholders of Velocity Express Corporation to be held at Stamford Sheraton, 2701 Summer Street, Stamford, Connecticut 06905, on January 27, 2006, at 3:00 p.m. local time.

Whether or not you are able to attend the meeting in person, I urge you to sign and date the enclosed proxy card and return it in the enclosed envelope. If you do attend the meeting in person, you may withdraw your proxy and vote personally on any matters properly brought before the meeting.

Please note that the Company’s address is One Morningside Drive North, Building B—Suite 300, Westport, CT 06880. Our phone number is (612) 337-4525. I look forward to seeing you at our meeting.

NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Velocity Express Corporation, a Delaware corporation (the “Company”), will be held at Stamford Sheraton, 2701 Summer Street, Stamford, Connecticut 06905, on January 27, 2006, at 3:00 p.m. local time, and at any adjournment or postponement thereof, for the following purposes, as more fully described in the accompanying proxy statement:

Only stockholders of record holding our Common Stock, Series M Convertible Preferred Stock, Series N Convertible Preferred Stock and Series O Convertible Preferred Stock at the close of business on December 23, 2005, are entitled to receive notice of, and to vote at, the meeting.

All stockholders are cordially invited and requested to attend the meeting in person. Stockholders who are unable to attend in person are requested to complete, date and sign the enclosed proxy exactly as your name appears thereon and promptly return it in the envelope provided, which requires no postage if mailed in the United States. Your proxy is being solicited by the Board of Directors of the Company. Your attendance at the meeting, whether in person or by proxy, is important to ensure a quorum. If you return your proxy, you still may vote your shares in person by giving written notice (by subsequent proxy or otherwise) to the Secretary of the Company at any time prior to the vote at the meeting.

This proxy statement is furnished in connection with the solicitation of proxies by the Board of Directors (the “Board”) of Velocity Express Corporation, a Delaware corporation (the “Company”), for use at the Special Meeting of Stockholders (the “Meeting”) to be held at Stamford Sheraton, 2701 Summer Street, Stamford, Connecticut 06905, on January 27, 2006 at 3:00 p.m., local time, and at any adjournment or postponement thereof. All voting securities represented by properly executed and returned proxies, unless such proxies have previously been revoked, will be voted at the Meeting and, where the manner of voting is specified on the proxy, will be voted in accordance with such specifications. Voting securities represented by properly executed and returned proxies on which no specification has been made will be voted for the approval of Proposals 1, 2 and 3, as described more fully below. If any other matters are properly presented at the Meeting for action, including a question of adjourning or postponing the Meeting from time to time, the persons named in the proxies and acting thereunder will have discretion to vote on such matters in accordance with their best judgment.

The notice of meeting, this proxy statement and the related proxy card are first being mailed to stockholders on or about January 12, 2006.

The Board has fixed the close of business on December 23, 2005, as the record date for the determination of stockholders entitled to notice of and to vote at the Meeting or at any adjournment or postponement thereof. As of December 23, 2005, the following classes of securities of the Company were outstanding: 16,402,884 shares of Common Stock, par value $0.004 per share (“Common Stock”), 5,468,250 shares of Series M Convertible Preferred Stock, par value $0.004 per share (“Series M Preferred”), 1,945,941 shares of Series N Convertible Preferred Stock, par value $0.004 per share (“Series N Preferred”), and 510,068 shares of Series O Convertible Preferred Stock, par value $0.004 per share (“Series O Preferred”). Holders of our Series P Convertible Preferred Stock, par value $0.004 (“Series P Preferred”) do not have voting rights. As of the record date, the Company had 187 stockholders of record of Common Stock, 25 stockholders of record of Series M Preferred, 10 stockholders of record of Series N Preferred, and 10 stockholders of record of Series O Preferred. The outstanding shares of Series M Preferred, Series N Preferred and Series O Preferred are collectively referred to herein as the “Prior Preferred.”

With respect to the proposals submitted to the stockholders, each share of Common Stock is entitled to one vote and each share of Series M Preferred, Series N Preferred and Series O Preferred is entitled to one vote for each share of Common Stock issuable upon conversion of each share of Series M Preferred, Series N Preferred and Series O Preferred, respectively. As of December 23, 2005, stockholders were entitled to cast the following numbers of votes:

A stockholder may revoke his or her proxy at any time before it is voted either by filing with the Secretary of the Company, at its principal executive offices, a written notice of revocation or a duly executed proxy bearing a later date, or by attending the Meeting and notifying the Secretary of the Company that the stockholder will vote his or her shares in person. Any written notice or subsequent proxy should be delivered to Velocity Express Corporation, One Morningside Drive North, Building B-Suite 300, Westport CT 06880, Attention: Wesley C. Fredenburg, or hand-delivered to Mr. Fredenburg before the vote at the Meeting.

The presence, in person or by proxy, of the holders of a majority of the outstanding shares of Common Stock, and the holders of a majority of the outstanding shares of each separate series of Prior Preferred, is necessary to constitute a quorum at the Meeting. All votes will be tabulated by the inspector of election for the Meeting, who will separately tabulate affirmative and negative votes, abstentions and broker non-votes.

Approval of Proposals 1, 2 and 3 requires the affirmative vote of holders of a majority of the voting power of the shares of Common Stock and Prior Preferred, present in person or represented by proxy and entitled to vote at the Meeting, voting together as a single group.

Abstentions and “broker non-votes” (shares identified as held by brokers or nominees as to which instructions have not been received from the beneficial owners or persons entitled to vote and that the broker or nominee does not have discretionary power to vote on a particular matter) will be counted toward determining the presence of a quorum for the transaction of business, but will not be counted for any purpose in determining whether a proposal has been approved. If a properly executed proxy is returned and the stockholder has abstained from voting on any matter, the shares represented by such proxy will be considered for purposes of calculating the vote, but will not be considered to have been voted in favor of such matter.

If a properly executed proxy is returned by a broker holding shares in street name which indicates that the broker does not have discretionary authority as to certain shares to vote on one or more matters, such shares will not be considered to be represented at the meeting for purposes of calculating the vote with respect to such matter.

Under Delaware law, stockholders are not entitled to appraisal rights in connection with any of the Proposals in this Proxy Statement.

As of December 23, 2005, we had issued and outstanding 16,402,884 shares of common stock, 5,468,250 shares of Series M Preferred, 1,945,941 shares of Series N Preferred, 510,068 shares of Series O Preferred and 3,135,672 shares of Series P Preferred. The following tables contain certain information known to us regarding beneficial ownership of our outstanding voting securities as of December 23, 2005, by (i) each person who is known to us to own beneficially more than five percent of each class of our voting securities, (ii) each of our directors, (iii) each of our named executive officers, and (iv) all executive officers and directors as a group. Beneficial ownership listed in the tables below based on ownership of our convertible preferred shares reflects common stock equivalents. Each share of common stock is entitled to one vote. For purposes of voting as of December 23, 2005, each holder of Series M Preferred, Series N Preferred and Series O Preferred is entitled to vote a number of votes equal to the ratio of the Series M Preferred, Series N Preferred and Series O Preferred stated value to market price multiplied by the number of shares held by such holder, rounded down to the nearest whole number.

Unless otherwise noted and subject to applicable community property laws, each person identified below has sole voting and investment power with respect to such shares and the address of each person identified below is Velocity Express Corporation, One Morningside Drive North, Bldg. B, Suite 300, Westport, Connecticut 06880. Beneficial ownership is determined in accordance with the rules of the SEC and includes the class of capital stock identified on each table and securities convertible into or exercisable for the class of capital stock identified on each table owned by or for, among others, the spouse, children or certain other relatives of such person, as well as other securities as to which the person has or shares voting or investment power or has the right to acquire within 60 days of December 23, 2005.

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

The following summary of the terms of the private placement and the description of the Series P Preferred is intended to provide you with basic information concerning the transaction; however, it is not a substitute for reviewing the form of the Series P Preferred Certificate of Designation in its entirety, which is included as Appendix A hereto.

On October 7, 2005, our Board designated and approved the issuance of up to 5,022,000 shares of Series P Preferred in a private placement. On October 14, 2005, the Company entered into Stock Purchase Agreements with accredited investors to sell 3,099,513 shares of the Series P Preferred at $3.34 per share for an aggregate consideration of $10,352,370 (collectively, the “Series P Stock Purchase Agreements”). The Series P Preferred is subject to the rights and preferences set forth in its certificate of designation, the Company’s Amended and Restated Certificate of Incorporation, and the Company’s bylaws. The shares of Series P Preferred sold in the private placement were unregistered and are, therefore, subject to restrictions on resale and transferability. Purchasers of the Series P Preferred in the private placement were granted registration rights with respect to shares of Common Stock into which the Series P Preferred is convertible, as described below.

The Company has used the proceeds from the sale of the Series P Preferred for the following purposes: (i) 1% to invest in technology, (ii) 29% to strengthen its balance sheet by reducing accounts payable, and (iii) 70% for working capital. The issuance of Common Stock pursuant to the exercise of conversion rights of the Series P Preferred will not result in any net proceeds to the Company. The issuance of Common Stock as payment in-kind dividends will be in lieu of cash dividends to the holders of Series P Preferred. Net proceeds from exercise of A or B Warrants, if any, will be added to the Company’s working capital.

The Company’s Common Stock is listed on the Nasdaq Capital Market. The marketplace rules of Nasdaq (the “Nasdaq Rules”) require stockholder approval if, in connection with a transaction other than a public offering, the Company issues, at a price less than the greater of book or market value, Common Stock or securities convertible into or exercisable for Common Stock which equals 20% or more of the Company’s outstanding Common Stock or 20% or more of the voting power outstanding before the issuance. The closing bid price of one share of Common Stock on the Nasdaq SmallCap Market on October 14, 2005 was $3.35. The equivalent conversion price of one share of Series P Preferred on that date was $3.34 and therefore was below the public market price of one share of Common Stock on the Nasdaq Capital Market when the Series P Preferred were sold. On October 14, 2005, the date on which shares of Series P Preferred were issued, the 3,099,513 shares of Series P Preferred outstanding were convertible into 3,099,513 shares of Common Stock, representing less than 20% of the Company’s outstanding Common Stock on that date. Therefore, shareholder approval for the issuance of the Series P Preferred was not required by the Nasdaq Rules. As described below, however, the terms of the Series P Preferred provide for the issuance of additional shares of Common Stock, or instruments convertible into Common Stock. These additional issuances could cause the Company to issue more than 20% of the Company’s outstanding Common Stock or 20% or more of the voting power outstanding before the issuance and, therefore, require shareholder approval. Specifically, and as described below in more detail, shareholder approval is required in order to (i) issue the PIK shares, (ii) issue additional shares upon a change in the conversion rate of the Series P Preferred, or (iii) issue additional shares upon exercise of the A or B Warrant.

Holders of the Series P Preferred Stock receive dividends at a rate of 8% per annum. The Series P Preferred Dividends are cumulative, whether or not earned or declared, and are paid quarterly in arrears on the first day of February, May, August and November in each year. At the election of the Company, the Series P Preferred Dividends may be paid by (a) issuing each Holder of Series P Preferred Stock such number of shares of Series P Preferred Stock equal to the Series P Preferred Dividend divided by the Series P Stated Value (“PIK Shares”), or (b) cash out of legally available funds therefor. In the event that the issuance of the PIK shares would result in the Company issuing a total number of Series P Preferred shares that, upon conversion, is in excess of 20% of the Company’s outstanding Common Stock or voting stock as of the date of the Series P Preferred Stock Purchase Agreement, the PIK shares may not be issued until the Company’s shareholders approve the issuance of the Series P PIK Shares, unless the Company is no longer subject to the rules and listing standards of the Nasdaq Capital Market. Any election by the Company to pay dividends in shares of Series P Preferred Stock or cash must be made uniformly with respect to all outstanding shares of Series P Preferred Stock for a given dividend period. No dividends may be paid on any other capital stock of the Company until all outstanding dividends for the Series M Preferred for the current fiscal year and all prior fiscal years have been paid or declared and set apart for payment. If the Company pays a dividend on the Common Stock (other than a dividend payable solely in shares of Common Stock) or any other class of capital stock of the Company, the Company must, at the same time, pay to each holder of Series P Preferred a dividend equal to the dividend that would have been payable to such holder if the shares of Series P Preferred held by such holder had been converted into Common Stock on the date of determination of holders of Common Stock entitled to receive the dividends.

Under the Series P Registration Rights Agreement, the Company is obligated to file a registration statement with the Securities and Exchange Commission (the “SEC”) promptly after the Closing Date but no later than ninety days after October 14, 2005 (the “Filing Deadline”) to effect the registration for resale of the shares of Common Stock that will be issuable upon conversion of the Series P Preferred or the PIK Shares. If the registration statement is not filed by the Filing Deadline or the registration is not declared effective by the SEC within 180 days after the earlier of the Filing Deadline, the Company will be obligated to make a pro rata payment to each Investor in an amount equal to 1.5% of the aggregate amount invested by such Investor for each 30-day period or pro rata for any portion thereof that the registration statement is not filed or effective, as the case may be. Upon a change in the Series P Conversion Price such that additional shares of Common Stock become issuable upon the conversion of the Series P Preferred or the PIK Shares and upon a written demand of any Investor, the Company will have an obligation to file or have an effective registration statement covering those shares as well and will incur the same liquidated damages should it fail to do so. Promptly following the date when the Company is eligible to use a registration statement on Form S-3 to register the Common Stock issuable upon conversion of the Series P Preferred or the PIK Shares for resale, the Company shall file such S-3 registration statement and shall use commercially reasonable effort to have the S-3 registration statement declared effective. The Company will pay all expenses associated with each registration, including expenses for one counsel to the Investors and the Investor’s reasonable non-commission expenses in connection with the registration. The Series P Registration Rights Agreement provides for customary indemnification rights for both the Company and the Investors from the other party.

The Series P Convertible Preferred Stock has a term of three years (the “Term”). At any time after the effective date of the Registration Statement and (i) prior to the Term, or (ii) upon a change of control, the Company shall have the right, but not the obligation, to redeem all or a portion of the shares of Series P Preferred by tendering to the Holder 130% of the stated value of the outstanding Series P Preferred together with all accrued dividends. At the Term, the Company shall have the right, but not the obligation, to redeem all or a

portion of the shares of Series P Preferred by tendering to the Holder 100% of the Conversion Price together with all accrued but unpaid dividends. In the event that the Company elects to redeem the Series P Preferred prior to the Registration Statement becoming effective, the Company may redeem the Series P Preferred by paying to the Investor the greater of: (1) 130% of the outstanding stated value of the Series P Preferred plus accrued dividends, or (2) 100% of the stated value of the Series P Preferred plus all accrued dividends, plus 50% of the difference between the conversion price then in effect and the average closing price of the Company’s common stock for the 30 calendar days preceding such redemption.

Each holder of Series P Preferred also received an A Warrant and a B Warrant, each a warrant to purchase up to 20% of the amount of Series P Preferred purchased. The exercise of the A Warrant and B Warrant are subject to the prior approval of the Company’s shareholders. The exercise price for both the A and B Warrants is $4.00 per share. Additionally, the B Warrant is only exercisable in the event that a registration statement, allowing for the sale of the Series P Preferred, is not declared effective within 270 days of October 14, 2005. The Company has the option to redeem both the A and B Warrants in the event that the Company’s common stock maintains a closing price of at least $7.00 for twenty consecutive trading days.

Upon any liquidation, dissolution and winding up of the Company, each holder of Series P Preferred is entitled to receive an amount in cash equal to $3.34 for each share of Series P Preferred, plus any accrued but unpaid dividends thereon (“Series P Liquidation Preference”). If the Company’s assets are insufficient to pay all liquidation preferences for all of its preferred stock, the Company will first distribute its assets to cover the liquidation preference of the Series P Preferred and Series M Preferred and the remaining assets will be distributed between the holders of Series N Preferred and Series O Preferred, on a pro rata basis dependent on the aggregate maximum liquidation preference of all of the Series N Preferred and Series O Preferred outstanding. Any remaining assets will be distributed to holders of the Common Stock.

Except as set forth below, or if the Series P Preferred is converted into voting shares of Common Stock, the holders of shares of Series P Preferred have no voting rights.

For so long as shares of Series P Preferred issued under the Series P Stock Purchase Agreements remain outstanding, the approval of the holders of 62.5% of the shares of Series P Preferred then outstanding is required for the Company to alter or change the Series P Liquidation Preference.

The holders of Series P Preferred, at any time and from time to time, may convert all or any portion of the Series P Preferred, including any fraction of a share, into shares of the Common Stock (or shares or units of any security into which the Company’s Common Stock is changed). The initial conversion price for the Series P Preferred was $3.34 per common share.

The rate at which shares of Series P Preferred may be converted to Common Stock shall be adjusted, from time to time, in order to prevent dilution of this right to so convert held by the holders of the Series P Preferred. In the event the Company issues or sells any shares of Common Stock or securities convertible into or exercisable for Common Stock for a consideration per share of Common Stock received or receivable upon conversion or exercise of such securities, of less than $3.34, the conversion rate of the Series P Preferred shall be proportionately adjusted to prevent dilution. A change in the conversion rate would result in a greater number of shares of Common Stock being issued upon conversion of the Series P Preferred. These additional shares of

Common Stock could result in the Company issuing excess of 20% of the Company’s outstanding Common Stock or voting stock as of the date of the Series P Preferred Stock Purchase Agreement and, therefore, require shareholder approval.

Effect of Issuance of Series P Preferred on the Company’s Outstanding Securities

Because the Series P Preferred was sold at $3.34 per share, the issuance of the Series P Preferred was dilutive to the holders of the Company’s outstanding capital stock, including the Series M Preferred, Series N Preferred, Series O Preferred and Common Stock. Of these securities, each of the Prior Preferred carries anti-dilution provisions in their conversion or exercise rights.

The conversion prices of each of the Prior Preferred are required to be reduced on a weighted average basis concurrent with any issuance, other than certain permitted issuances, by the Company of securities for a consideration per share less than the original conversion price or each of the Prior Preferreds.

The Company did not seek the opinion of an independent financial advisor as to whether the issuance of the Series P Preferred was fair to the Company and its stockholders from a financial point of view. The Board of Directors of the Company, however, considered the Company’s financial condition, working capital needs and the market price of its Common Stock, and approved the terms and conditions of such transactions.

Our annual report on Form 10-K, as amended, for the fiscal year ended July 2, 2005 includes our audited financial statements and “Management’s Discussion and Analysis,” which are incorporated by reference in this proxy statement. Our quarterly report on Form 10-Q for the fiscal quarter ended October 1, 2005 includes our unaudited financial statements and “Management’s Discussion and Analysis,” which are incorporated by reference in this proxy statement. One copy of each report accompanies this proxy statement.

Representatives of the principal accountants for the current year and the most recently completed fiscal year are expected to be present at the meeting, will have an opportunity to make a statement if they desire to do so, and are expected to be available to respond to appropriate questions.

The affirmative vote of holders of a majority of the voting power of the shares of Common Stock and Prior Preferred, voting together as a single class, present in person or represented by proxy and entitled to vote at the Meeting, is required to approve this Proposal 1.

The following summary of the terms of the private placement and the description of the Series N Preferred is intended to provide you with basic information concerning the transaction; however, it is not a substitute for reviewing the form of the Series N Preferred Certificate of Designation in its entirety, which is included as Appendix B hereto.

On April 14, 2005, our Board designated and approved the issuance of up to 2,544,098 shares of Series N Preferred in a private placement. On April 28, 2005, the Company entered into Stock Purchase Agreements with four accredited investors to sell 2,544,097 shares of the Series N Preferred at $3.685 per share for an aggregate consideration of $9,375,000 (collectively, the “Series N Stock Purchase Agreements”). The Series N Preferred is subject to the rights and preferences set forth in its certificate of designation, the Company’s Amended and Restated Certificate of Incorporation, and the Company’s bylaws. The shares of Series N Preferred sold in the private placement were unregistered and are, therefore, subject to restrictions on resale and transferability. Purchasers of the Series N Preferred in the private placement were granted registration rights with respect to shares of Common Stock into which the Series N Preferred is convertible, as described below.

The Company has used the proceeds from the sale of the Series N Preferred for the following purposes: (i) 2% to invest in technology, (ii) 8% to strengthen its balance sheet by reducing accounts payable, and (iii) 90% for working capital. The issuance of Common Stock pursuant to the exercise of conversion rights of the Series N Preferred will not result in any net proceeds to the Company. The issuance of Common Stock as payment in-kind dividends will be in lieu of cash dividends to the holders of Series N Preferred.

The Company’s Common Stock is listed on the Nasdaq Capital Market. The marketplace rules of Nasdaq (the “Nasdaq Rules”) require stockholder approval if, in connection with a transaction other than a public offering, the Company issues, at a price less than the greater of book or market value, Common Stock or securities convertible into or exercisable for Common Stock which equals 20% or more of the Company’s outstanding Common Stock or 20% or more of the voting power outstanding before the issuance. The closing bid price of one share of Common Stock on the Nasdaq Capital Market on April 28, 2005 was $5.56. The equivalent conversion price of one share of Series N Preferred on that date was $3.685 and therefore was below the public market price of one share of Common Stock on the Nasdaq Capital Market when the Series N Preferred were sold. On April 28, 2005, the date on which shares of Series N Preferred were issued, the 2,544,097 shares of Series N Preferred outstanding were convertible into 2,544,097 shares of Common Stock, representing less than 20% of the Company’s outstanding Common Stock on that date. Therefore, shareholder approval for the issuance of the Series N Preferred was not required by the Nasdaq Rules. As described below, the terms of the Series N Preferred provide for the issuance of additional shares of Common Stock, or instruments convertible into Common Stock. These additional issuances could cause the Company to issue more than 20% of the Company’s outstanding Common Stock or 20% or more of the voting power outstanding before the issuance and, therefore, require shareholder approval. Specifically, and as described below in more detail, shareholder approval is required in order to (i) issue PIK shares, and (ii) issue additional shares upon a change in the conversion rate of the Series N Preferred.

Holders of the Series N Preferred Stock receive dividends at a rate of 6% per annum. The Series N Preferred Dividends are cumulative, whether or not earned or declared, and are paid quarterly in arrears. At the election of

the Company, the Series N Preferred Dividends may be paid by (a) issuing each Holder of Series N Preferred Stock such number of shares of Series N Preferred Stock equal to the Series N Preferred Dividend divided by the Series N Stated Value (“PIK Shares”), or (b) cash out of legally available funds therefor. In the event that the issuance of the PIK shares would result in the Company issuing a total number of Series N Preferred shares that, upon conversion, is in excess of 20% of the Company’s outstanding Common Stock or voting stock as of the date of the Series N Preferred Stock Purchase Agreement, the PIK shares may not be issued until the Company’s shareholders approve the issuance of the Series N PIK Shares, unless the Company is no longer subject to the rules and listing standards of the Nasdaq Capital Market. Any election by the Company to pay dividends in shares of Series N Preferred Stock or cash must be made uniformly with respect to all outstanding shares of Series N Preferred Stock for a given dividend period. No dividends may be paid on any other capital stock of the Company until all outstanding dividends for the Series M Preferred for the current fiscal year and all prior fiscal years have been paid or declared and set apart for payment. If the Company pays a dividend on the Common Stock (other than a dividend payable solely in shares of Common Stock) or any other class of capital stock of the Company, the Company must, at the same time, pay to each holder of Series N Preferred a dividend equal to the dividend that would have been payable to such holder if the shares of Series N Preferred held by such holder had been converted into Common Stock on the date of determination of holders of Common Stock entitled to receive the dividends.

Under the Series N Registration Rights Agreement, the Company was obligated to file a registration statement with the Securities and Exchange Commission (the “SEC”) no later than sixty days after April 28, 2005. The Company filed a Form S-1 registration statement covering the Common Stock into which the Series N Preferred would be converted and the Form S-1 became effective on August 5, 2005. The Company will pay all expenses associated with this registration, including expenses for one counsel to the Investors and the Investor’s reasonable non-commission expenses in connection with the registration. The Series N Registration Rights Agreement provides for customary indemnification rights for both the Company and the Investors from the other party.

Upon any liquidation, dissolution and winding up of the Company, each holder of Series N Preferred is entitled to receive an amount in cash equal to $3.685 for each share of Series N Preferred, plus any accrued but unpaid dividends thereon (“Series N Liquidation Preference”). If the Company’s assets are insufficient to pay all liquidation preferences for all of its preferred stock, the Company will first distribute its assets to cover the liquidation preference of the Series P Preferred and Series M Preferred and the remaining assets will be distributed between the holders of Series N Preferred and Series O Preferred, on a pro rata basis dependent on the aggregate maximum liquidation preference of all of the Series N Preferred and Series O Preferred outstanding. Any remaining assets will be distributed to holders of the Common Stock.

In addition to any class voting rights provided by law and the certificate of designation of the Series N Preferred, the holders of Series N Preferred shall have the right to vote together with the holders of Common Stock as a single class on any matter on which the holders of Common Stock are entitled to vote (including the election of directors). Each holder of Series N Preferred shall be entitled to one vote for each share of Common Stock that would be issuable upon the conversion of his, her or its Series N Preferred on the record date for the determination of shareholders entitled to vote.

For so long as shares of Series N Preferred issued under the Series N Stock Purchase Agreements remain outstanding, the approval of the holders of 62.5% of the shares of Series N Preferred then outstanding is required for the Company to take any of the actions set forth in Section 6 (a)-(l) of the Series N Certificate of Designation, attached as Appendix B hereto.

The holders of Series N Preferred, at any time and from time to time, may convert all or any portion of the Series N Preferred, including any fraction of a share, into shares of the Common Stock (or shares or units of any security into which the Company’s Common Stock is changed). The initial conversion price for the Series N Preferred was $3.685 per common share.

The rate at which shares of Series N Preferred may be converted to Common Stock shall be adjusted, from time to time, in order to prevent dilution of this right to so convert held by the holders of the Series N Preferred. In the event the Company issues or sells any shares of Common Stock or securities convertible into or exercisable for Common Stock for a consideration per share of Common Stock received or receivable upon conversion or exercise of such securities, of less than $3.685, the conversion rate of the Series N Preferred shall be proportionately adjusted to prevent dilution. A change in the conversion rate would result in a greater number of shares of Common Stock being issued upon conversion of the Series N Preferred. These additional shares of Common Stock could result in the Company issuing excess of 20% of the Company’s outstanding Common Stock or voting stock as of the date of the Series N Preferred Stock Purchase Agreement and, therefore, require shareholder approval.

Effect of Issuance of Series N Preferred on the Company’s Outstanding Securities

Because the Series N Preferred was sold at $3.685 per share, the issuance of the Series N Preferred was dilutive to the holders of the Company’s outstanding capital stock, including the Series M Preferred and Common Stock. Of these securities, each of the Prior Preferred carries anti-dilution provisions in their conversion or exercise rights.

The Company did not seek the opinion of an independent financial advisor as to whether the potential issuance of the Series N Preferred was fair to the Company and its stockholders from a financial point of view. The Board of Directors of the Company, however, considered the Company’s financial condition, working capital needs and the market price of its Common Stock, and approved the terms and conditions of such transactions.

The following summary of the terms of the private placement and the description of the Series O Preferred is intended to provide you with basic information concerning the transaction; however, it is not a substitute for reviewing the form of the Series O Preferred Certificate of Designation in its entirety, which is included as Appendix C hereto.

On July 18, 2005, our Board designated and approved the issuance of up to 1,625,000 shares of Series O Preferred in a private placement. On July 20, 2005, the Company entered into Stock Purchase Agreements with four accredited investors to sell 1,400,000 shares of the Series O Preferred at $4.00 per share for an aggregate consideration of $5,500,000 (collectively, the “Series O Stock Purchase Agreements”). The Series O Preferred is subject to the rights and preferences set forth in its certificate of designation, the Company’s Amended and Restated Certificate of Incorporation, and the Company’s bylaws. The shares of Series O Preferred sold in the private placement were unregistered and are, therefore, subject to restrictions on resale and transferability. Purchasers of the Series O Preferred in the private placement were granted registration rights with respect to shares of Common Stock into which the Series O Preferred is convertible, as described below.

The Company has used the proceeds from the sale of the Series O Preferred for the following purposes: (i) 1% to invest in technology, (ii) 9% to strengthen its balance sheet by reducing accounts payable, and (iii) 90% for working capital. The issuance of Common Stock pursuant to the exercise of conversion rights of the Series O Preferred will not result in any net proceeds to the Company. The issuance of Common Stock as payment in-kind dividends will be in lieu of cash dividends to the holders of Series O Preferred.

The Company’s Common Stock is listed on the Nasdaq Capital Market. The marketplace rules of Nasdaq (the “Nasdaq Rules”) require stockholder approval if, in connection with a transaction other than a public offering, the Company issues, at a price less than the greater of book or market value, Common Stock or securities convertible into or exercisable for Common Stock which equals 20% or more of the Company’s outstanding Common Stock or 20% or more of the voting power outstanding before the issuance. The closing bid price of one share of Common Stock on the Nasdaq Capital Market on July 18, 2005 was $6.46. The equivalent conversion price of one share of Series O Preferred on that date was $4.00 and therefore was below the public market price of one share of Common Stock on the Nasdaq Capital Market when the Series O Preferred were sold. On July 18, 2005, the date on which shares of Series O Preferred were issued, the 1,400,000 shares of Series O Preferred outstanding were convertible into 1,400,000 shares of Common Stock, representing less than 20% of the Company’s outstanding Common Stock on that date. Therefore, shareholder approval for the issuance of the Series O Preferred was not required by the Nasdaq Rules. As described below, the terms of the Series O Preferred provide for the issuance of additional shares of Common Stock, or instruments convertible into Common Stock. These additional issuances could cause the Company to issue more than 20% of the Company’s outstanding Common Stock or 20% or more of the voting power outstanding before the issuance and, therefore, require shareholder approval. Specifically, and as described below in more detail, shareholder approval is required in order to (i) issue PIK shares, and (ii) issue additional shares upon a change in the conversion rate of the Series O Preferred.

Holders of the Series O Preferred Stock receive dividends at a rate of 6% per annum. The Series O Preferred Dividends are cumulative, whether or not earned or declared, and are paid quarterly in arrears. At the election of

the Company, the Series O Preferred Dividends may be paid by (a) issuing each Holder of Series O Preferred Stock such number of shares of Series O Preferred Stock equal to the Series O Preferred Dividend divided by the Series O Stated Value (“PIK Shares”), or (b) cash out of legally available funds therefor. In the event that the issuance of the PIK shares would result in the Company issuing a total number of Series O Preferred shares that, upon conversion, is in excess of 20% of the Company’s outstanding Common Stock or voting stock as of the date of the Series O Preferred Stock Purchase Agreement, the PIK shares may not be issued until the Company’s shareholders approve the issuance of the Series O PIK Shares, unless the Company is no longer subject to the rules and listing standards of the Nasdaq Capital Market. Any election by the Company to pay dividends in shares of Series O Preferred Stock or cash must be made uniformly with respect to all outstanding shares of Series O Preferred Stock for a given dividend period. No dividends may be paid on any other capital stock of the Company until all outstanding dividends for the Series O Preferred for the current fiscal year and all prior fiscal years have been paid or declared and set apart for payment. If the Company pays a dividend on the Common Stock (other than a dividend payable solely in shares of Common Stock) or any other class of capital stock of the Company, the Company must, at the same time, pay to each holder of Series O Preferred a dividend equal to the dividend that would have been payable to such holder if the shares of Series O Preferred held by such holder had been converted into Common Stock on the date of determination of holders of Common Stock entitled to receive the dividends.

Under the Series O Registration Rights Agreement, the Company was obligated to file a registration statement with the Securities and Exchange Commission (the “SEC”) no later than sixty days after July 18, 2005. The Company filed a Form S-1 registration statement covering the Common Stock into which the Series O Preferred may be converted and the Form S-1 became effective on August 5, 2005. The Company will pay all expenses associated with this registration, including expenses for one counsel to the Investors and the Investor’s reasonable non-commission expenses in connection with the registration. The Series O Registration Rights Agreement provides for customary indemnification rights for both the Company and the Investors from the other party.

Upon any liquidation, dissolution and winding up of the Company, each holder of Series O Preferred is entitled to receive an amount in cash equal to $4.00 for each share of Series O Preferred, plus any accrued but unpaid dividends thereon (“Series O Liquidation Preference”). If the Company’s assets are insufficient to pay all liquidation preferences for all of its preferred stock, the Company will first distribute its assets to cover the liquidation preference of the Series P Preferred and Series M Preferred and the remaining assets will be distributed between the holders of Series N Preferred and Series O Preferred, on a pro rata basis dependent on the aggregate maximum liquidation preference of all of the Series N Preferred and Series O Preferred outstanding. Any remaining assets will be distributed to holders of the Common Stock.

In addition to any class voting rights provided by law and the certificate of designation of the Series O Preferred, the holders of Series O Preferred shall have the right to vote together with the holders of Common Stock as a single class on any matter on which the holders of Common Stock are entitled to vote (including the election of directors). Each holder of Series O Preferred shall be entitled to one vote for each share of Common Stock that would be issuable upon the conversion of his, her or its Series O Preferred on the record date for the determination of shareholders entitled to vote.

For so long as shares of Series O Preferred issued under the Series O Stock Purchase Agreements remain outstanding, the approval of the holders of 62.5% of the shares of Series O Preferred then outstanding is required for the Company to take any of the actions set forth in Section 6 (a)-(d) of the Series O Certificate of Designation, attached hereto.

The holders of Series O Preferred, at any time and from time to time, may convert all or any portion of the Series O Preferred, including any fraction of a share, into shares of the Common Stock (or shares or units of any security into which the Company’s Common Stock is changed). The initial conversion price for the Series O Preferred was $4.00 per common share.

The rate at which shares of Series O Preferred may be converted to Common Stock shall be adjusted, from time to time, in order to prevent dilution of this right to so convert held by the holders of the Series O Preferred. In the event the Company issues or sells any shares of Common Stock or securities convertible into or exercisable for Common Stock for a consideration per share of Common Stock received or receivable upon conversion or exercise of such securities, of less than $4.00, the conversion rate of the Series O Preferred shall be proportionately adjusted to prevent dilution. A change in the conversion rate would result in a greater number of shares of Common Stock being issued upon conversion of the Series O Preferred. These additional shares of Common Stock could result in the Company issuing excess of 20% of the Company’s outstanding Common Stock or voting stock as of the date of the Series O Preferred Stock Purchase Agreement and, therefore, require shareholder approval.

Effect of Issuance of Series O Preferred on the Company’s Outstanding Securities

Because the Series O Preferred was sold at $4.00 per share, the issuance of the Series O Preferred was dilutive to the holders of the Company’s outstanding capital stock, including the Series M Preferred, Series N Preferred and Common Stock. Of these securities, each of the Prior Preferred carries anti-dilution provisions in their conversion or exercise rights.

The Company did not seek the opinion of an independent financial advisor as to whether the potential issuance of the Series O Preferred was fair to the Company and its stockholders from a financial point of view. The Board of Directors of the Company, however, considered the Company’s financial condition, working capital needs and the market price of its Common Stock, and approved the terms and conditions of such transactions.

As previously reported, on November 4, 2005, Ernst & Young LLP (“E&Y”) provided notice to the Company that it would cease serving as the Company’s independent registered public accounting firm upon the earlier of completion of interim review for the Company’s interim period ended October 1, 2005 or upon the Company hiring a new independent registered public accounting firm. This amendment is being filed to report that the Company has hired a new independent registered public accounting firm and that E&Y is no longer the Company’s independent registered public accounting firm.

The reports of E&Y on the financial statements of the Company as of and for the years ended July 2, 2005 and July 3, 2004 did not contain an adverse opinion or disclaimer of opinion, and were not further qualified or modified as to uncertainty, audit scope or accounting principles.

During the years ended July 2, 2005 and July 3, 2004 and through November 8, 2005, there have been no disagreements with E&Y on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of E&Y, would have caused E&Y to make reference thereto in its reports on the Company’s financial statements for such years.

During the years ended July 2, 2005 and July 3, 2004 and through November 8, 2005, there have been no reportable events of the type described in Item 304(a)(1)(v) of Regulation S-K, except that in connection with the completion of the year-end audit for July 2, 2005 and July 3, 2004 E&Y advised the Company and Company’s audit committee that they noted certain matters considered to be material weaknesses and significant deficiencies in the design or operation of the Company’s internal controls that, in their judgment, could adversely affect the Company’s ability to record, process, summarize and report financial data consistent with the assertions of management in the consolidated financial statements. Specifically, E&Y recommended that the Company as of July 3, 2004 improve its entity level controls by hiring key finance personnel including a Chief Financial Officer and Corporate Controller; ensure the timely preparation of accounting reconciliations and analyses; perform timely cutoff and reviews of accounts payable; and fully reconcile cash applications on a timely basis for its accounts receivable balance. In connection with the preparation of the Company’s consolidated financial statements for the year ended July 2, 2005, E&Y recommended that the Company fully reconcile cash applications on a timely basis related to its accounts receivable accounts and hire additional finance staff so that the Company is able to prepare financial statements in a timely manner.

On November 8, 2005, the audit committee of the board of directors of the Company engaged UHY LLP (“UHY”) as the Company’s independent registered public accounting firm commencing with works to be performed in relation to our fiscal quarter ended October 1, 2005, and in connection with the audit of our financial statements for the fiscal year ending July 1, 2006. The Company has had no occasions in the past two years upon which it has consulted with UHY on any matters.

We expect to hold our Annual Meeting of Stockholders for the year 2005 on or around March 31, 2006. If a stockholder of the Company wishes to present a proposal for consideration for inclusion in the proxy materials for the Annual Meeting of Stockholders for the year 2005, the proposal must be sent by certified mail, return receipt requested, and must be received at the executive offices of Velocity Express Corporation, at One Morningside Drive North, Building B—Suite 300, Westport, Connecticut 06880, Attention: Wesley C. Fredenburg, no later than January 31, 2006. All proposals must conform to the rules and regulations of the SEC.

Under SEC rules, if a stockholder notifies the Company of his or her intent to present a proposal for consideration at the Annual Meeting of Stockholders for the year 2005 after February 28, 2006, the Company, acting through the persons named as proxies in the proxy materials for such meeting, may exercise discretionary authority with respect to such proposal without including information regarding such proposal in its proxy materials.

The cost of soliciting these proxies, consisting of the printing, handling, and mailing of the proxy statement and related material, and the actual expense incurred by brokerage houses, custodians, nominees and fiduciaries in forwarding proxy material to the beneficial owners of stock, will be paid by the Company. In order to assure that there is a quorum present at the Meeting, it may be necessary for certain officers, directors, regular employees and other representatives of the Company to solicit proxies by telephone or in person. These persons will receive no extra compensation for their services.

Our annual report on Form 10-K, as amended, for the fiscal year ended July 2, 2005, and our quarterly report on Form 10-Q for the fiscal quarter ended October 1, 2005, accompany this proxy statement. The Company will furnish to any person whose proxy is being solicited any exhibit described in the exhibit list in the enclosed Form 10-K or the enclosed Form 10-Q, upon payment, in advance, of fees based upon the Company’s reasonable expenses in furnishing such exhibit(s), upon written or oral request. Please submit your request to:

You may also view or obtain additional copies of the Form 10-K, Form 10-Q, and our other filings on the SEC’s website at http://www.sec.gov.

Velocity Express Corporation, a corporation organized and existing under the laws of the State of Delaware (the “Company”), hereby certifies that, pursuant to authority vested in the Board of Directors of the Company by Article IV of the Certificate of Incorporation of the Company, the following resolution was adopted as of October 7, 2005 by the Board of Directors of the Company pursuant to Section 151 of the Delaware General Corporation Law:

“RESOLVED that, pursuant to authority vested in the Board of Directors of the Company by Article IV of the Company’s Certificate of Incorporation, out of the total authorized number of 299,515,155 shares of its preferred stock, par value $0.004 per share (“Preferred Stock”), there shall be designated a Series P, 5,022,000 shares which shall be issued in and constitute a single series to be known as “Series P Convertible Preferred Stock” (hereinafter called the “Series P Preferred Stock”). The shares of Series P Preferred Stock have the voting powers, designations, preferences and other special rights, and qualifications, limitations and restrictions thereof set forth below:

As used in this Certificate of Designations, Preferences and Rights of Series P Convertible Preferred Stock of Velocity Express Corporation, the following terms shall have the respective meanings set forth below:

“Affiliate”, as applied to any Person, means any other Person directly or indirectly controlling, controlled by, or under common control with, that Person. For the purposes of this definition, “control” (including, with correlative meanings, the terms “controlling”, “controlled by” and “under common control with”), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities or by contract or otherwise.

“Closing Date” means the Closing Date as defined in the Series P Preferred Stock Purchase Agreement.

“Common Stock” means the common stock, $0.004 par value per share, of the Company, including the stock into which the Series P Preferred Stock is convertible, and any securities into which the Common Stock may be reclassified.

“Event of Default” shall mean any of the following events, after the applicable cure period:

(i) The Corporation fails to timely pay any dividend payment or the failure to timely pay any other sum of money due to the Holder from the Corporation and such failure continues for a period of ten (10) days after written notice to the Corporation from the Holder.

(ii) The Company breaches any material covenant, term or condition of the Series P Stock Purchase Agreement, the Registration Rights Agreement or in this Certificate of Designation, and if capable of being cured such breach continues for a period of ten (10) days after written notice to the Company from the Holder.

(iii) Any material representation or warranty of the Company made in the Series P Stock Purchase Agreement, the Registration Rights Agreement or in any agreement, statement or certificate given in writing pursuant thereto shall prove to have been false or misleading at the time when made.

(vi) An order entered by a court of competent jurisdiction, or by the Securities and Exchange Commission, or by the National Association of Securities Dealers, preventing purchase and sale transactions in the Company’s Common Stock for a period of five or more consecutive trading days.

(viii) Delisting of the Common Stock from the Nasdaq Small Cap Market or such other principal market or exchange on which the Common Stock is listed for trading, if the Common Stock is not quoted or listed on such market or exchange, or quoted on the automated quotation system of a national securities association or listed on a national securities exchange, within ten (10) trading days after such delisting.

(x) Upon the occurrence of a Change in Control. A “Change in Control” shall mean (i) the Company becoming a Subsidiary of another entity, (ii) a majority of the board of directors of the Company as of the Issue Date of Series P Preferred Stock or successors appointed by the board of directors having a majority consisting of such persons or their successors no longer serving as directors of the Company except due to natural causes, (iii) if any person or entity other than officers or directors or persons or entities beneficially owning more than ten percent (10%) or more of the voting power of outstanding capital stock of the Company as of the Issue date of Series P Preferred Stock, acquires fifty percent (50%) or more of the voting power of outstanding capital stock of the Company, (iv) the sale, lease or transfer of substantially all the assets of the Company or Subsidiaries.

(xi) Upon the failure of the Company, on or before ninety (90) days after the Closing Date, to obtain Shareholder Approval, as defined in Section 4.26 the Series P Stock Purchase Agreement.

“Excluded Stock” means (A) capital stock, Options (as defined in Section 4D(1)) or Convertible Securities (as defined in Section 4D(1)) issued to employees, officers or directors of the Company pursuant to any stock or option plan duly adopted by a majority of the non-employee members of the Board of Directors of the Company or a majority of the members of a committee of non-employee directors established for such purpose, (B) shares of Common Stock issued upon the conversion or exercise of Options or Convertible Securities issued prior to the date hereof, provided that such securities have not been amended since the date hereof, and (C) shares of Common Stock issued or issuable by reason of a dividend, stock split or other distribution on shares of Common Stock (but only to the extent that such a dividend, split or distribution results in an adjustment in the Conversion Price pursuant to the other provisions of this Series N Preferred Stock).

“Market Price” means the lower of the average closing prices of the Common Stock for the five trading days preceeding (i) the date of the binding agreement to issue the Series P Preferred Stock or (ii) the date of issuance of the Series P Preferred Stock.

“Person” shall be construed in the broadest sense and means and includes any natural person, a partnership, a corporation, an association, a joint stock company, a limited liability company, a trust, a joint venture, an unincorporated organization and other entity or governmental or quasi-governmental entity.

“Registration Statement” means that registration statement required to be filed under the terms of the Series P Preferred Registration Rights Agreement.

“Series P Stated Value” means $3.34 (appropriately adjusted for any stock split, reverse stock split, stock dividend or other reclassification or combination of the Series P Preferred Stock occurring after the date hereof).

“Series P Stock Purchase Agreement” means the stock purchase agreement entered into between the Investor and the Company for the purchase and sale of Series P Preferred Stock.

“Subsidiary” means any corporation, association or other business entity (i) at least 50% of the outstanding voting securities of which are at the time owned or controlled, directly or indirectly, by the Company; or (ii) with respect to which the Company possesses, directly or indirectly, the power to direct or cause the direction of the affairs or management of such Person.

(a) Each Holder of Series P Preferred Stock, in preference and priority to the Holders of all other classes of stock other than Holders of the Series M Preferred Stock, shall be entitled to receive, with respect to each share of Series P Preferred Stock then outstanding and held by such Holder of Series P Preferred Stock, dividends, commencing from the date of issuance of such share of Series P Preferred Stock, at the rate of eight percent (8%) per annum of the Series P Stated Value (the “Series P Preferred Dividends”), subject to the adjustment provisions in Section 4 (c). The Series P Preferred Dividends shall be cumulative, whether or not earned or declared, and shall be paid quarterly in arrears on the first day of February, May, August and November in each year. At the election of the Company, the Series P Preferred Dividends shall be paid by (a) issuing each Holder of Series P Preferred Stock such number of shares of Series P Preferred Stock equal to the Series P Preferred Dividend divided by the Series P Stated Value (“PIK Shares”), or (b) cash out of legally available funds therefor. In the event that the issuance of the PIK shares would result in the Company issuing a total number of Series P Preferred shares that, upon conversion, is in excess of 20% of the Company’s outstanding Common Stock or voting stock as of the date of the Series P Preferred Stock Purchase Agreement, the PIK shares shall not be issued until the Company’s shareHolders approve the issuance of the Series P PIK Shares, unless the Company is no longer subject to the rules and listing standards of the Nasdaq SmallCap Market. Any election by the Company to pay dividends in shares of Series P Preferred Stock or cash shall be made uniformly with respect to all outstanding shares of Series P Preferred Stock for a given dividend period.

(b) No dividends shall be paid on any Common Stock of the Company or any other capital stock of the Company other than the Series M, Preferred Stock during any fiscal year of the Company until all outstanding Series P Preferred Dividends (with respect to the current fiscal year and all prior fiscal years) shall have been paid or declared and set apart for payment to the Holders of Series P Preferred Stock.

(c) In the event that the Company shall at any time pay a dividend on the Common Stock or any other class or Series P capital stock of the Company other than the Series M Preferred Stock, the Company shall, at the same time, pay to each Holder of Series P Preferred Stock a dividend equal to the dividend that would have been payable to such Holder if the shares of Series P Preferred Stock held by such Holder had been converted into Common Stock on the date of determination of Holders of Common Stock entitled to receive such dividends.

3. Liquidation; Redemption. Upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the Holders of the shares of Series P Preferred Stock shall rank (i) senior to the Holders of the Common Stock and Series N and O Preferred Stock (ii) on parity with the Holders of the Series M Preferred Stock, as to such distributions, and shall be entitled to be paid an amount per share equal to the Series P Stated Value plus any accrued and unpaid Series P Preferred Dividends (the “Liquidation Preference”). No modification of this Liquidation Preference shall be made without the prior written approval of at least 62.5% of the then outstanding Series P Preferred. If upon such liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the assets to be distributed among the Holders of the Series P Preferred Stock and any class or Series P capital stock ranking on a parity with the Series P Preferred Stock as to such distributions shall be insufficient to permit payment to the Holders of the Series P Preferred Stock and any such class or Series P capital stock of their respective liquidation amount, then the entire assets of the Company to be distributed shall be distributed pro rata to the Holders of Series P Preferred Stock and the Holders of such class or Series P capital stock ranking on a parity with the Series P Preferred Stock as to such distributions according to the preferential amounts due thereon.

(a) At any time after the effective date of the Registration Statement and (i) prior to the Term, or (ii) upon a Change of Control, the Company shall have the right, but not the obligation, to redeem all or a portion of the

shares of Series P Preferred Stock by tendering to the Holder 130% of the Stated Value of the outstanding Series P Preferred Stock together with allaccrued but unpaid dividends. At the Term, the Company shall have the right, but not the obligation, to redeem all or a portion of the shares of Series P Preferred Stock by tendering to the Holder 100% of the Conversion Price together with all accrued but unpaid dividends .

(b) In the event that the Company elects to redeem the Series P prior to the Registration Statement becoming effective, the Company may redeem the Series P by paying to the Investor the greater of: (1) 130% of the outstanding Stated Value of the Series P plus accrued but unpaid dividends, and (2) 100% of the Stated Value of the Series P plus all accrued but unpaid dividends, plus 50% of the difference between the Fixed Conversion Price then in effect and the average closing price of the Company’s common stock for the 30 calendar days preceding such redemption.

( c) At the (i) Term,or (ii) if an Event of a Default occurs, the Series P Preferred Dividends shall increase to the rate of eighteen percent (18%) until such time as the Company converts or redeems the Shares under Section 4(a) hereof.

5A. Right to Convert. Subject to the terms and conditions of this paragraph 5A and 5B, the Holder of any share or shares of Series P Preferred Stock shall have the right, at its option at any time, to convert any such shares of Series P Preferred Stock into such number of fully paid and nonassessable whole shares of Common Stock as is obtained by multiplying the number of shares of Series P Preferred Stock so to be converted by the Liquidation Preference per share and dividing the result by the conversion price of $3.34 per share or, if there has been an adjustment of the conversion price, by the conversion price as last adjusted and in effect at the date any share or shares of Series P Preferred Stock are surrendered for conversion (such price, or such price as last adjusted, being referred to herein as the “Conversion Price”). Such rights of conversion shall be exercised by the Holder at any time during its usual business hours on the date set forth in such notice, together with a properly completed notice of conversion in the form attached hereto with a statement of the name or names (with address), subject to compliance with applicable laws to the extent such designation shall involve a transfer, in which the certificate or certificates for shares of Common Stock, shall be issued. Such conversion shall be deemed to have been effected and the Conversion Price shall be determined as of the close of business on the date on which such written notice shall have been given by the Holder. The Holder may not convert that amount of the Obligation Amount on a Conversion Date in amounts that would result in the Holder having a beneficial ownership of Common Stock which would be in excess of the sum of (i) the number of shares of Common Stock beneficially owned by the Holder and its affiliates on such Conversion Date, and (ii) the number of shares of Common Stock issuable upon the conversion of the Series P and accrued dividends with respect to which the determination of this proviso is being made on such Conversion Date, which would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock of the Company. For the purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder. Subject to the foregoing, the Holder shall not be limited to successive exercises which would result in the aggregate issuance of more than 4.99%. The Holder may revoke the conversion limitation described in this Paragraph, in whole or in part, upon 61 days prior notice to the Company. The Holder may allocate which of the equity of the Company deemed beneficially owned by the Holder shall be included in the 4.99% amount described above and which shall be allocated to the excess above 4.99%.

5B. Mandatory Conversion. If at any time after the Closing Date, and after the Registration Statement has been effective for a minimum of 20 consecutive trading days, the closing price of the Company’s Common Stock is at least $6.00 for twenty (20) consecutive trading days, at the election of the Company, each Holder must convert its Series P Preferred Stock into shares of the Company’s Common Stock (the

“Mandatory Conversion”). Each Mandatory Conversion in any calendar month shall be limited to ten percent (10%) of the total dollar volume traded in Company’s common stock in the previous calendar month.

5C. Issuance of Certificates; Time Conversion Effected. Within three (3) business days after the conversion of the Series P Preferred Stock , the Company shall issue and deliver, or cause to be issued and delivered, to the Holder, registered in such name or names as such Holder may direct, subject to compliance with applicable laws to the extent such designation shall involve a transfer of, a certificate or certificates for the number of whole shares of Common Stock issuable upon the conversion of such share or shares of Series P Preferred Stock. Upon the effective date of any such conversion, the rights of the Holder of the shares of Series P Preferred Stock being converted shall cease, and the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the Holder or Holders of record of the shares represented thereby. The Company understands that a delay in the delivery of Common Stock upon (i) conversion of the Series P Preferred Stock in the form required pursuant to this Certificate and the Stock Purchase Agreement, or (ii) in response to a proper request to have a restrictive legend removed under Rule 144 of the Securities Act of 1933 , could result in economic loss to the Holder. As compensation to the Holder for such loss, the Company agrees to pay (as liquidated damages and not as a penalty) to the Holder for such late delivery of Common Stock upon Conversion of the Series P Preferred Stock in the amount of $100 per business day after the third business day after a request for conversion, or a legend removal, has been made for each $10,000 of Series P Preferred Stock and accrued dividends being converted, or the corresponding Common Stock, for which a legend removal has been requested, which is not timely delivered. The Company shall pay any payments incurred under this section in immediately available funds upon demand. Furthermore, in addition to any other remedies which may be available to the Holder, in the event that the Company fails for any reason to effect delivery as stated in this Section 5C, the Holder will be entitled to revoke all or part of the relevant notice of conversion by delivery of a notice to such effect to the Company whereupon the Company and the Holder shall each be restored to their respective positions immediately prior to the delivery of such notice, except that the liquidated damages described above shall be payable through the date notice of revocation is given to the Company.

5D. Fractional Shares; Dividends; Partial Conversion. No fractional shares shall be issued upon conversion of the Series P Preferred Stock into Common Stock, and the number of shares of Common Stock to be issued shall be rounded up to the nearest whole share. In addition to any other rights available to the Holder, if the Company fails to make timely delivery to the Holder such certificate or certificates, pursuant to Section 5C, within five (5) business days and if within seven (7) business days thereafter the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by such Holder of the Common Stock which the Holder anticipated receiving upon such conversion (a “Buy-In”), then the Company shall pay in cash to the Holder (in addition to any remedies available to or elected by the Holder) within five (5) business days after written notice from the Holder, the amount by which (A) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (B) the aggregate Stated Value of the shares of Series A Preferred Stock for which such conversion was not timely honored, together with interest thereon at a rate of 15% per annum, accruing until such amount and any accrued interest thereon is paid in full (which amount shall be paid as liquidated damages and not as a penalty). For example, if the Holder purchases shares of Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of $10,000 of Stated Value of Series A Preferred Stock, the Company shall be required to pay the Holder $1,000, plus interest. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In.

5E. Adjustment of Conversion Price. If the Company shall issue or sell, or is, in accordance with subsections 5E(1) through 5E(8) below, deemed to have issued or sold, any Additional Shares of Common Stock without consideration or for a consideration per share less than the Conversion Price in effect immediately prior to the time of such issue or sale, then and in each such case (a “Trigger Issuance”) the

then-existing Conversion Price, shall be reduced, as of the close of business on the effective date of the Trigger Issuance, to a price determined as follows:


Adjusted Conversion Price =		(A x B) + D
		A + C

“A” equals the number of shares of Common Stock outstanding, including Additional Shares of Common Stock (as defined below) deemed to be issued hereunder, immediately preceding such Trigger Issuance;

“B” equals the Conversion Price in effect immediately preceding such Trigger Issuance;

“C” equals the number of Additional Shares of Common Stock issued or deemed issued hereunder as a result of the Trigger Issuance; and

“D” equals the aggregate consideration, if any, received or deemed to be received by the Company upon such Trigger Issuance;

provided, however, that in no event shall the Conversion Price after giving effect to such Trigger Issuance be greater than the Conversion Price in effect prior to such Trigger Issuance.

For purposes of this subsection 5E, “Additional Shares of Common Stock” shall mean all shares of Common Stock issued by the Company or deemed to be issued pursuant to this subsection 5E, other than Excluded Stock.

In the event that the adjustment to the conversion price would result in the Company issuing a total number of common shares, upon conversion of the Series P Preferred shares, that is in excess of 20% of the Company’s outstanding Common Stock or voting stock as of the date of the Series P Preferred Stock Purchase Agreement, then no adjustment will occur until the Company’s shareholders approve the issuance of the Series P Preferred.

For purposes of this subsection 5E, the following paragraphs 5E(1) to 5E(8) shall also be applicable:

5E(1) Issuance of Rights or Options. In case at any time the Company shall in any manner grant (directly and not by assumption in a merger or otherwise) any warrants or other rights to subscribe for or to purchase, or any options for the purchase of, Common Stock or any stock or security convertible into or exchangeable for Common Stock (such warrants, rights or options being called “Options” and such convertible or exchangeable stock or securities being called “Convertible Securities”) whether or not such Options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such Options or upon the conversion or exchange of such Convertible Securities (determined by dividing (i) the sum (which sum shall constitute the applicable consideration) of (x) the total amount, if any, received or receivable by the Company as consideration for the granting of such Options, plus (y) the aggregate amount of additional consideration payable to the Company upon the exercise of all such Options, plus (z), in the case of such Options which relate to Convertible Securities, the aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (ii) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options) shall be less than the Conversion Price in effect immediately prior to the time of the granting of such Options, then the total number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to have been issued for such price per share as of the date of granting of such Options or the issuance of such Convertible Securities and thereafter shall be deemed to be outstanding for purposes of adjusting the Conversion Price. Except as otherwise provided in subsection 5E(3) no adjustment of the Conversion Price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such Options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities.

5E(2) Issuance of Convertible Securities. In case the Company shall in any manner issue (directly and not by assumption in a merger or otherwise) or sell any Convertible Securities, whether or not the rights to exchange or convert any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (i) the sum (which sum shall constitute the applicable consideration) of (x) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus (y) the aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (ii) the total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the Conversion Price in effect immediately prior to the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall be deemed to have been issued for such price per share as of the date of the issue or sale of such Convertible Securities and thereafter shall be deemed to be outstanding for purposes of adjusting the Conversion Price, provided that (a) except as otherwise provided in subsection 5E(3), no adjustment of the Conversion Price shall be made upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities and (b) no further adjustment of the Conversion Price shall be made by reason of the issue or sale of Convertible Securities upon exercise of any Options to purchase any such Convertible Securities for which adjustments of the Conversion Price have been made pursuant to the other provisions of subsection 5D.

5E(3) Change in Option Price or Conversion Rate. Upon the happening of any of the following events, namely, if the purchase price provided for in any Option referred to in subsection 5E(l) hereof, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in subsections 5E(l) or 5E(2), or the rate at which Convertible Securities referred to in subsections 5D(l) or 5D(2) are convertible into or exchangeable for Common Stock shall change at any time (including, but not limited to, changes under or by reason of provisions designed to protect against dilution), the Conversion Price in effect at the time of such event shall forthwith be readjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold. On the termination of any Option for which any adjustment was made pursuant to this subsection 5(E) or any right to convert or exchange Convertible Securities for which any adjustment was made pursuant to this subsection 5(E) (including without limitation upon the redemption or purchase for consideration of such Convertible Securities by the Company), and after five (5) calendar days notice to the Holder, the Conversion Price then in effect hereunder shall forthwith be changed to the Conversion Price which would have been in effect at the time of such termination had such Option or Convertible Securities, to the extent outstanding immediately prior to such termination, never been issued.

5E(4) Stock Dividends. Subject to the provisions of this subsection 4D, in case the Company shall declare a dividend or make any other distribution upon any stock of the Company (other than the Common Stock) payable in Common Stock, Options or Convertible Securities, then any Common Stock, Options or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration; provided, however, that the provisions of this subsection 5E(4) shall not apply to the issuance of PIK Shares in accordance with the terms hereof.

5E(5) Subdivision or Combination of Stock. In case the Company shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares or shall declare or pay a dividend on its outstanding shares of Common Stock payable in shares of Common Stock, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock of the Company shall be combined into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased.

5E(6) Consideration for Stock. In case any shares of Common Stock, Options or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the net amount received by the Company therefor, after deduction therefrom of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Company in connection therewith. In case

any shares of Common Stock, Options or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be deemed to be the fair value of such consideration as determined in good faith by the Board of Directors of the Company, after deduction of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Company in connection therewith. In case any Options shall be issued in connection with the issue and sale of other securities of the Company, together comprising one integral transaction in which no specific consideration is allocated to such Options by the parties thereto, such Options shall be deemed to have been issued for such consideration as determined in good faith by the Board of Directors of the Company. If Common Stock, Options or Convertible Securities shall be issued or sold by the Company and, in connection therewith, other Options or Convertible Securities (the “Additional Rights”) are issued, then the consideration received or deemed to be received by the Company shall be reduced by the fair market value of the Additional Rights (as determined using the Black-Scholes option pricing model or another method mutually agreed to by the Company and the Holder). The Board of Directors of the Company shall respond promptly, in writing, to an inquiry by the Holder as to the fair market value of the Additional Rights. In the event that the Board of Directors of the Company and the Holder are unable to agree upon the fair market value of the Additional Rights, the Company and the Holder shall jointly select an appraiser, who is experienced in such matters. The decision of such appraiser shall be final and conclusive, and the cost of such appraiser shall be borne by the Company.

5E(7) Record Date. In case the Company shall take a record of the Holders of its Common Stock for the purpose of entitling them (i) to receive a dividend or other distribution payable in Common Stock, Options or Convertible Securities or (ii) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be.

5E(8) Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company or any of its wholly-owned subsidiaries, and the disposition of any such shares (other than the cancellation or retirement thereof) shall be considered an issue or sale of Common Stock for the purpose of this Section 4E.

5F Stock Splits and Dividends. If the Company shall, at any time or from time to time while the Series P Preferred Stock is outstanding, pay a dividend or make a distribution on its Common Stock in shares of Common Stock, subdivide its outstanding shares of Common Stock into a greater number of shares or combine its outstanding shares of Common Stock into a smaller number of shares or issue by reclassification of its outstanding shares of Common Stock any shares of its capital stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then the Conversion Price in effect immediately prior to the date upon which such change shall become effective shall be adjusted by the Company so that the Holder thereafter converting its shares of Series P Preferred Stock shall be entitled to receive the number of shares of Common Stock or other capital stock which the such Holder would have received if the shares of Series P Preferred Stock had been converted immediately prior to such event. Such adjustments shall be made successively whenever any event listed above shall occur.

5G. Reorganization or Reclassification. If any capital reorganization or reclassification of the capital stock of the Company shall be effected in such a way (including, without limitation, by way of consolidation or merger) that Holders of Common Stock but not Holders of Series P Preferred Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock then, as a condition of such reorganization or reclassification, lawful and adequate provision shall be made whereby each Holder of a share or shares of Series P Preferred Stock shall thereafter have the right to receive, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock of the Company immediately theretofore receivable upon the conversion of such share or shares of the Series P Preferred Stock, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of Common Stock equal to the number of shares of such stock

immediately theretofore so receivable had such reorganization or reclassification not taken place and in any such case appropriate provision shall be made with respect to the rights and interests of such Holder to the end that the provisions hereof (including without limitation provisions for adjustments of the Conversion Price) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise of such conversion rights (including an immediate adjustment, by reason of such reorganization or reclassification, of the Conversion Price to the value for the Common Stock reflected by the terms of such reorganization or reclassification if the value so reflected is less than the Conversion Price in effect immediately prior to such reorganization or reclassification). In the event of a merger or consolidation of the Company as a result of which a greater or lesser number of shares of common stock of the surviving corporation are issuable to Holders of the Common Stock of the Company outstanding immediately prior to such merger or consolidation, the Conversion Price in effect immediately prior to such merger or consolidation shall be adjusted in the same manner as though there were a subdivision or combination of the outstanding shares of Common Stock of the Company.

5H. Distributions. In case the Company shall fix a payment date for the making of a distribution to all Holders of Common Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing corporation) of evidences of indebtedness or assets (other than cash dividends or cash distributions payable out of consolidated earnings or earned surplus or dividends or distributions referred to in Section 5F), or subscription rights or warrants, the Conversion Price to be in effect after such payment date shall be determined by multiplying the Conversion Price in effect immediately prior to such payment date by a fraction, the numerator of which shall be the total number of shares of Common Stock outstanding multiplied by the Market Price (as defined below) per share of Common Stock immediately prior to such payment date, less the fair market value (as determined by the Company’s Board of Directors in good faith) of said assets or evidences of indebtedness so distributed, or of such subscription rights or warrants, and the denominator of which shall be the total number of shares of Common Stock outstanding multiplied by such Market Price per share of Common Stock immediately prior to such payment date. “Market Price” as of a particular date (the “Valuation Date”) shall mean the following: (a) if the Common Stock is then listed on a national stock exchange, the closing sale price of one share of Common Stock on such exchange on the last trading day prior to the Valuation Date; (b) if the Common Stock is then quoted on The Nasdaq Stock Market, Inc. (“Nasdaq”), the National Association of Securities Dealers, Inc. OTC Bulletin Board (the “Bulletin Board”) or such similar exchange or association, the closing sale price of one share of Common Stock on Nasdaq, the Bulletin Board or such other exchange or association on the last trading day prior to the Valuation Date or, if no such closing sale price is available, the average of the high bid and the low asked price quoted thereon over the immediately preceding three trading day period prior to the Valuation Date; or (c) if the Common Stock is not then listed on a national stock exchange or quoted on Nasdaq, the Bulletin Board or such other exchange or association, the fair market value of one share of Common Stock as of the Valuation Date, shall be determined in good faith by the Board of Directors of the Company and the Holders of at least 62.5% of the outstanding Series P Preferred Stock. If the Common Stock is not then listed on a national securities exchange, the Bulletin Board or such other exchange or association, the Board of Directors of the Company shall respond promptly, in writing, to an inquiry by a Holder of Series P Preferred Stock prior to the exercise hereunder as to the fair market value of a share of Common Stock as determined by the Board of Directors of the Company. In the event that the Board of Directors of the Company and the Holders of at least 62.5% of the outstanding Series P Preferred Stock are unable to agree upon the fair market value in respect of subpart (c) hereof, the Company and the Holders of at least 62.5% of the outstanding Series P Preferred Stock shall jointly select an appraiser, who is experienced in such matters. The decision of such appraiser shall be final and conclusive, and the cost of such appraiser shall be borne by the Company. Such adjustment shall be made successively whenever such a payment date is fixed.

5I. Effective Date of Adjustment. An adjustment to the Conversion Price shall become effective immediately after the payment date in the case of each dividend or distribution and immediately after the effective date of each other event which requires an adjustment.

5J. Subsequent Adjustments. In the event that, as a result of an adjustment made pursuant to this Section 4, Holders of Series P Preferred Stock shall become entitled to receive any shares of capital stock of the Company other than shares of Common Stock, the number of such other shares so receivable upon the conversion of the Series P Preferred Stock shall be subject thereafter to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Conversion Shares contained herein.

5K. Notice of Adjustment. Upon any adjustment of the Conversion Price, then, and in each such case the Company shall give written notice thereof by first class mail, postage prepaid, addressed to each Holder of shares of Series P Preferred Stock at the address of such Holder as shown on the books of the Company, which notice shall state the Conversion Price resulting from such adjustment, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based.

(1) the Company shall declare any dividend upon its Common Stock payable in cash or stock or make any other distribution to the Holders of its Common Stock;

(2) the Company shall offer for subscription pro rata to the Holders of its Common Stock any additional shares of such stock of any class or other rights;

(3) there shall be any capital reorganization or reclassification of the capital stock of the Company, or a consolidation or merger of the Company with, or a sale of all or substantially all its assets to, another corporation; or

(4) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company;

then, in any one or more of said cases, the Company shall give, by first class mail, postage prepaid, addressed to each Holder of any shares of Series P Preferred Stock at the address of such Holder as shown on the books of the Company, (a) at least 15 days prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, and (b) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, at least 15 days prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (a) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the Holders of Common Stock shall be entitled thereto, and such notice in accordance with the foregoing clause (b) shall also specify the date on which the Holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be.

(1) The Company will at all times reserve and keep available out of its authorized but unissued Common Stock solely for the purpose of issuance upon the conversion of the Series P Preferred Stock as herein provided, 150% of such number of shares of Common Stock as shall then be issuable upon the conversion of all outstanding shares of Series P Preferred Stock. All shares of Common Stock which shall be so issued shall be duly and validly issued and fully paid and nonassessable and free from all liens, duties and charges arising out of or by reason of the issue thereof (including, without limitation, in respect of taxes) and, without limiting the generality of the foregoing, the Company covenants that it will from time to time take all such action as may be requisite to assure that the par value per share of the Common Stock is at all times equal to or less than the effective Conversion Price. The Company will take all such action within its control as may be necessary on its part to assure that all such shares of Common Stock may be so issued without violation of any applicable law or regulation, or of any requirements of any national securities exchange upon which the Common Stock of the Company may be listed. The Company will not take any action which results in any adjustment

of the Conversion Price if after such action the total number of shares of Common Stock issued and outstanding and thereafter issuable upon exercise of all options and conversion of Convertible Securities, including upon conversion of the Series P Preferred Stock, would exceed the total number of shares of such class of Common Stock then authorized by the Company’s Certificate of Incorporation, or result in a conversion price less than the par value.

(2) The Company will at all times reserve and keep available out of its authorized Series P Preferred Stock such number of shares of Series P Preferred Stock as is equal to the number of shares of Series P Preferred Stock then outstanding. All shares of Series P Preferred Stock, which shall be so issued shall be duly and validly issued and fully paid and nonassessable and free from all liens, duties and charges arising out of or by reason of the issue thereof (including, without limitation, in respect of taxes).

5N. No Reissuance or Additional Issuance of Series P Preferred Stock. Shares of Series P Preferred Stock that are converted into shares of Common Stock as provided herein shall be retired and may not be reissued as Series P Preferred Stock but may be reissued as all or part of another Series P Preferred Stock. No additional Shares of Series P Preferred will be authorized or issued, other than as originally authorized.

5O. Issue Tax. The issuance of certificates for shares of Common Stock upon conversion of the Series P Preferred Stock shall be made without charge to the Holders thereof for any issuance tax, stamp tax, transfer tax, duty or charge in respect thereof, provided that the Company shall not be required to pay any tax, duty or charge which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the Holder of the Series P Preferred Stock which is being converted.

5P. Closing of Books. The Company will at no time close its transfer books against the transfer of any Series P Preferred Stock or of any shares of Common Stock issued or issuable upon the conversion of any shares of Series P Preferred Stock in any manner which interferes with the timely conversion of such Series P Preferred Stock; provided, however, nothing herein shall be construed to prevent the Company from setting record dates for the Holders of its securities.

6. Other Covenants. As long as at least 60% of the Series P Preferred remains outstanding, the Holders, acting as a single class, shall have the right to appoint one (1) person to attend all meetings of the Company’s Board of Directors as a monitor.

7. Offering Restrictions. For so long as Series P Preferred Stock is outstanding, the Company will not enter into any equity line of credit or similar agreement, nor issue nor agree to issue any floating or variable priced equity linked instruments nor any of the foregoing or equity with price reset rights.

8. No Waiver. Except as otherwise modified or provided for herein, the Holders of Series P Preferred Stock shall also be entitled to, and shall not be deemed to have waived, any other applicable rights granted to such Holders under the Delaware General Corporation Law.

9. No Impairment. The Company will not, through any reorganization, transfer of assets, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company but will at all times in good faith assist in the carrying out of all the provisions hereunder and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights and liquidation preferences granted hereunder of the Holders of the Series P Preferred Stock against impairment.

8. Action By Holders. Any action or consent to be taken or given by the Holders of the Series P Preferred Stock may be given either at a meeting of the Holders of the Series P Preferred Stock called and held for such purpose or by written consent.

IN WITNESS WHEREOF, the undersigned has executed this Certificate of Designations, Preferences and Rights this 14th day of October 2005.


VELOCITY EXPRESS CORPORATION

By:
		Name: Wesley Fredenburg
		Title: Secretary

Velocity Express Corporation, a corporation organized and existing under the laws of the State of Delaware (the “Company”), hereby certifies that, pursuant to authority vested in the Board of Directors of the Company by Article IV of the Certificate of Incorporation of the Company, the following resolution was adopted as of April 14, 2005 by the Board of Directors of the Company pursuant to Section 151 of the Delaware General Corporation Law:

“RESOLVED that, pursuant to authority vested in the Board of Directors of the Company by Article IV of the Company’s Certificate of Incorporation, out of the total authorized number of 299,515,270 shares of its preferred stock, par value $0.004 per share (“Preferred Stock”), there shall be designated a series of 2,544,097 shares which shall be issued in and constitute a single series to be known as “Series N Convertible Preferred Stock” (hereinafter called the “Series N Preferred Stock”). The shares of Series N Preferred Stock have the voting powers, designations, preferences and other special rights, and qualifications, limitations and restrictions thereof set forth below:

As used in this Certificate of Designations, Preferences and Rights of Series N Convertible Preferred Stock of Velocity Express Corporation, the following terms shall have the respective meanings set forth below:

“Common Stock” means the common stock, $0.004 par value per share, of the Company, including the stock into which the Series N Preferred Stock is convertible, and any securities into which the Common Stock may be reclassified.

“Excluded Stock” means (A) capital stock, Options (as defined in Section 4D(1)) or Convertible Securities (as defined in Section 4D(1)) issued to employees, consultants, officers or directors of the Company pursuant to any stock or option plan duly adopted by a majority of the non-employee members of the Board of Directors of the Company or a majority of the members of a committee of non-employee directors established for such purpose, (B) shares of Common Stock issued upon the conversion or exercise of Options or Convertible Securities issued prior to the date hereof, provided that such securities have not been amended since the date hereof, (C) capital stock or Convertible Securities issued to a lender in connection with the provision of credit to the Company and (D) shares of Common Stock issued or issuable by reason of a dividend, stock split or other distribution on shares of Common Stock (but only to the extent that such a dividend, split or distribution results in an adjustment in the Conversion Price pursuant to the other provisions of this Series N Preferred Stock).

“Market Price” means the lower of market value of the Common Stock as of (i) the date of the binding agreement to issue the Series N Preferred Stock or (ii) the date of issuance of the Series N Preferred Stock.

“Series N Stated Value” means $3.685 (appropriately adjusted for any stock split, reverse stock split, stock dividend or other reclassification or combination of the Series N Preferred Stock occurring after the date hereof).

(a) Each holder of Series N Preferred Stock, in preference and priority to the holders of all other classes of stock other than holders of the Series M Preferred Stock, shall be entitled to receive, with respect to each share of Series N Preferred Stock then outstanding and held by such holder of Series N Preferred Stock, dividends, commencing from the date of issuance of such share of Series N Preferred Stock, at the rate of six percent (6%) per annum of the Series N Stated Value (the “Series N Preferred Dividends”). The Series N Preferred Dividends shall be cumulative, whether or not earned or declared, and shall be paid quarterly in arrears on the first day of March, June, September and December in each year. During the first two (2) years following the date of issuance, the Series N Preferred Dividends shall be paid by issuing each holder of Series N Preferred Stock such number of shares of Series N Preferred Stock equal to the Series N Preferred Dividend divided by the Series N Stated Value (“PIK Shares”). From and after the second anniversary of the date of issuance, the Company shall have the option to pay the Series N Preferred Dividends in PIK Shares or in cash out of legally available funds therefor. Any election by the Company to pay dividends in shares of Series N Preferred Stock or cash shall be made uniformly with respect to all outstanding shares of Series N Preferred Stock for a given dividend period.

(b) No dividends shall be paid on any Common Stock of the Company or any other capital stock of the Company other than the Series M Preferred Stock during any fiscal year of the Company until all outstanding Series N Preferred Dividends (with respect to the current fiscal year and all prior fiscal years) shall have been paid or declared and set apart for payment to the holders of Series N Preferred Stock.

(c) In the event that the Company shall at any time pay a dividend on the Common Stock (other than a dividend payable solely in shares of Common Stock) or any other class or series of capital stock of the Company other than the Series M Preferred Stock, the Company shall, at the same time, pay to each holder of Series N Preferred Stock a dividend equal to the dividend that would have been payable to such holder if the shares of Series N Preferred Stock held by such holder had been converted into Common Stock on the date of determination of holders of Common Stock entitled to receive such dividends.

3. Liquidation; Redemption. Upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of the shares of Series N Preferred Stock shall rank (i) senior to the holders of the Common Stock and any other class or series of capital stock of the Company hereafter created and (ii) junior to the holders of the Series M Preferred Stock, as to such distributions, and shall be entitled to be paid an amount per share equal to the Series N Stated Value plus any accrued and unpaid Series N Preferred Dividends (the “Liquidation Preference”). If upon such liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the assets to be distributed among the holders of the Series N Preferred Stock and any class or series of capital stock ranking on a parity with the Series N Preferred Stock as to such distributions shall be insufficient to permit payment to the holders of the Series N Preferred Stock and any such

class or series of capital stock of their respective liquidation amount, then the entire assets of the Company to be distributed shall be distributed pro rata to the holders of Series N Preferred Stock and the holders of such class or series of capital stock ranking on a parity with the Series N Preferred Stock as to such distributions according to the preferential amounts due thereon. Unless waived in writing by the holders of at least 62.5% of the Series N Preferred Stock then outstanding, voting together as one class, a consolidation or merger of the Company into or with any other entity or entities, or the sale or transfer by the Company of all or substantially all of its assets, in each case under circumstances in which the holders of a majority in voting power of the outstanding capital stock of the Company, immediately prior to such a merger, consolidation or sale, own less than a majority in voting power of the outstanding capital stock of the corporation or the surviving or resulting corporation or acquirer, as the case may be, immediately following such a merger, consolidation or sale (each such transaction being hereinafter referred to as a “Corporate Transaction”) shall be deemed to be a liquidation within the meaning of this Section 3; provided, however, that the holder(s) of any share or shares of Series N Preferred Stock shall have the right, at its option, upon consummation of a Corporate Transaction, to require the Company to redeem such holder(s) shares or shares of Series N Preferred Stock, for an amount equal to such holder’s Liquidation Preference.

4A. Right to Convert. Subject to the terms and conditions of this paragraph 4A, the holder of any share or shares of Series N Preferred Stock shall have the right, at its option at any time, to convert any such shares of Series N Preferred Stock into such number of fully paid and nonassessable whole shares of Common Stock as is obtained by multiplying the number of shares of Series N Preferred Stock so to be converted by the Liquidation Preference per share and dividing the result by the conversion price of $3.685 per share or, if there has been an adjustment of the conversion price, by the conversion price as last adjusted and in effect at the date any share or shares of Series N Preferred Stock are surrendered for conversion (such price, or such price as last adjusted, being referred to herein as the “Conversion Price”). Such rights of conversion shall be exercised by the holder thereof by surrender of a certificate or certificates for the shares to be converted to the Company at its principal office (or such other office or agency of the Company as the Company may designate by notice in writing to the holder or holders of the Series N Preferred Stock) at any time during its usual business hours on the date set forth in such notice, together with a properly completed notice of conversion in the form attached to the Series N Preferred Stock certificate with a statement of the name or names (with address), subject to compliance with applicable laws to the extent such designation shall involve a transfer, in which the certificate or certificates for shares of Common Stock, shall be issued. Such conversion shall be deemed to have been effected and the Conversion Price shall be determined as of the close of business on the date on which such written notice shall have been received by the Company and the certificate or certificates for such shares shall have been surrendered as aforesaid.

4B. Issuance of Certificates; Time Conversion Effected. Within three business days after the conversion of the Series N Preferred Stock and surrender of the certificate or certificates for the share or shares of the Series N Preferred Stock being converted, the Company shall issue and deliver, or cause to be issued and delivered, to the holder, registered in such name or names as such holder may direct, subject to compliance with applicable laws to the extent such designation shall involve a transfer, a certificate or certificates for the number of whole shares of Common Stock issuable upon the conversion of such share or shares of Series N Preferred Stock. Upon the effective date of any such conversion, the rights of the holder of the shares of Series N Preferred Stock being converted shall cease, and the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares represented thereby.

4C. Fractional Shares; Dividends; Partial Conversion. No fractional shares shall be issued upon conversion of the Series N Preferred Stock into Common Stock, and the number of shares of Common Stock to be issued shall be rounded down to the nearest whole share. In case the number of shares of Series N Preferred Stock represented by the certificate or certificates surrendered pursuant to subsection

4A(a) exceeds the number of shares converted, the Company shall upon such conversion, execute and deliver to the holder thereof at the expense of the Company, a new certificate for the number of shares of Series N Preferred Stock represented by the certificate or certificates surrendered which are not to be converted.

4D. Adjustment of Conversion Price. If the Company shall issue or sell, or is, in accordance with subsections 4D(1) through 4D(8) below, deemed to have issued or sold, any Additional Shares of Common Stock without consideration or for a consideration per share less than the Conversion Price in effect immediately prior to the time of such issue or sale, then and in each such case (a “Trigger Issuance”) the then-existing Conversion Price, shall be reduced, as of the close of business on the effective date of the Trigger Issuance, to a price determined as follows:

“B” equals the Conversion Price in effect immediately preceding such Trigger Issuance;

“C” equals the number of Additional Shares of Common Stock issued or deemed issued hereunder as a result of the Trigger Issuance; and

“D” equals the aggregate consideration, if any, received or deemed to be received by the Company upon such Trigger Issuance;

provided, however, that in no event shall the Conversion Price after giving effect to such Trigger Issuance be greater than the Conversion Price in effect prior to such Trigger Issuance.

For purposes of this subsection 4D, “Additional Shares of Common Stock” shall mean all shares of Common Stock issued by the Company or deemed to be issued pursuant to this subsection 4D, other than Excluded Stock.

For purposes of this subsection 4D, the following paragraphs 4D(1) to 4D(8) shall also be applicable:

4D(1) Issuance of Rights or Options. In case at any time the Company shall in any manner grant (directly and not by assumption in a merger or otherwise) any warrants or other rights to subscribe for or to purchase, or any options for the purchase of, Common Stock or any stock or security convertible into or exchangeable for Common Stock (such warrants, rights or options being called “Options” and such convertible or exchangeable stock or securities being called “Convertible Securities”) whether or not such Options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such Options or upon the conversion or exchange of such Convertible Securities (determined by dividing (i) the sum (which sum shall constitute the applicable consideration) of (x) the total amount, if any, received or receivable by the Company as consideration for the granting of such Options, plus (y) the aggregate amount of additional consideration payable to the Company upon the exercise of all such Options, plus (z), in the case of such Options which relate to Convertible Securities, the aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (ii) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such

Options) shall be less than the Conversion Price in effect immediately prior to the time of the granting of such Options, then the total number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to have been issued for such price per share as of the date of granting of such Options or the issuance of such Convertible Securities and thereafter shall be deemed to be outstanding for purposes of adjusting the Conversion Price. Except as otherwise provided in subsection 4D(3), no adjustment of the Conversion Price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such Options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities.

4D(2) Issuance of Convertible Securities. In case the Company shall in any manner issue (directly and not by assumption in a merger or otherwise) or sell any Convertible Securities, whether or not the rights to exchange or convert any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (i) the sum (which sum shall constitute the applicable consideration) of (x) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus (y) the aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (ii) the total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the Conversion Price in effect immediately prior to the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall be deemed to have been issued for such price per share as of the date of the issue or sale of such Convertible Securities and thereafter shall be deemed to be outstanding for purposes of adjusting the Conversion Price, provided that (a) except as otherwise provided in subsection 4D(3), no adjustment of the Conversion Price shall be made upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities and (b) no further adjustment of the Conversion Price shall be made by reason of the issue or sale of Convertible Securities upon exercise of any Options to purchase any such Convertible Securities for which adjustments of the Conversion Price have been made pursuant to the other provisions of subsection 4D.

4D(3) Change in Option Price or Conversion Rate. Upon the happening of any of the following events, namely, if the purchase price provided for in any Option referred to in subsection 4D(l) hereof, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in subsections 4D(l) or 4D(2), or the rate at which Convertible Securities referred to in subsections 4D(l) or 4D(2) are convertible into or exchangeable for Common Stock shall change at any time (including, but not limited to, changes under or by reason of provisions designed to protect against dilution), the Conversion Price in effect at the time of such event shall forthwith be readjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold. On the termination of any Option for which any adjustment was made pursuant to this subsection 4(D) or any right to convert or exchange Convertible Securities for which any adjustment was made pursuant to this subsection 4(D) (including without limitation upon the redemption or purchase for consideration of such Convertible Securities by the Company), the Conversion Price then in effect hereunder shall forthwith be changed to the Conversion Price which would have been in effect at the time of such termination had such Option or Convertible Securities, to the extent outstanding immediately prior to such termination, never been issued.

4D(4) Stock Dividends. Subject to the provisions of this subsection 4D, in case the Company shall declare a dividend or make any other distribution upon any stock of the Company (other than the Common Stock) payable in Common Stock, Options or Convertible Securities, then any Common Stock, Options or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration; provided, however, that the provisions of this subsection 4D(4) shall not apply to the issuance of PIK Shares in accordance with the terms hereof.

4D(5) Subdivision or Combination of Stock. In case the Company shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares or shall declare or pay a dividend on

its outstanding shares of Common Stock payable in shares of Common Stock, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock of the Company shall be combined into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased.

4D(6) Consideration for Stock. In case any shares of Common Stock, Options or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the net amount received by the Company therefor, after deduction therefrom of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Company in connection therewith. In case any shares of Common Stock, Options or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be deemed to be the fair value of such consideration as determined in good faith by the Board of Directors of the Company, after deduction of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Company in connection therewith. In case any Options shall be issued in connection with the issue and sale of other securities of the Company, together comprising one integral transaction in which no specific consideration is allocated to such Options by the parties thereto, such Options shall be deemed to have been issued for such consideration as determined in good faith by the Board of Directors of the Company. If Common Stock, Options or Convertible Securities shall be issued or sold by the Company and, in connection therewith, other Options or Convertible Securities (the “Additional Rights”) are issued, then the consideration received or deemed to be received by the Company shall be reduced by the fair market value of the Additional Rights (as determined using the Black-Scholes option pricing model or another method mutually agreed to by the Company and the holder). The Board of Directors of the Company shall respond promptly, in writing, to an inquiry by the holder as to the fair market value of the Additional Rights. In the event that the Board of Directors of the Company and the holder are unable to agree upon the fair market value of the Additional Rights, the Company and the holder shall jointly select an appraiser, who is experienced in such matters. The decision of such appraiser shall be final and conclusive, and the cost of such appraiser shall be borne evenly by the Company and the holder.

4D(7) Record Date. In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (i) to receive a dividend or other distribution payable in Common Stock, Options or Convertible Securities or (ii) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be.

4D(8) Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company or any of its wholly-owned subsidiaries, and the disposition of any such shares (other than the cancellation or retirement thereof) shall be considered an issue or sale of Common Stock for the purpose of this Section 4D.

4E Stock Splits and Dividends. If the Company shall, at any time or from time to time while the Series N Preferred Stock is outstanding, pay a dividend or make a distribution on its Common Stock in shares of Common Stock, subdivide its outstanding shares of Common Stock into a greater number of shares or combine its outstanding shares of Common Stock into a smaller number of shares or issue by reclassification of its outstanding shares of Common Stock any shares of its capital stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then the Conversion Price in effect immediately prior to the date upon which such change shall become effective shall be adjusted by the Company so that the holder thereafter converting its shares of Series N Preferred Stock shall be entitled to receive the number of shares of Common Stock or other capital stock which the such holder would have received if the shares of Series N Preferred Stock had been converted immediately prior to such event. Such adjustments shall be made successively whenever any event listed above shall occur.

4F. Reorganization or Reclassification. If any capital reorganization or reclassification of the capital stock of the Company shall be effected in such a way (including, without limitation, by way of consolidation or merger) that holders of Common Stock but not holders of Series N Preferred Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock then, as a condition of such reorganization or reclassification, lawful and adequate provision shall be made whereby each holder of a share or shares of Series N Preferred Stock shall thereafter have the right to receive, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock of the Company immediately theretofore receivable upon the conversion of such share or shares of the Series N Preferred Stock, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of Common Stock equal to the number of shares of such stock immediately theretofore so receivable had such reorganization or reclassification not taken place and in any such case appropriate provision shall be made with respect to the rights and interests of such holder to the end that the provisions hereof (including without limitation provisions for adjustments of the Conversion Price) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise of such conversion rights (including an immediate adjustment, by reason of such reorganization or reclassification, of the Conversion Price to the value for the Common Stock reflected by the terms of such reorganization or reclassification if the value so reflected is less than the Conversion Price in effect immediately prior to such reorganization or reclassification). In the event of a merger or consolidation of the Company as a result of which a greater or lesser number of shares of common stock of the surviving corporation are issuable to holders of the Common Stock of the Company outstanding immediately prior to such merger or consolidation, the Conversion Price in effect immediately prior to such merger or consolidation shall be adjusted in the same manner as though there were a subdivision or combination of the outstanding shares of Common Stock of the Company.

4G. Distributions. In case the Company shall fix a payment date for the making of a distribution to all holders of Common Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing corporation) of evidences of indebtedness or assets (other than cash dividends or cash distributions payable out of consolidated earnings or earned surplus or dividends or distributions referred to in Section 4E), or subscription rights or warrants, the Conversion Price to be in effect after such payment date shall be determined by multiplying the Conversion Price in effect immediately prior to such payment date by a fraction, the numerator of which shall be the total number of shares of Common Stock outstanding multiplied by the Market Price (as defined below) per share of Common Stock immediately prior to such payment date, less the fair market value (as determined by the Company’s Board of Directors in good faith) of said assets or evidences of indebtedness so distributed, or of such subscription rights or warrants, and the denominator of which shall be the total number of shares of Common Stock outstanding multiplied by such Market Price per share of Common Stock immediately prior to such payment date. “Market Price” as of a particular date (the “Valuation Date”) shall mean the following: (a) if the Common Stock is then listed on a national stock exchange, the closing sale price of one share of Common Stock on such exchange on the last trading day prior to the Valuation Date; (b) if the Common Stock is then quoted on The Nasdaq Stock Market, Inc. (“Nasdaq”), the National Association of Securities Dealers, Inc. OTC Bulletin Board (the “Bulletin Board”) or such similar exchange or association, the closing sale price of one share of Common Stock on Nasdaq, the Bulletin Board or such other exchange or association on the last trading day prior to the Valuation Date or, if no such closing sale price is available, the average of the high bid and the low asked price quoted thereon on the last trading day prior to the Valuation Date; or (c) if the Common Stock is not then listed on a national stock exchange or quoted on Nasdaq, the Bulletin Board or such other exchange or association, the fair market value of one share of Common Stock as of the Valuation Date, shall be determined in good faith by the Board of Directors of the Company and the holders of at least 62.5% of the outstanding Series N Preferred Stock. If the Common Stock is not then listed on a national securities exchange, the Bulletin Board or such other exchange or association, the Board of Directors of the Company shall respond promptly, in writing, to an inquiry by a holder of Series N Preferred Stock prior to the exercise hereunder as to the fair market value of a share of Common Stock as determined by the Board of Directors of the Company. In the event that the Board of

Directors of the Company and the holders of at least 62.5% of the outstanding Series N Preferred Stock are unable to agree upon the fair market value in respect of subpart (c) hereof, the Company and the holders of at least 62.5% of the outstanding Series N Preferred Stock shall jointly select an appraiser, who is experienced in such matters. The decision of such appraiser shall be final and conclusive, and the cost of such appraiser shall be borne equally by the Company and such holders. Such adjustment shall be made successively whenever such a payment date is fixed.

4H. Effective Date of Adjustment. An adjustment to the Conversion Price shall become effective immediately after the payment date in the case of each dividend or distribution and immediately after the effective date of each other event which requires an adjustment.

4I. Subsequent Adjustments. In the event that, as a result of an adjustment made pursuant to this Section 4, holders of Series N Preferred Stock shall become entitled to receive any shares of capital stock of the Company other than shares of Common Stock, the number of such other shares so receivable upon the conversion of the Series N Preferred Stock shall be subject thereafter to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Conversion Shares contained herein.

4J. Notice of Adjustment. Upon any adjustment of the Conversion Price, then, and in each such case the Company shall give written notice thereof by first class mail, postage prepaid, addressed to each holder of shares of Series N Preferred Stock at the address of such holder as shown on the books of the Company, which notice shall state the Conversion Price resulting from such adjustment, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based.

(1) the Company shall declare any dividend upon its Common Stock payable in cash or stock or make any other distribution to the holders of its Common Stock;

(2) the Company shall offer for subscription pro rata to the holders of its Common Stock any additional shares of such stock of any class or other rights;

(4) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company;

then, in any one or more of said cases, the Company shall give, by first class mail, postage prepaid, addressed to each holder of any shares of Series N Preferred Stock at the address of such holder as shown on the books of the Company, (a) at least 15 days prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, and (b) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, at least 15 days prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (a) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto, and such notice in accordance with the foregoing clause (b) shall also specify the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be.

(1) The Company will at all times reserve and keep available out of its authorized but unissued Common Stock solely for the purpose of issuance upon the conversion of the Series N Preferred Stock as herein provided, such number of shares of Common Stock as shall then be issuable upon the

conversion of all outstanding shares of Series N Preferred Stock. All shares of Common Stock which shall be so issued shall be duly and validly issued and fully paid and nonassessable and free from all liens, duties and charges arising out of or by reason of the issue thereof (including, without limitation, in respect of taxes) and, without limiting the generality of the foregoing, the Company covenants that it will from time to time take all such action as may be requisite to assure that the par value per share of the Common Stock is at all times equal to or less than the effective Conversion Price. The Company will take all such action within its control as may be necessary on its part to assure that all such shares of Common Stock may be so issued without violation of any applicable law or regulation, or of any requirements of any national securities exchange upon which the Common Stock of the Company may be listed. The Company will not take any action which results in any adjustment of the Conversion Price if after such action the total number of shares of Common Stock issued and outstanding and thereafter issuable upon exercise of all options and conversion of Convertible Securities, including upon conversion of the Series N Preferred Stock, would exceed the total number of shares of such class of Common Stock then authorized by the Company’s Certificate of Incorporation.

(2) The Company will at all times reserve and keep available out of its authorized Series N Preferred Stock such number of shares of Series N Preferred Stock as is equal to the number of shares of Series N Preferred Stock then outstanding. All shares of Series N Preferred Stock which shall be so issued shall be duly and validly issued and fully paid and nonassessable and free from all liens, duties and charges arising out of or by reason of the issue thereof (including, without limitation, in respect of taxes).

4M. No Reissuance of Series N Preferred Stock. Shares of Series N Preferred Stock that are converted into shares of Common Stock as provided herein shall be retired and may not be reissued as Series N Preferred Stock but may be reissued as all or part of another series of Preferred Stock.

4N. Issue Tax. The issuance of certificates for shares of Common Stock upon conversion of the Series N Preferred Stock shall be made without charge to the holders thereof for any issuance tax, stamp tax, transfer tax, duty or charge in respect thereof, provided that the Company shall not be required to pay any tax, duty or charge which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the holder of the Series N Preferred Stock which is being converted.

4O. Closing of Books. The Company will at no time close its transfer books against the transfer of any Series N Preferred Stock or of any shares of Common Stock issued or issuable upon the conversion of any shares of Series N Preferred Stock in any manner which interferes with the timely conversion of such Series N Preferred Stock; provided, however, nothing herein shall be construed to prevent the Company from setting record dates for the holders of its securities.

5. Voting—Series N Preferred Stock. In addition to any class voting rights provided by law and this Certificate of Designations, the holders of Series N Preferred Stock shall have the right to vote together with the holders of Common Stock as a single class on any matter on which the holders of Common Stock are entitled to vote. With respect to the voting rights of the holders of the Series N Preferred Stock pursuant to the preceding sentence, each holder of Series N Preferred Stock shall be entitled to vote a number of votes equal to the ratio of the Series N Stated Value to the Market Price multiplied by the number of shares held by such holder, rounded down to the nearest whole number.

6. Certain Restrictions. In addition to any other vote of the holders of Series N Preferred Stock required by law or by the Certificate of Incorporation, without the prior consent of the holders of at least 62.5% of the outstanding Series N Preferred Stock, given in person or by proxy, either in writing or at a special meeting called for that purpose, at which meeting the holders of the shares of such Series N Preferred Stock shall vote together as a class, the Company will not:

(a) authorize, create, designate, establish or issue (whether by merger or otherwise) (i) an increased number of shares of Series N Preferred Stock (other than shares of Series N Preferred Stock payable as

payment-in-kind dividends on outstanding shares of Series N Preferred Stock), or (ii) any other class or series of capital stock ranking senior to or on parity with the Series N Preferred Stock as to dividends or upon liquidation or reclassify any shares of Common Stock into shares having any preference or priority as to dividends or upon liquidation superior to or on parity with any such preference or priority of Series N Preferred Stock;

(b) adopt a plan for the liquidation, dissolution or winding up of the affairs of the Company or any recapitalization plan (whether occurring by merger, consolidation or otherwise), file any petition seeking protection under any federal or state bankruptcy or insolvency law or make a general assignment for the benefit of creditors unless the holders of the Series N Preferred Stock will receive an amount in cash at least equal to the Liquidation Preference in such transaction;

(c) merge into or consolidate with engage in any share exchange with any other Person or permit any Person to merge into or consolidate with or engage in any share exchange the Company if immediately thereafter, less than 50% of the voting power of the surviving entity is retained by the holders of voting power of the Company immediately prior thereto unless the holders of the Series N Preferred Stock will receive an amount in cash at least equal to the Liquidation Preference in such transaction;

(d) adopt any stock option, stock compensation or stock purchase plan (other than the Stock Option Plan (as defined in the Purchase Agreement)), maintain any stock option, stock compensation or stock purchase plan which contains any “evergreen” or formula provisions increasing the number of shares of Common Stock available for grant thereunder (other than customary anti-dilution adjustments) or amend any existing stock option, stock compensation or stock purchase plan so as to increase the number of shares of Common Stock covered thereby;

(e) enter into any transaction with any Affiliate or stockholder of the Company;

(f) enter into or consummate the sale, lease, transfer, assignment or other disposition of all or any substantial part of its assets, whether in a single transaction or series of related transactions, to any Person unless the holders of the Series N Preferred Stock will receive an amount in cash at least equal to the Liquidation Preference in such transaction;

(g) amend, alter or repeal, whether by merger, consolidation or otherwise, the Certificate of Incorporation or By-laws of the Company or the Resolutions contained in this Certificate of Designations of the Series N Preferred Stock and the powers, preferences, privileges, relative, participating, optional and other special rights and qualifications, limitations and restrictions thereof, which would adversely affect any right, preference, privilege or voting power of the Series N Preferred Stock, or which would increase or decrease the amount of authorized shares of the Series N Preferred Stock or of any other series of preferred stock ranking senior to the Series N Preferred Stock, with respect to the payment of dividends (whether or not such series of preferred stock is cumulative or noncumulative as to payment of dividends) or upon liquidation;

(h) directly or indirectly, declare or pay any dividend (other than dividends permitted pursuant to Section 2 and dividends payable in shares of Common Stock but only to the extent that such stock dividend results in an adjustment of the Conversion Price pursuant to Section 4(D)(4)) or directly or indirectly purchase, redeem, repurchase or otherwise acquire or permit any Subsidiary to redeem, purchase, repurchase or otherwise acquire (or make any payment to a sinking fund for such redemption, purchase, repurchase or other acquisition) any share of Common Stock or any other class or series of the Company’s capital stock (except for shares of Common Stock repurchased from current of former employees, consultants, or directors upon termination of service in accordance with plans approved by the Company board of directors) whether in cash, securities or property or in obligations of the Company or any Subsidiary;

(i) materially change the nature or scope of the business of the Company or enter into any new line of business;

(j) consummate or agree to make any sale, transfer, assignment, pledge, lease, license or similar transaction by which the Company grants any rights to any of the Company’s intellectual property or

technology other than non-exclusive licenses granted by the Company to customers in connection with the sale of the Company’s products in the ordinary course of business consistent with past practices;

(k) increase or decrease the number of directors comprising the Company’s Board of Directors; or

7. No Waiver. Except as otherwise modified or provided for herein, the holders of Series N Preferred Stock shall also be entitled to, and shall not be deemed to have waived, any other applicable rights granted to such holders under the Delaware General Corporation Law.

8. No Impairment. The Company will not, through any reorganization, transfer of assets, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company but will at all times in good faith assist in the carrying out of all the provisions hereunder and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights and liquidation preferences granted hereunder of the holders of the Series N Preferred Stock against impairment.

9. Amendment; Waiver. Any term of the Series N Preferred Stock may be amended or waived (including the adjustment provisions included in Section 4(D) hereof) upon the written consent of the Company and the holders of at least 62.5% of the Series N Preferred Stock then outstanding; provided, however that the number of Conversion Shares issuable hereunder and the Conversion Price may not be amended, and the right to convert the Series N Preferred Stock may not be altered or waived, without the written consent of the holders of all of the Series N Preferred Stock then outstanding.

10. Action By Holders. Any action or consent to be taken or given by the holders of the Series N Preferred Stock may be given either at a meeting of the holders of the Series N Preferred Stock called and held for such purpose or by written consent.

IN WITNESS WHEREOF, the undersigned has executed this Certificate of Designations, Preferences and Rights this 28th day of April, 2005.


VELOCITY EXPRESS CORPORATION

By:		/S/ WESLEY C. FREDENBURG
		Name: Wesley C. Fredenburg
		Title: Secretary

Velocity Express Corporation, a corporation organized and existing under the laws of the State of Delaware (the “Company”), hereby certifies that, pursuant to authority vested in the Board of Directors of the Company by Article IV of the Certificate of Incorporation of the Company, the following resolution was adopted as of July 18, 2005 by the Board of Directors of the Company pursuant to Section 151 of the Delaware General Corporation Law:

“RESOLVED that, pursuant to authority vested in the Board of Directors of the Company by Article IV of the Company’s Certificate of Incorporation, out of the total authorized number of 299,515,270 shares of its preferred stock, par value $0.004 per share (“Preferred Stock”), there shall be designated a series of 1,625,000 shares which shall be issued in and constitute a single series to be known as “Series O Convertible Preferred Stock” (hereinafter called the “Series O Preferred Stock”). The shares of Series O Preferred Stock have the voting powers, designations, preferences and other special rights, and qualifications, limitations and restrictions thereof set forth below:

As used in this Certificate of Designations, Preferences and Rights of Series O Convertible Preferred Stock of Velocity Express Corporation, the following terms shall have the respective meanings set forth below:

“Common Stock” means the common stock, $0.004 par value per share, of the Company, including the stock into which the Series O Preferred Stock is convertible, and any securities into which the Common Stock may be reclassified.

“Market Price” means the lower of market value of the Common Stock as of (i) the date of the binding agreement to issue the Series O Preferred Stock or (ii) the date of issuance of the Series O Preferred Stock.

“Series O Stated Value” means $4.00 (appropriately adjusted for any stock split, reverse stock split, stock dividend or other reclassification or combination of the Series O Preferred Stock occurring after the date hereof).

(a) Each holder of Series O Preferred Stock, in preference and priority to the holders of all other classes of stock other than holders of the Series M and N Preferred Stock, shall be entitled to receive, with respect to each share of Series O Preferred Stock then outstanding and held by such holder of Series O Preferred Stock, dividends, commencing from the date of issuance of such share of Series O Preferred Stock, at the rate of six percent (6%) per annum of the Series O Stated Value (the “Series O Preferred Dividends”). The Series O Preferred Dividends shall be cumulative, whether or not earned or declared, and shall be paid quarterly in arrears on the first day of March, June, September and December in each year. During the first two (2) years following the date of issuance, the Series O Preferred Dividends shall be paid by issuing each holder of Series O Preferred Stock such number of shares of Series O Preferred Stock equal to the Series O Preferred Dividend divided by the Series O Stated Value (“PIK Shares”). In the event that the issuance of the PIK shares would result in the Company issuing a total number of Series O Preferred shares that is in excess of 20% of the Company’s outstanding Common Stock or voting stock as of the date of the Series O Preferred Stock Purchase Agreement, the PIK shares shall not be issued until the Company’s shareholders approve the issuance of the Series O Preferred. From and after the second anniversary of the date of issuance, the Company shall have the option to pay the Series O Preferred Dividends in PIK Shares or in cash out of legally available funds therefor. Any election by the Company to pay dividends in shares of Series O Preferred Stock or cash shall be made uniformly with respect to all outstanding shares of Series O Preferred Stock for a given dividend period.

(b) No dividends shall be paid on any Common Stock of the Company or any other capital stock of the Company other than the Series M and N Preferred Stock during any fiscal year of the Company until all outstanding Series O Preferred Dividends (with respect to the current fiscal year and all prior fiscal years) shall have been paid or declared and set apart for payment to the holders of Series O Preferred Stock.

(c) In the event that the Company shall at any time pay a dividend on the Common Stock (other than a dividend payable solely in shares of Common Stock) or any other class or series of capital stock of the Company other than the Series M and N Preferred Stock, the Company shall, at the same time, pay to each holder of Series O Preferred Stock a dividend equal to the dividend that would have been payable to such holder if the shares of Series O Preferred Stock held by such holder had been converted into Common Stock on the date of determination of holders of Common Stock entitled to receive such dividends.

3. Liquidation; Redemption. Upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of the shares of Series O Preferred Stock shall rank (i) senior to the holders of the Common Stock and (ii) junior to the holders of the Series M and N Preferred Stock, as to such distributions, and shall be entitled to be paid an amount per share equal to the Series O Stated Value plus any

accrued and unpaid Series O Preferred Dividends (the “Liquidation Preference”). If upon such liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the assets to be distributed among the holders of the Series O Preferred Stock and any class or series of capital stock ranking on a parity with the Series O Preferred Stock as to such distributions shall be insufficient to permit payment to the holders of the Series O Preferred Stock and any such class or series of capital stock of their respective liquidation amount, then the entire assets of the Company to be distributed shall be distributed pro rata to the holders of Series O Preferred Stock and the holders of such class or series of capital stock ranking on a parity with the Series O Preferred Stock as to such distributions according to the preferential amounts due thereon. Unless waived in writing by the holders of at least 62.5% of the Series O Preferred Stock then outstanding, voting together as one class, a consolidation or merger of the Company into or with any other entity or entities, or the sale or transfer by the Company of all or substantially all of its assets, in each case under circumstances in which the holders of a majority in voting power of the outstanding capital stock of the Company, immediately prior to such a merger, consolidation or sale, own less than a majority in voting power of the outstanding capital stock of the corporation or the surviving or resulting corporation or acquirer, as the case may be, immediately following such a merger, consolidation or sale (each such transaction being hereinafter referred to as a “Corporate Transaction”) shall be deemed to be a liquidation within the meaning of this Section 3; provided, however, that the holder(s) of any share or shares of Series O Preferred Stock shall have the right, at its option, upon consummation of a Corporate Transaction, to require the Company to redeem such holder(s) shares or shares of Series O Preferred Stock, for an amount equal to such holder’s Liquidation Preference.

4A. Right to Convert. Subject to the terms and conditions of this paragraph 4A, the holder of any share or shares of Series O Preferred Stock shall have the right, at its option at any time, to convert any such shares of Series O Preferred Stock into such number of fully paid and nonassessable whole shares of Common Stock as is obtained by multiplying the number of shares of Series O Preferred Stock so to be converted by the Liquidation Preference per share and dividing the result by the conversion price of $4.00 per share or, if there has been an adjustment of the conversion price, by the conversion price as last adjusted and in effect at the date any share or shares of Series O Preferred Stock are surrendered for conversion (such price, or such price as last adjusted, being referred to herein as the “Conversion Price”). Such rights of conversion shall be exercised by the holder thereof by surrender of a certificate or certificates for the shares to be converted to the Company at its principal office (or such other office or agency of the Company as the Company may designate by notice in writing to the holder or holders of the Series O Preferred Stock) at any time during its usual business hours on the date set forth in such notice, together with a properly completed notice of conversion in the form attached to the Series O Preferred Stock certificate with a statement of the name or names (with address), subject to compliance with applicable laws to the extent such designation shall involve a transfer, in which the certificate or certificates for shares of Common Stock, shall be issued. Such conversion shall be deemed to have been effected and the Conversion Price shall be determined as of the close of business on the date on which such written notice shall have been received by the Company and the certificate or certificates for such shares shall have been surrendered as aforesaid.

4B. Issuance of Certificates; Time Conversion Effected. Within five business days after the conversion of the Series O Preferred Stock and surrender of the certificate or certificates for the share or shares of the Series O Preferred Stock being converted, the Company shall issue and deliver, or cause to be issued and delivered, to the holder, registered in such name or names as such holder may direct, subject to compliance with applicable laws to the extent such designation shall involve a transfer, a certificate or certificates for the number of whole shares of Common Stock issuable upon the conversion of such share or shares of Series O Preferred Stock. Upon the effective date of any such conversion, the rights of the holder of the shares of Series O Preferred Stock being converted shall cease, and the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares represented thereby.

4C. Fractional Shares; Dividends; Partial Conversion. No fractional shares shall be issued upon conversion of the Series O Preferred Stock into Common Stock, and the number of shares of Common Stock to be issued shall be rounded down to the nearest whole share. In case the number of shares of Series O Preferred Stock represented by the certificate or certificates surrendered pursuant to subsection 4A(a) exceeds the number of shares converted, the Company shall upon such conversion, execute and deliver to the holder thereof at the expense of the Company, a new certificate for the number of shares of Series N Preferred Stock represented by the certificate or certificates surrendered which are not to be converted.


Adjusted Conversion Price =		(A x B) + D
		A + C

“B” equals the Conversion Price in effect immediately preceding such Trigger Issuance;

“C” equals the number of Additional Shares of Common Stock issued or deemed issued hereunder as a result of the Trigger Issuance; and

“D” equals the aggregate consideration, if any, received or deemed to be received by the Company upon such Trigger Issuance;

provided, however, that in no event shall the Conversion Price after giving effect to such Trigger Issuance be greater than the Conversion Price in effect prior to such Trigger Issuance.

In the event that the adjustment to the conversion price would result in the Company issuing a total number of common shares, upon conversion of the Series O Preferred shares, that is in excess of 20% of the Company’s outstanding Common Stock or voting stock as of the date of the Series O Preferred Stock Purchase Agreement, then no adjustment will occur until the Company’s shareholders approve the issuance of the Series O Preferred.

For purposes of this subsection 4D, the following paragraphs 4D(1) to 4D(8) shall also be applicable:

consideration payable to the Company upon the exercise of all such Options, plus (z), in the case of such Options which relate to Convertible Securities, the aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (ii) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options) shall be less than the Conversion Price in effect immediately prior to the time of the granting of such Options, then the total number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to have been issued for such price per share as of the date of granting of such Options or the issuance of such Convertible Securities and thereafter shall be deemed to be outstanding for purposes of adjusting the Conversion Price. Except as otherwise provided in subsection 4D(3), no adjustment of the Conversion Price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such Options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities.

Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration; provided, however, that the provisions of this subsection 4D(4) shall not apply to the issuance of PIK Shares in accordance with the terms hereof.

4D(5) Subdivision or Combination of Stock. In case the Company shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares or shall declare or pay a dividend on its outstanding shares of Common Stock payable in shares of Common Stock, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock of the Company shall be combined into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased.

4E Stock Splits and Dividends. If the Company shall, at any time or from time to time while the Series O Preferred Stock is outstanding, pay a dividend or make a distribution on its Common Stock in shares of Common Stock, subdivide its outstanding shares of Common Stock into a greater number of shares or combine its outstanding shares of Common Stock into a smaller number of shares or issue by reclassification of its outstanding shares of Common Stock any shares of its capital stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then the Conversion Price in effect immediately prior to the date upon which such change shall become effective shall be adjusted by the Company so that the holder thereafter converting its shares of

Series O Preferred Stock shall be entitled to receive the number of shares of Common Stock or other capital stock which the such holder would have received if the shares of Series O Preferred Stock had been converted immediately prior to such event. Such adjustments shall be made successively whenever any event listed above shall occur.

4F. Reorganization or Reclassification. If any capital reorganization or reclassification of the capital stock of the Company shall be effected in such a way (including, without limitation, by way of consolidation or merger) that holders of Common Stock but not holders of Series O Preferred Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock then, as a condition of such reorganization or reclassification, lawful and adequate provision shall be made whereby each holder of a share or shares of Series O Preferred Stock shall thereafter have the right to receive, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock of the Company immediately theretofore receivable upon the conversion of such share or shares of the Series O Preferred Stock, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of Common Stock equal to the number of shares of such stock immediately theretofore so receivable had such reorganization or reclassification not taken place and in any such case appropriate provision shall be made with respect to the rights and interests of such holder to the end that the provisions hereof (including without limitation provisions for adjustments of the Conversion Price) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise of such conversion rights (including an immediate adjustment, by reason of such reorganization or reclassification, of the Conversion Price to the value for the Common Stock reflected by the terms of such reorganization or reclassification if the value so reflected is less than the Conversion Price in effect immediately prior to such reorganization or reclassification). In the event of a merger or consolidation of the Company as a result of which a greater or lesser number of shares of common stock of the surviving corporation are issuable to holders of the Common Stock of the Company outstanding immediately prior to such merger or consolidation, the Conversion Price in effect immediately prior to such merger or consolidation shall be adjusted in the same manner as though there were a subdivision or combination of the outstanding shares of Common Stock of the Company.

Stock is not then listed on a national securities exchange, the Bulletin Board or such other exchange or association, the Board of Directors of the Company shall respond promptly, in writing, to an inquiry by a holder of Series O Preferred Stock prior to the exercise hereunder as to the fair market value of a share of Common Stock as determined by the Board of Directors of the Company. In the event that the Board of Directors of the Company and the holders of at least 62.5% of the outstanding Series O Preferred Stock are unable to agree upon the fair market value in respect of subpart (c) hereof, the Company and the holders of at least 62.5% of the outstanding Series O Preferred Stock shall jointly select an appraiser, who is experienced in such matters. The decision of such appraiser shall be final and conclusive, and the cost of such appraiser shall be borne equally by the Company and such holders. Such adjustment shall be made successively whenever such a payment date is fixed.

4I. Subsequent Adjustments. In the event that, as a result of an adjustment made pursuant to this Section 4, holders of Series O Preferred Stock shall become entitled to receive any shares of capital stock of the Company other than shares of Common Stock, the number of such other shares so receivable upon the conversion of the Series O Preferred Stock shall be subject thereafter to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Conversion Shares contained herein.

4J. Notice of Adjustment. Upon any adjustment of the Conversion Price, then, and in each such case the Company shall give written notice thereof by first class mail, postage prepaid, addressed to each holder of shares of Series O Preferred Stock at the address of such holder as shown on the books of the Company, which notice shall state the Conversion Price resulting from such adjustment, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based.

(1) the Company shall declare any dividend upon its Common Stock payable in cash or stock or make any other distribution to the holders of its Common Stock;

(2) the Company shall offer for subscription pro rata to the holders of its Common Stock any additional shares of such stock of any class or other rights;

(4) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company;

then, in any one or more of said cases, the Company shall give, by first class mail, postage prepaid, addressed to each holder of any shares of Series O Preferred Stock at the address of such holder as shown on the books of the Company, (a) at least 15 days prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, and (b) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, at least 15 days prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (a) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto, and such notice in accordance with the foregoing clause (b) shall also specify the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be.

(1) The Company will at all times reserve and keep available out of its authorized but unissued Common Stock solely for the purpose of issuance upon the conversion of the Series O Preferred Stock as herein provided, such number of shares of Common Stock as shall then be issuable upon the conversion of all outstanding shares of Series O Preferred Stock. All shares of Common Stock which shall be so issued shall be duly and validly issued and fully paid and nonassessable and free from all liens, duties and charges arising out of or by reason of the issue thereof (including, without limitation, in respect of taxes) and, without limiting the generality of the foregoing, the Company covenants that it will from time to time take all such action as may be requisite to assure that the par value per share of the Common Stock is at all times equal to or less than the effective Conversion Price. The Company will take all such action within its control as may be necessary on its part to assure that all such shares of Common Stock may be so issued without violation of any applicable law or regulation, or of any requirements of any national securities exchange upon which the Common Stock of the Company may be listed. The Company will not take any action which results in any adjustment of the Conversion Price if after such action the total number of shares of Common Stock issued and outstanding and thereafter issuable upon exercise of all options and conversion of Convertible Securities, including upon conversion of the Series O Preferred Stock, would exceed the total number of shares of such class of Common Stock then authorized by the Company’s Certificate of Incorporation.

(2) The Company will at all times reserve and keep available out of its authorized Series O Preferred Stock such number of shares of Series O Preferred Stock as is equal to the number of shares of Series O Preferred Stock then outstanding. All shares of Series O Preferred Stock, which shall be so issued shall be duly and validly issued and fully paid and nonassessable and free from all liens, duties and charges arising out of or by reason of the issue thereof (including, without limitation, in respect of taxes).

4M. No Reissuance of Series O Preferred Stock. Shares of Series O Preferred Stock that are converted into shares of Common Stock as provided herein shall be retired and may not be reissued as Series O Preferred Stock but may be reissued as all or part of another series of Preferred Stock.

4N. Issue Tax. The issuance of certificates for shares of Common Stock upon conversion of the Series O Preferred Stock shall be made without charge to the holders thereof for any issuance tax, stamp tax, transfer tax, duty or charge in respect thereof, provided that the Company shall not be required to pay any tax, duty or charge which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the holder of the Series O Preferred Stock which is being converted.

4O. Closing of Books. The Company will at no time close its transfer books against the transfer of any Series O Preferred Stock or of any shares of Common Stock issued or issuable upon the conversion of any shares of Series O Preferred Stock in any manner which interferes with the timely conversion of such Series O Preferred Stock; provided, however, nothing herein shall be construed to prevent the Company from setting record dates for the holders of its securities.

5. Voting—Series O Preferred Stock. In addition to any class voting rights provided by law and this Certificate of Designations, the holders of Series O Preferred Stock shall have the right to vote together with the holders of Common Stock as a single class on any matter on which the holders of Common Stock are entitled to vote. With respect to the voting rights of the holders of the Series O Preferred Stock pursuant to the preceding sentence, each holder of Series O Preferred Stock shall be entitled to vote a number of votes equal to the ratio of the Series O Stated Value to the Market Price multiplied by the number of shares held by such holder, rounded down to the nearest whole number.

6. Certain Restrictions. In addition to any other vote of the holders of Series O Preferred Stock required by law or by the Certificate of Incorporation, without the prior consent of the holders of at least 62.5% of the

outstanding Series O Preferred Stock, given in person or by proxy, either in writing or at a special meeting called for that purpose, at which meeting the holders of the shares of such Series O Preferred Stock shall vote together as a class, the Company will not:

(a) authorize, create, designate, establish or issue (whether by merger or otherwise) (i) an increased number of shares of Series O Preferred Stock (other than shares of Series O Preferred Stock payable as payment-in-kind dividends on outstanding shares of Series O Preferred Stock), or (ii) any other class or series of capital stock ranking senior to or on parity with the Series O Preferred Stock as to dividends or upon liquidation or reclassify any shares of Common Stock into shares having any preference or priority as to dividends or upon liquidation superior to or on parity with any such preference or priority of Series O Preferred Stock;

(b) adopt a plan for the liquidation, dissolution or winding up of the affairs of the Company or any recapitalization plan (whether occurring by merger, consolidation or otherwise), file any petition seeking protection under any federal or state bankruptcy or insolvency law or make a general assignment for the benefit of creditors unless the holders of the Series O Preferred Stock will receive an amount in cash at least equal to the Liquidation Preference in such transaction;

(c) amend, alter or repeal, whether by merger, consolidation or otherwise, the Certificate of Incorporation or By-laws of the Company or the Resolutions contained in this Certificate of Designations of the Series O Preferred Stock and the powers, preferences, privileges, relative, participating, optional and other special rights and qualifications, limitations and restrictions thereof, which would adversely affect any right, preference, privilege or voting power of the Series O Preferred Stock, or which would increase or decrease the amount of authorized shares of the Series O Preferred Stock or of any other series of preferred stock ranking senior to the Series O Preferred Stock, with respect to the payment of dividends (whether or not such series of preferred stock is cumulative or noncumulative as to payment of dividends) or upon liquidation;

7. No Waiver. Except as otherwise modified or provided for herein, the holders of Series O Preferred Stock shall also be entitled to, and shall not be deemed to have waived, any other applicable rights granted to such holders under the Delaware General Corporation Law.

9. Amendment; Waiver. Any term of the Series O Preferred Stock may be amended or waived (including the adjustment provisions included in Section 4(D) hereof) upon the written consent of the Company and the holders of at least 62.5% of the Series O Preferred Stock then outstanding; provided, however that the number of Conversion Shares issuable hereunder and the Conversion Price may not be amended, and the right to convert the Series O Preferred Stock may not be altered or waived, without the written consent of the holders of all of the Series O Preferred Stock then outstanding.

10. Action By Holders. Any action or consent to be taken or given by the holders of the Series O Preferred Stock may be given either at a meeting of the holders of the Series O Preferred Stock called and held for such purpose or by written consent.

IN WITNESS WHEREOF, the undersigned has executed this Certificate of Designations, Preferences and Rights this 20th day of July, 2005.


VELOCITY EXPRESS CORPORATION

By:		/S/ WESLEY FREDENBURG
		Name: Wesley Fredenburg
		Title: Secretary

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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.).

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: January 1, 2005: $3,753,504.

As of July 2, 2005, there were 13,065,085 shares of Common Stock of the registrant issued and outstanding.

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

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

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

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

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

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

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

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

In fiscal 2001, the Company divested the second of the three non-core air courier operations in October 2000 and in the third quarter of fiscal 2001 announced the implementation of a multi-faceted restructuring program allowing it to accelerate the “right-sizing” of its operations. As a result, the Company streamlined and downsized its operations by reducing its workforce and consolidating various locations.

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

In fiscal 2002, the Company divested its third air courier business operation in October 2001.

During fiscal 2004 the Company relocated its headquarters and financial functions to Westport, Connecticut from Minnesota. The costs of relocation, employee acquisition, training and severance were recognized as period costs. Approximately $243,000 of severance pay liability remained at July 3, 2004 and was reflected as pertaining to that fiscal year. At July 2, 2005 all of the severance pay liability had been satisfied.

At the end of the 3rd quarter of fiscal 2005 Company management redefined its business model to take advantage of the Company’s strengths in service delivery its local markets. Approximately 40 operating centers were designated for closure and employee headcount was reduced by about 200. At that time, the Company recorded a charge of $602,000 related to the restructuring; mostly reflective of severance costs. During the final quarter of fiscal 2005 the Company ceased use of most of the named facilities and recorded an additional $550,000 in net lease contract termination costs and fixed asset impairments as well as $100,000 in severance, and an estimated $300,000 charge was recorded to recognize the cost of service contracts that have no future economic benefit to the Company.

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

The Company believes the market for same-day time-critical logistics solutions is large and growing. Although the market is large, it is highly fragmented. There are relatively low entry barriers in this market as the capital requirements to start a local courier business are relatively small and the industry is not subject to extensive regulation. The Company believes there are currently as many as 6,000 same-day transportation companies in the United States. Most are privately held and operate only on the local level. The focus is generally on operations, with little attention given to marketing and sales. Accordingly, the Company believes there is little perceived service differentiation between competitors at a local level, and that customer loyalty is generally short-term.

There are no dominant brands in the same-day time-critical logistics industry, and there is a relatively basic level of technology usage. By contrast, the next-day package delivery industry is highly consolidated and dominated by large, well-recognized companies such as UPS^® and Federal Express^®, both of which use technology extensively.

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

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

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

From time to time, the Company’s drivers are involved in accidents. The Company carries liability insurance with a minimal deductible. Owner-operators and independent contractors are required to maintain auto liability insurance at amounts required by the Company. The Company also has insurance policies covering fidelity liability, which coverage includes all drivers. The Company reviews prospective drivers to ensure that they have acceptable driving records, and pass a criminal background and drug test, among other criteria; and in doing so, the Company has established a key competitive advantage.

The Company has initiated a comprehensive sales and marketing program that emphasizes its competitive position as the leading national provider of same-day transportation services. The Company has also realigned its national accounts and logistics team, and restructured its field sales organization to effectively pursue growth opportunities. Sales efforts are conducted at both the local and national levels through the Company’s extensive network of local sales representatives. The Company employs 33 marketing and sales representatives who make regular calls on existing and potential customers to determine their ongoing delivery and logistics needs. Sales efforts are coordinated with customer service representatives who regularly communicate with customers to monitor the quality of services and quickly respond to customer concerns.

The Company’s sales department develops and executes marketing strategies and programs that are supported by corporate communications and research services. The corporate communications department also provides ongoing communication of corporate activities and programs to employees, the press and the general public. The expansion of the Company’s national sales program and continuing investment in technology to support expanding operations have been undertaken at a time when large companies are increasing their demand for delivery providers who offer a range of delivery services at multiple locations. As of the end of fiscal 2005, approximately 80 percent of the Company’s revenues come from national companies needing multi-location logistics solutions.

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

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

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

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

As of July 2, 2005, the Company had approximately 1,241 employees, of whom approximately 675 primarily were employed in various management, sales, and other corporate positions and approximately 566 were employed as drivers and operations personnel. Additionally, the Company had contracts with approximately 3,100 independent contractor drivers in its delivery operations in North America. The Company believes that its relations with its employees are good and the Company is not a party of any collective bargaining agreement.

The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are made available free of charge through the Investor Relations section of the Company’s internet website (http://www.velocityexp.com) as soon as practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission.

As of July 2, 2005, the Company operated from 127 leased facilities in the United States and 1 leased facility in Canada (not including customer-owned facilities). These facilities are principally used for distribution and warehousing operations. The table below summarizes the location of our current leased facilities within the United States:

The Company’s corporate headquarters is located at One Morningside Drive North, Bldg. B, Suite 300, Westport, Connecticut 06880. The Company believes that its properties are well maintained, in good condition and adequate for its present needs. Furthermore, the Company believes that suitable additional or replacement space will be available when required.

As of July 2, 2005, the Company leased approximately 232 vehicles of various types through operating leases, which were operated by drivers employed by the Company. The Company also engages independent contractors who provide their own vehicles and are required to carry insurance coverage at levels dictated by the Company.

Aggregate rental expense, primarily for facilities, was approximately $16.9 million for the year ended July 2, 2005. See Note 13 to the Company’s Consolidated Financial Statements.

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

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

The Company brought action against SVT, Inc (“SVT”), a company that had previously supplied significant information technology functions to Velocity. The Company successfully sought injunctive relief and money damages. SVT counterclaimed for amounts it said Velocity owed to SVT for services already provided. On December 3, 2004 the case settled in favor of SVT for $1.25 million, which was paid in full by Velocity in January 2005.

On August 1, 2005, the Company received notice from the Superior Court for the State of California, County of Santa Clara, that the Court had entered an order granting certain motions for summary judgment against the Company in the matter styled Velocity Express, Inc. v. Banc of America Commercial Finance Corporation, Banc of America Leasing and Capital, LLC, John Hancock Life Insurance Company and John Hancock Mezzanine Lenders, LP, Charles F. Short III, Sidewinder Holdings Ltd. and Sidewinder N. A. Ltd. Corp., (the “Plaintiffs”) The motions sought to resolve the substantive liability issues in the case and to recover in excess of $10 million for breach of contract, fees, interest and other charges arising from a contract entered into in 1997 between Corporate Express Delivery Systems, Inc. and Mobile Information Systems, Inc. (“MIS”) By granting the motions, the court did resolve the liability issues and hold that BOA/Hancock is entitled to recover the amounts sued for. The parties have reached a negotiated settlement outside of the court; with the Company making scheduled payments totaling $2.9 million after an initial good faith payment of $0.3 million. In addition, the Plaintiffs will receive 500,000 shares of the Company’s common stock, guaranteed at a $6.00 per share minimum value subject to future conditions. As part of the final settlement, the Company will seek waivers of financial covenants of the Company’s Amended and Restated Loan and Security Agreement, with Fleet Capital Corporation and Merrill Lynch Capital (the “Senior Lender”), and with BET Associates, LP relative to waiver of certain financial covenants of its Subordinated Debt. The total accrued settlement cost approximates $5.7 million at July 2, 2005.

On August 5, 2005 the Company entered into a settlement related to actions arising from an effort, by John H. Harland Company (“Harland”), to recover from Velocity payments made by Harland to Patrick Connolly under a long-standing employment agreement between Connelly and a predecessor company to Velocity. Connolly claimed to be entitled to payments of approximately $15,000 per month during his lifetime. An order was entered in the arbitration in April 2005 directing Velocity to resume making the monthly payments. Mr. Connolly died subsequent to the arbitration ruling, thereby terminating any further obligation to make the monthly payments. Under the settlement with Harland, with an initial payment of $250,000, the Company is required to pay $325,000 over the next eleven [11] months, for a total of $575,000.

The MIS and Harland settlement commitments are reflected on the Company’s balance sheet at July 2, 2005 as a component of current liabilities.

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

No matters were submitted to shareholders during the fourth quarter of fiscal 2005.

The Company’s Common Stock currently trades under the symbol “VEXP” on the NASDAQ Small Cap Market. The following table sets forth the quarterly high and low closing prices for the Company’s Common Stock, as reported by NASDAQ for each full quarterly period within the two most recent fiscal years. These prices represent inter-dealer prices without adjustment for mark-up, mark-down or commission and do not necessarily reflect actual transactions. (Adjusted to reflect 1:50 reverse stock split effective February 16, 2005)

On October 10, 2005, the number of registered holders of record of Common Stock was 445. Approximately 2,800 shareholders hold common stock in street name.

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

The Company has not paid any cash dividends on its Common Stock and expects that for the foreseeable future it will follow a policy of retaining earnings, if any, in order to finance the continued operations of its business. However, in the instances of issuance(s) of Preferred Stock Series M, N & O there is a provision for accumulation of Payment in Kind (“PIK”) dividend. Further, in instances where the Preferred Stock is considered to be issued at a discount, such calculated amount of Beneficial Conversion is recognized as a deemed dividend to the Preferred Shareholders at the time of the sale and a charge against the net loss available to Common Shareholders. Payment of dividends is within the discretion of the Company’s Board of Directors and will depend upon the earnings, capital requirements and operating and financial condition of the Company, among other factors. Further, the Company’s ability to pay dividends is restricted under the terms of the revolving credit facility and subordinated debt facility.

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

The following table sets forth information about the Company’s equity compensation plans as of July 2, 2005. For more information about the Company’s stock option plans, see Note 9 to the Consolidated Financial Statements.

The following describes sales of the Company’s securities in the last fiscal quarter and subsequent to the last fiscal quarter without registration under the Securities Act of 1933 (the “Securities Act”):

Pursuant to a Stock Purchase Agreement entered into on April 28, 2005, the Company sold 2,544,097 shares of Series N Convertible Preferred Stock (“Series N Preferred Stock”) for $3.685 per share for net proceeds of $9,375,000. Each share of Series N Preferred Stock is convertible into one share of the Company’s common stock, and had an initial conversion price of $3.685 per share subject to certain adjustments. The proceeds were to be used for general working capital needs. The Series N Preferred Stock is entitled to receive, in preference to holders of all other classes of stock (other than holders of the Series M Preferred Stock), a PIK dividend at the rate of six percent per annum of the Series N stated value. Upon any liquidation, dissolution or winding up of the Company the holders of the shares of Series N Preferred Stock shall rank senior to the holders of the Common Stock, but junior to the holders of the Series M Preferred Stock, as to such distributions, and shall be entitled to

be paid an amount per share equal to the Series N stated value plus any accrued and unpaid dividends. The approval of shareholders holding at least 62.5% of the outstanding shares of the Series N Preferred Stock is required for certain significant corporate actions, including mergers and sales of substantially all of the Company’s assets. The financing was completed in accordance with the exemption provided by Rule 506 of Regulation D. Common shares relative to conversion of Series N Preferred, were registered by means of a Form S-1 filed on August 5, 2005.

On July 20, 2005 the Company entered into Stock Purchase Agreements for the sale of 1,400,000 shares of a newly authorized series of the Company’s preferred stock (the “Series O Preferred Stock”) in exchange for aggregate gross proceeds of $5,600,000. The financing was completed in accordance with the exemption provided by Rule 506 of Regulation D. Common shares relative to conversion of Series O Preferred, were registered by means of a Form S-1 filed on August 5, 2005.

The Series O Preferred Stock is entitled to receive in preference to holders of all other classes of stock, other than holders of the Series M and N Preferred Stock, a PIK dividend at the rate of six percent per annum of the Series O stated value. Upon any liquidation, dissolution or winding up of the Company the holders of the shares of Series O Preferred Stock shall rank senior to the holders of the Common Stock, but junior to the holders of the Series M and N Preferred Stock, as to such distributions, and shall be entitled to be paid an amount per share equal to the Series O stated value plus any accrued and unpaid dividends (the “Liquidation Preference”). In addition to being junior to the Series M and N Preferred Stock from the standpoint of liquidation, the Series O Preferred Stock also has reduced voting rights. For example, the approval of at least 62.5% of the outstanding shares of Series O Preferred Stock is not required in order for the Company to merge, dispose of substantial assets, engage in affiliate transactions, pay dividends, authorize new stock options plans, license or sell its intellectual property or change the number of board of directors.

Each of the shareholders have the right, at its option at any time, to convert any such shares of Series O Preferred Stock into such number of fully paid and nonassessable whole shares of Common Stock as is obtained by multiplying the number of shares of Series O Preferred Stock so to be converted by the Liquidation Preference per share and dividing the result by the conversion price of $4.00 per share subject to certain adjustments.

On October 14, 2005, the Company entered into Stock Purchase Agreements (the “Purchase Agreements”) with one group of institutional investment funds and one accredited investor (the “Investors”). The Purchase Agreements provide for the private placement of 3,099,513 shares of a newly authorized series of the Company’s preferred stock (the “Series P Preferred Stock”) in exchange for aggregate gross proceeds of $10,352,370. The Series P Preferred Stock has a term of three years (the “Term”) and is entitled to receive a dividend at the rate of eight (8) percent per annum of the Series P stated value, payable quarterly, in cash or PIK shares of Series P Preferred at the option of the Company. Under certain events of default, the interest rate will convert to 18%. To the extent that the issuance of such PIK shares would result in the Company issuing in excess of 20% of its outstanding common stock, the issuance will require the prior approval of the Company’s shareholders. Upon any liquidation, dissolution or winding up of the Company, the Investors of the shares of Series P Preferred Stock shall rank on parity with the holders of the Company’s Series M Preferred Stock. Each of the Investors has the right, at its option at any time, to convert any shares of Series P Preferred Stock into shares of Common Stock at the conversion price of $3.34 per share subject to certain adjustments. At any time after the effective date of the Registration Statement and (i) prior to the Term, or (ii) upon a Change of Control, the Company shall have the right, but not the obligation, to redeem all or a portion of the shares of Series P Preferred by tendering to the Investors 130% of the stated value of the outstanding Series P Preferred together with all accrued dividends. At the Term, the Company shall have the right, but not the obligation, to redeem all or a portion of the shares of Series P Preferred Stock by tendering to the Investors 100% of the Conversion Price together with all accrued but unpaid dividends. In the event that the Company elects to redeem the Series P prior to the Registration Statement becoming effective, the Company may redeem the Series P by paying to the Investors the greater of: (1) 130% of the outstanding stated value of the Series P Preferred plus accrued dividends, and (2) 100% of the stated value of the Series P plus all accrued dividends, plus 50% of the difference between the conversion price then in effect

and the average closing price of the Company’s common stock for the 30 calendar days preceding such redemption. Each investor also received an A Warrant and B Warrant, each a warrant to purchase up to 20% of the amount of Series P Preferred purchased. The exercise of the A Warrant and B Warrant are subject to the prior approval of the Company’s shareholders. The exercise price for both warrants is $4.00, subject to adjustments. Additionally, the B Warrant is only exercisable in the event that a registration statement, allowing for the sale of the Series P Preferred, is not declared effective within 270 days of closing. The Company has the option to redeem both warrants in the event that the Company’s common stock maintains a closing price of at least $7.00 for twenty consecutive trading days. The Investors are also parties to a Registration Rights Agreement (the “Rights Agreement”). The Rights Agreement requires the filing of a registration statement no later than 90 days after the closing date, and that it be effective within 180 days.

Management believes these sales will provide the Company with sufficient working capital resources to position it to obtain new business with existing and new customers by settling their respective concerns about the Company’s ability to service their respective business needs on a continuing basis.

In each instance of security sale, it is of the opinion of the Company that the offering was fair, to the shareholders at the time of the transaction.

The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operation” appearing in Item 7 of this Form 10-K. The selected statements of operations data as well as the selected balance sheet data presented below are derived from our consolidated financial statements.

The following items impact the comparability of our data from continuing operations:

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

Sales 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 and associated profits.

Cost of sales consists of costs relating directly to performance of services, including driver and messenger costs, third party delivery charges, insurance and workers’ compensation costs. Substantially all of the drivers used by the Company provide their own vehicles, and approximately 99.4% of these owner-operators are independent contractors as opposed to employees of the Company. Drivers and messengers are generally compensated based on a percentage of the delivery charge. Consequently, the Company’s driver and messenger costs are variable in nature. To the extent that the drivers and messengers are employees of the Company, employee benefit costs related to them, such as payroll taxes and insurance, are also included in cost of sales.

Selling, general and administrative expenses (“SG&A”) 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.

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 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 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.

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

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make payments when due or within a reasonable period of time thereafter. Estimates are used in determining this allowance based on the Company’s historical collection experience, current trends, credit policy and a percentage earned revenue. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make required payments, additional allowances or write-off may be required. In fiscal 2005, the change in the allowance for doubtful accounts was a net increase of $5.1 million.

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

In order to determine the fair value of Velocity Express the Company employed two approaches, as follows:

Each of the approaches indicated above is widely accepted in determining Fair Value for an enterprise. In each instance, the values indicated were in excess of the carrying amount of Goodwill, and therefore no adjustment for impairment was required in fiscal 2005.

During the third quarter of fiscal 2005, the Company initiated an insurance program with minimal or no deductibles. Prior to that time the Company maintained an insurance program with policies that had various higher deductible levels. The Company reserved the estimated amounts of uninsured claims and deductibles related to such insurance retentions for claims that had occurred in the normal course of 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.

As discussed in Note 13 to the consolidated financial statements, the Company is involved in various legal proceedings and contingencies and has recorded liabilities for these matters in accordance with SFAS No. 5, Accounting for Contingencies (“SFAS No. 5”). SFAS No. 5 requires a liability to be recorded based on the Company’s estimate of the probable cost of the resolution of a contingency. The actual resolution of these contingencies may differ from its estimates. If a contingency were settled for an amount greater than the estimate, a future charge to income would result. Likewise, if a contingency were settled for an amount that is less than the estimate, a future credit to income would result.

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

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

The Company had a net loss of $49.8 million for the fiscal year ended July 2, 2005, including a net loss of $21.3 million for the three months then ended July 2, 2005, which resulted in cash used in operating activities for the year of $45.3 million. In fiscal 2005, the Company has financed this operating cash flow deficit through net proceeds of $52.2 million from the issuance of preferred stock (see Liquidity and Capital Resources). The Company’s ability to generate sufficient capital resources for its liquidity needs depends on its ability to substantially reduce its net loss or raise additional capital. Although the Company has begun several initiatives to control costs, and has a financial plan for 2006 that anticipates operating cash flow in the 4^th quarter, declines in revenue and increased operating expenses have resulted in an increased net loss during the 4^th fiscal quarter of fiscal 2005.

With the enactment of the Federal Law known as Check 21, on October 28, 2004, the Company anticipates continued deterioration of financial services revenue as financial institutions will now electronically scan and process checks, without the required need to move the physical documents to the clearing institution. Partially off-setting this deterioration of revenue in the Financial Services industry, the Company believes it will benefit from the growth in Healthcare and Healthcare related services industries within the United States, and be able to effectively leverage their broad coverage footprint to capitalize on this national growth industry.

During fiscal 2006, the Company plans to continue to invest in automated technologies that will increase its competitive advantage in the market by providing more economical delivery routing, enhance and automated package tracking, and increased productivity from both a frontline delivery and back office perspective. During fiscal years 2003, 2004 and 2005, the Company spent over $5 million, in the development and implementation of route management software solutions that are anticipated to have a significant impact on reducing overall delivery cost, and increasing the Company’s ability to better manage their variable operating cost. During the fourth quarter of fiscal 2005 the Company realized a savings approximating 3% of driver pay as a direct result of the implementation of its route management software solution. Initiatives will be fine tuned over the next 12 months, and are anticipated to be applied across all services offering categories, allowing the Company to have operating cash flow in the 4^th fiscal quarter of 2006, through optimized route management and delivery density.

During 2005 the Company continued to require third party financing to meet its liquidity requirements. On April 28, 2005, the Company entered into a Stock Agreement, pursuant to which the Company sold 2,544,097 shares of Series N Preferred Convertible Stock (“Series N Preferred Stock”) to investors for $3.685 per share for net proceeds of approximately $9.4 million. Based on the pricing of the Series N Preferred Stock, the sale contained a beneficial conversion amounting to $4.8 million which was recognized as a deemed dividend to preferred shareholders at the time of the sale and a charge against net loss available to common shareholders. On July 20, 2005, the Company entered into a Stock Agreement, pursuant to which the Company sold 1,400,000 shares of Series O Preferred Convertible Stock (“Series O Preferred Stock”) to investors for $4.00 per share for net proceeds of approximately $5.6 million. Based on the pricing of the Series O Preferred Stock, the sale contained a beneficial conversion amounting to $3.1 million which was recognized as a deemed dividend to preferred shareholders at the time of the sale and a charge against net loss available to common shareholders. On October 14, 2005, the Company entered into Stock Purchase Agreements with one group of institutional investment funds and one accredited investor, pursuant to which the Company sold 3,099,513 shares of Series P Preferred Stock (the “Series P Preferred Stock”) for $3.34 per share for net proceeds of approximately $10.4 million.

The Company reports its financial results on a 52-53 week fiscal year basis. Under this basis, the Company’s fiscal year ends on the Saturday closest to June 30^th. Fiscal 2004 was a 53 week year, 2005 and 2003 each consisted of 52 weeks. In fiscal years consisting of 53 weeks, the final quarter will consist of 14 weeks. As such, the fiscal 2004 year includes an additional week of revenues and expenses when compared against the results of fiscal 2005 and 2003, respectively.

Revenue for the year ended July 2, 2005 decreased $31.3 million or 10.9% to $256.7 million from $287.9 million for the year ended July 3, 2004. The decrease in revenue for the year ended July 2, 2005 compared to the same period last year is in large part attributable to lower volume experienced as a result of the restructure of operations done at the end of the company’s third fiscal quarter. Analyses of route profitability indicated that the Company was operating in a number of locations that did not have sufficient customer density for the Company to profitably deliver its targeted service levels. As a result the Company closed over 40 of its locations (primarily smaller facilities in low density areas) and terminated several unprofitable customer contracts. The result was a 20% reduction of weekly revenue. For the fiscal year lost revenues, inclusive of the fourth quarter restructure and losses associated with pricing pressures and customer freight volume fluctuations, were approximately $56 million. This revenue decline was partially offset by new customer contracts and business expansion with existing customers approximating $25 million. Greater concentration on national [large] account business resulted in an increased proportion of revenues originating from those accounts. For fiscal 2005, $154.0 million or 60.0% of total revenues can be attributed to the Company’s top 50 accounts; versus $149.5 million or 51.9% as to the representative top 50 relative to the operations of fiscal 2004.

The Company is continually engaged in bidding additional contract work for a variety of new and existing customers. The Company’s current pipeline of bidding activity remains robust, with potential customers where

expected billings would approximate an annual $45 million. The activity is consistent across all geographic regions in which the Company operates. Implementation of newly awarded contracts generally requires from thirty to sixty days for full implementation.

Cost of Services for the year ended July 2, 2005 was $208.3 million, a reduction of $30.0 million or 12.6% from $238.3 million for the year ended July 3, 2004. Decreased volume and closed facilities accounts for $25.9 million of the decrease. The Company has focused on reducing its cost through two initiatives:

As a result, payments to drivers and purchased transportation cost have been reduced by $5.0 million and costs associated with employee drivers, primarily vehicle costs and insurance, have been reduced by an additional $5.2 million. Beginning in April of 2005, with the Company’s restructuring including consolidation of operating locations, the Company began to realize significant reductions in costs relative to its redefined routes as fostered by its proprietary route management system. With approximately $4.0 million of weekly revenue and already recognized 8% drop in driver pay, the Company has recognized real savings from implementation of the route management system. Projected over a 12 month period such savings would project to $16.6 million annually. This savings has been partially offset by a $6.2 million in increased costs of warehouse labor. As a result, the gross margin on service has increased from 17.2% for the year ended July 3, 2004 to 18.8% for the year ended July 2, 2005. Management’s expectation is for quarter over quarter improvements in margin.

Occupancy charges for the year ended July 2, 2005 were $15.0 million, an increase of $0.9 million or 6.6 % from $14.1 million for the year ended July 3, 2004. The increase is mainly due to higher utility and common area maintenance charges as well as higher net rental expense and is offset by savings achieved by a cost reduction initiative enacted with the shut down of facilities commencing in April 2005.

Selling, general and administrative (“SG&A”) expenses for the year ended July 2, 2005 were $77.4 million or 30.2% of revenue, a decrease of $0.9 million or 1.2% as compared with $78.3 million or 27.2% of revenue for the year ended July 3, 2004. The decrease in SG&A for the year resulted, in part, from a decrease in bad debt expense from prior by $4.5 million and a decrease in the cost of warrants issued to certain members of management by $2.6 million, partially offset by an increase in legal settlement costs of $5.4 million and an increase in legal fees of $0.8 million.

Restructuring charges and asset impairments for the year ended July 2, 2005 were $1.6 million, an increase of $1.2 million or 350.3% from the $0.4 million for the year ended July 3, 2004. The $1.6 million charge in 2005 represents severance costs associated with a reduction in force, contract termination costs and asset impairments related to the Company’s restructuring of its operations.

Interest expense for the year ended July 2, 2005 increased $0.2 million to $4.8 million from $4.6 million for the year ended July 3, 2004. Interest expense related to the Company’s borrowings increased over the same period in the prior year as a result of higher average interest rates under the revolving credit and senior subordinated debt facilities.

As a result of the foregoing factors, the net loss for the year ended July 3, 2005 was $49.8 million, compared with $47.8 million for the same period in fiscal 2004, a decline of $2.0 million, or 4.2%.

Net loss applicable to common shareholders was $106.9 million for year ended July 2, 2005 as compared with $77.7 million for the same period in fiscal 2004. For the year ended July 2, 2005, the difference between net loss applicable to common shareholders and net loss in the current year relates to the beneficial conversion

associated with the sale of the Series J, K, L, M, and N Preferred Stock. In the prior year, the difference between net loss applicable to common shareholders and net loss related to the beneficial conversion associated with the sale of the Series I and J Preferred Stock.

Revenue for the year ended July 3, 2004 decreased $19.2 million or 6.3% to $287.9 million from $307.1 million for the year ended June 28, 2003. The decrease in revenue for the year ended July 3, 2004 compared to the same period in fiscal 2003 is related to lower volume experienced as a result of customer attrition, revenue loss associated with pricing pressure, and customer freight volume fluctuations of approximately $54.3 million. This decline was offset by revenue growth during the year from new customer contracts and expansion within existing customers of approximately $35.1 million. A greater focus on selling to national accounts resulted in an increased proportion of revenues originating from those accounts. In fiscal 2004, $149.5 million or 51.9% of total revenues can be attributed to the Company’s 50 largest accounts; versus $129.1 million or 42.0% during fiscal 2003.

Cost of services for the year ended July 3, 2004 was $238.3 million, a reduction of $2.8 million or 1.2% from $241.1 million for the year ended June 28, 2003. These decreases consist of a $7.5 million volume and restructure related reductions in employee driver, and employee driver related cost, off-set by increases of $4.7 million related to rising insurance cost. During 2004, under the employee driver based model, the Company was effected adversely by fix driver pay commitments during periods where customer attrition and reductions in sales volume where experienced. As a result, when combined with the increase in insurance cost, gross margin declined from 21.5% in fiscal 2003 to 17.2% for the year ended July 3, 2004. During the Second/Third Quarter of 2004, the Company began the movement towards an independent contractor driver based model, which allowed for continued improvement in driver related cost. As of July 3, 2004, the Company had reduced the number of employee based drivers by approximately 10% from the prior fiscal year-end.

Selling, general and administrative (“SG&A”) expenses for the year ended July 3, 2004 were $78.3 million or 27.2% of revenue, an increase of $17.3 million or 28.4% as compared with $61.0 million or 19.9% of revenue for the year ended June 28, 2003. The increase in SG&A for the year resulted, in part, from $7.7 million of incremental adjustments to the Company’s accounts receivable in fiscal 2004. An additional $2.7 million of SG&A was recorded to recognize the cost of warrants issued to certain members of management. Further, approximately $2.4 million of the SG&A increase relates to increased utilization of contract labor. Other items contributing to the increase totaled $4.5 million.

Occupancy charges for the year ended July 3, 2004 were $14.1 million, an increase of $1.1 million or 8.1% from $13.0 million for the year ended June 28, 2003. The net increase is due to higher utility and common area maintenance charges, higher net rental expense and the expansion of facilities to handle increased demands associated with new markets, the expansion of the Company’s coverage footprint and location specific growth and volume related requirements.

Interest expense for the year ended July 3, 2004 increased $0.6 million to $4.6 million from $4.0 million for the year ended June 28, 2003. Interest expense related to the Company’s borrowings increased over the same period in the prior year as a result of higher average interest rates under the revolving credit and senior subordinated debt facilities, and an increase in amortization of deferred financing fees.

As a result of the foregoing factors, the net loss for the year ended July 3, 2004 was $47.8 million, compared with $12.3 million for the same period in fiscal 2003, a decline of $35.5 million.

Net loss applicable to common shareholders was $77.7 million for year ended July 3, 2004 as compared with $15.6 million for the same period in fiscal 2003. For the year ended July 3, 2004, the difference between net loss applicable to common shareholders and net loss in the current year relates to the beneficial conversion associated with the sale of the Series I Preferred & Series J Preferred. In the prior year, the difference between net loss applicable to common shareholders and net loss related to the accretion of the charge associated with the common stock warrants issued with the Series H Preferred.

As described above, on December 23, 2004 the Company reported material weaknesses as of July 3, 2004. The Company has taken steps to attempt to improve its internal controls and its control environment. At the direction of the Audit Committee, the Company proceeded with its plans to enhance its internal controls and procedures, which it believes addresses some of the previously defined deficiencies and weaknesses. The Company has substantially augmented its financial and control expertise during the second half of fiscal 2005 by the naming of a Chief Financial Officer, hiring a Senior Vice President of Finance and the addition of a Corporate Controller, to provide hands-on oversight of the monthly financial closing, data analysis, account reconciliation and cutoff. The Company has also restructured its Finance Group to establish day to day process oversight, stronger cutoff & authorization controls, and operating efficiencies. In addition, the Company has designated specialists in this group to identify operating problems and spearhead resolution. Further, the Company has moved to purge inactive accounts from its files and has implemented a system of invoice processing and approval built upon multiple levels of active and passive reviews starting with system-required authorized vendor numbers and ending with review by an authorized signer.

In connection with the preparation of the Company’s consolidated financial statements for the year ended July 2, 2005 certain material weaknesses became evident to management including the inability to fully reconcile cash applications on a timely basis and due to resource constraints, the inability to close the Company’s books in a timely manner on a month to month basis. 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.

At the direction of the Audit Committee, management has continued to review how the material weaknesses and deficiencies in internal control occurred and is proceeding expeditiously with its existing plan to enhance internal controls and procedures. The Company has accelerated efforts to move to a single financial reporting platform.

The Company reported a loss from operations of approximately $45.7 million for fiscal 2005 and has negative working capital of approximately $36.5 million at July 2, 2005, which includes the classification of the revolving credit facility as a current liability. As of July 2, 2005, the Company had total cash of approximately $5.8 million. The Company has financed its operations and has met its capital requirements since incorporation primarily through the combination of private and public issuances of equity securities, bank borrowings and cash generated from operations, as it is not currently generating positive cash flow from its operations. The Company believes that, barring any unforeseen changes, its existing cash will be sufficient to fund operating losses, capital expenditures and provide adequate working capital through the end of the fiscal year 2006. The accompanying financial statements have been prepared as if the Company will continue as a going concern. However, there can be no assurance that events in the future will not require the Company to seek additional capital and, if so required, that capital will be available on terms favorable or acceptable to the Company, if at all.

During the year ended July 2, 2005, the net increase in year end cash was $4.6 million compared to a net decrease of $0.4 million during the year ended July 3, 2004. As reported in the Company’s consolidated statements of cash flows, the increase (decrease) in cash during the years ended July 2, 2005 and July 3, 2004 is summarized as follows (in thousands):

Cash used in operations was $45.3 million for fiscal 2005. This use of funds was comprised of a net loss of $49.8 million and by net cash used as a result of working capital changes of $10.2 million ($7.6 million of which was used to pay down old vendor balances).

Cash used as a result of investing activities was $1.9 million and consisted primarily of capital expenditures for the Company’s continued development and implementation of cost savings and customer-driven technology solutions initiatives. The Company’s major technological cost savings initiative entailed detailed and interactive analysis and optimization of the Company’s routing designs and metrics. This effort was focused upon optimizing the efficiency of route definition and benchmarking standards used in delivery metrics and driver compensation. Two customer-driven technology solutions initiatives were placed in service during the fiscal year and were comprised of the following elements: (i) a smart package tracking technology which provides a single source of aggregated delivery information to national customers in the pharmaceutical controlled environment, it provides visibility throughout the delivery process from dispensing to acceptance at individual nurses station, and (ii) a customer-oriented web portal for online information access to provide package tracking, chain-of-custody updates, electronic signature capture, and real-time proof of delivery retrieval. The Company expects to reduce its capital expenditures in fiscal 2006 due to the completion of portions of the significant software initiatives described above.

Cash provided from financing activities amounted to $51.8 million during fiscal 2005. The primary source of cash was from the issuance of preferred stock.

On June 30, 2004, the Company’s Board of Directors authorized the sale of up to $25.0 million of Series K Convertible Preferred Stock (“Series K Preferred”) through a private placement. Pursuant to a Stock Purchase Agreement entered into on August 23, 2004, the Company sold 7,266,666 shares of Series K Preferred to investors for $1.50 per share and received net proceeds of approximately $10.9 million. This sale of Series K Preferred was deemed to have contained a beneficial conversion amounting to $10.9 million which was recognized as a deemed dividend to preferred shareholders and required a charge against net loss available to common shareholders. On December 21, 2004, the Company sold 2,584,800 additional shares of Series K Preferred for net proceeds of approximately $3.9 million to complete its sales of Series K Preferred and at that time recognized an additional charge against net loss available to common shareholders of $3.9 million to reflect the beneficial conversion.

The issuance of the Series K Preferred was approved at the shareholders’ meeting on February 14, 2005. Additionally, shareholder approval was granted to increase the number of authorized shares of the Company’s common stock by an amount sufficient to provide for the issuance of all the preferred shares. In accordance with the shareholders’ approval of an amendment to provide for mandatory conversion of all certain preferred shares, each share of Series K Preferred was converted into ten shares of the Company’s Common Stock on February 15, 2005.

The Company entered into a Stock Purchase Agreement on December 21, 2004, pursuant to which the Company sold 7,000,000 shares of Series L Preferred to investors for $1.00 per share. Based on the pricing of the Series L Preferred, the sale of Series L Preferred resulted in a beneficial conversion amounting to $7.0 million which was recognized as a deemed dividend to preferred shareholders at the time of the sale and a charge against net loss available to common shareholders. Upon shareholder approval of the Series M transaction [described below] at the shareholders meeting on February 14, 2005 all series L Preferred were converted to shares of Company common stock based upon the specific conversion features of its initial placement.

On December 21, 2004, the Company executed a purchase agreement to raise approximately $21.0 million of new equity capital investment. The investment was initially in the form of a convertible note which converted into Series M Convertible Preferred Stock (“Series M Preferred”) upon approval of the transaction by the Company’s shareholders at on February 14, 2005. The proceeds were used for general working capital needs consistent with financial budgets approved from time to time by the Company’s Board of Directors. The

Preferred Series M Stock accrues cumulative PIK dividends equal to 6% per annum. As part of the transaction, the investors required that the Company’s charter be amended in a number or respects, including a requirement that all previously issued preferred equity be converted to common stock. In the event of any liquidation or winding up of the Company, the holders of the Preferred Series M will be entitled to a preference on liquidation equal to one times (1x) the original purchase price of the Series M Preferred plus accrued and unpaid dividends. A consolidation or merger of the Company or a sale of substantially all of its assets shall be treated as a liquidation for these purposes. The Company sold an additional $1,910,000 of Series M Convertible Notes during January of 2005. Mr. Alexander Paluch, a member of the Company’s Board of Directors, purchased $40,000 of the Additional Notes and East River II, LP, an investment fund for which Mr. Paluch serves as a General Partner, purchased $250,000 of the Additional Notes in this offering.

Subsequent to formal shareholder approval at the shareholders’ meeting held on February 14, 2005 the amount of the total Series M Preferred investment, plus accrued dividends, $23.1 million, was reclassified on the Company’s balance sheet as a component of shareholders’ equity. The Series M Preferred was deemed to contain a beneficial conversion amounting to $23.1 million which was recognized as a charge against net loss available to common shareholders at the time that the notes converted to equity.

As part of the above-described Series M private placement, the new investors required that THLPV reach an agreement to extend, for a two-year period, the July 1, 2004 capital contribution agreement previously entered into between THLPV and the lenders. Under the terms of the capital contribution agreement, in the event that THLPV elects to not provide further financial support for the Company, THLPV is required to notify the Company’s lenders of such decision and provide specific levels of financial support for a thirty (30) day period following the notification. In exchange for entering into the capital contribution agreement, the lenders agreed to waive certain financial covenants under the Company’s credit facilities. At the time, THLPV did not receive any compensation in exchange for entering into the capital contribution agreement. As part of the extension of the capital contribution agreement the Company agreed to issue to THLPV a warrant to purchase shares of common stock equal to 1% of the fully diluted common stock of the Company on a fully converted basis. The term of the warrant will be five years and will have an exercise price of $0.005 per share. Due to the value of the warrant, the Company recorded $2.3 million as a deferred financing cost.

Pursuant to a Stock Purchase Agreement entered into on April 28, 2005, the Company contracted to sell to nine institutional and accredited investors 2,544,097 shares of Series N Convertible Preferred Stock (“Series N Preferred”) for $3.685 per share for net proceeds of $9,375,000. Each share of Series N Convertible Preferred is convertible into one share of the Company’s common stock, and had an initial conversion price of $3.685 per share subject to certain adjustments. The proceeds are being used for general working capital needs consistent with financial budgets approved from time to time by the Company’s Board of Directors. The Series N Convertible Preferred Stock is entitled to receive in preference to holders of all other classes of stock, other than holders of the Series M Preferred Stock, a dividend at the rate of six percent per annum of the Series N stated value. Upon any liquidation, dissolution or winding up of the Company the holders of the shares of Series N Convertible Preferred Stock shall rank senior to the holders of the Common Stock, but junior to the holders of the Series M Preferred Stock, as to such distributions, and shall be entitled to be paid an amount per share equal to the Series N stated value plus any accrued and unpaid dividends. The approval of Investors holding at least 62.5% of the outstanding shares of the Series N Convertible Preferred Stock is required for certain significant corporate actions, including mergers and sales of substantially all of the Company’s assets. Based on the pricing of the Series N Preferred, the sale of Series N Preferred contained a beneficial conversion amounting to $4.8 million which was recognized as a deemed dividend to preferred shareholders at the time of the sale and a charge against net loss available to common shareholders.

The Series O Convertible Preferred Stock is entitled to receive in preference to holders of all other classes of stock, other than holders of the Series M and N Preferred Stock, a dividend at the rate of six percent per annum of the Series O stated value. Upon any liquidation, dissolution or winding up of the Company the holders of the shares of Series O Convertible Preferred Stock shall rank senior to the holders of the Common Stock, but junior to the holders of the Series M and N Preferred Stock, as to such distributions, and shall be entitled to be paid an amount per share equal to the Series O stated value plus any accrued and unpaid dividends (the “Liquidation Preference”). In addition to being junior the Series M and N Preferred Stock from the standpoint of liquidation, the Series O Preferred also has reduced voting rights. For example, the approval of at least 62.5% of the outstanding shares of Series O Preferred is not required in order for the Company to merge, dispose of substantial assets, engage in affiliate transactions, pay dividends, authorize new stock options plans, license or sell its intellectual property or change the number of board of directors. Based on the pricing of the Series O Preferred, the sale of Series O Preferred contained a beneficial conversion amounting to $3.1 million which was recognized as a deemed dividend to preferred shareholders at the time of the sale and a charge against net loss available to common shareholders.

Each of the Investors has the right, at its option at any time, to convert any such shares of Series O Convertible Preferred Stock into such number of fully paid and nonassessable whole shares of Common Stock as is obtained by multiplying the number of shares of Series O Convertible Preferred Stock so to be converted by the Liquidation Preference per share and dividing the result by the conversion price of $4.00 per share subject to certain adjustments.

In each instance of security sale, it is the opinion of the Company that the offering is fair, from a financial point of view, to the shareholders other than the investor group. For Series M such opinion is supported by a fairness opinion obtained by the Company.

On April 29, 2005 the Company sold its Ottawa, Ontario operations, and certain assets, to its local senior management team for approximately $280,000 resulting in a non-cash write-off of approximately $80,000 of its accumulated foreign currency translation adjustments. As the sale included assets which were pledged as security when the Company executed and delivered a guarantee dated January 25, 2002 to Fleet to guarantee the indebtedness, liabilities and obligations of certain borrowers, a partial release was required from Fleet as a condition of sale. Fleet granted such partial release in contemplation of the sale, requiring that net proceeds be remitted to apply against loans outstanding under the revolving credit facility. Remittance of proceeds was made direct to Fleet by the Purchaser coincidental with the close of the transaction. Gross revenues for the Ottawa operation approximate $3.0 million annually and the impact on the Company’s results from operations is insignificant.

The Company maintains a revolving credit facility with Bank of America (formerly Fleet) that allows for borrowings up to the lesser of $42.5 million or an amount based on a defined portion of receivables. Interest is payable monthly at a rate of prime plus 1.25% (7.75% at July 2, 2005), or, at the Company’s election, at LIBOR plus 3.25%. As of July 2, 2005, the Company has 53.9% of the facility usage under LIBOR contracts at an interest rate of 6.50%. In addition, the Company is required to pay a commitment fee of 0.375% on unused amounts of the total commitment, as defined in the agreement. The facility terminates on December 31, 2006. The Company’s accounts receivable have been pledged to secure borrowings under the revolving note. The Company also maintains a $6.0 million senior subordinated note, which was reduced by $0.6 million for the fair value of Series I Preferred Stock issued to the former lender (Bayview Capital), with interest payable quarterly at 15% per annum (to be reduced to 12% upon the occurrence of certain events), with a quarterly principal repayment schedule, subject to approval of the primary lender, commencing January 2005 terminating with a final payment at October 31, 2007. To date the primary lender has not provided such approval and, as such, these payments have not been made.

Substantially all of the Company’s assets have been pledged to secure borrowings under the revolving credit facility and senior subordinated note. The Company is subject to certain restrictive covenants under the agreements, the more significant of which include limitations on capital asset expenditures, dividends, acquisitions, new indebtedness in excess of $0.5 million and changes in capital structure. The Company is also required to maintain certain financial covenants. At July 2, 2005, the Company had in place waivers of its financial debt covenants related to its revolving credit facility and its senior subordinated debt facility. These waivers are in effect through January 1, 2007.

On March 31, 2004, July 1, 2004, and December 21, 2004 the Company entered into the third, fourth and fifth amendments, respectively, to the amended and restated revolving credit facility with Bank of America / Merrill Lynch. The purpose of these amendments was to reset certain of the financial covenants provided for in the agreement discussed above.

Exchange rates and inflation have not had a significant impact on the Company’s operations or cash flows.

The Company has commitments to make future interest payments on its existing revolving credit facility with the Bank of America and Merrill Lynch Capital. It also has commitments to make principal (subject to approval by the primary lender) and interest payments on the subordinated note agreement with BET Associates, LP.

The Company also has outstanding operating lease commitments of $18.6 million, payable over multiple years. Some of these commitments are for space that is not being utilized resulting in restructuring charges of $0.5 million during 2005. The Company has entered into subleases for some of this excess space or is in the process of attempting to sublease such space, but it is considered unlikely that any sublease income generated will offset the entire future commitment.

A summary of our significant future contractual obligations and their payments by fiscal year is summarized as follows (in thousands):

The following table presents information regarding available commercial commitments and their expiration dates by fiscal year (amounts in thousands):

Note: for more information regarding operating leases, long-term debt and the line of credit, refer to Notes 13 and 7, respectively.

As of the date of this Annual Report, the Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with the Company is a party, under which the Company has (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN No. 46), as revised by FIN 46 [revised December 2003], “Consolidation of Variable Interest Entities” [FIN 46R], which requires the consolidation of variable interest entities. FIN No. 46R is applicable to financial statements issued by the Company beginning in fiscal 2004. During May 2004 the Company entered into a business venture designed to provide both the manpower and the vehicle fleet to service, first—a major customer and, subsequently—a growing market demand. This major customer’s desire to outsource its delivery operation and related vehicle fleet provided the genesis for this new business venture, named Peritas. It was formed by MCG Global (“MCG”), one of the Company’s largest investors with a strategic objective to acquire a fleet of vehicles and to lease such vehicles to Independent Contractors (“ICs”) to service outsourced customer business endeavors. Velocity provides administrative services to Peritas for a fee and Peritas provides vehicle leases to ICs interested in providing outsource services to some customers on behalf of Velocity.

Company consolidated the operations of Peritas in accordance with FIN No. 46R. Fiscal 2004 net sales were $36,000.

During August 2004, Peritas paid Velocity for the initial vehicle purchases of $799,000. During November 2004, Peritas was purchased from MCG by TH Lee Putnam Ventures (“THLPV”), another of Velocity’s large investors. As THLPV acquired the significant beneficial interest and risk exposure in Peritas, Velocity no longer has a variable interest in Peritas that is at risk of disproportionate loss pursuant to its voting rights. Accordingly, Peritas was deconsolidated from the Company’s financial statements upon the completion of these transactions.

In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Shared-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes ABP Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB No. 95, Statement of Cash Flows. Generally the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Proforma disclosure will no longer be an alternative. The provisions in Statement 123(R) are effective for all stock options or other equity-based awards to employees or directors that vest or become exercisable in the Company’s first quarter of fiscal 2006. The Company will adopt the standards of Statement 123(R) for required financial reporting in the Company’s first quarter of fiscal 2006. The adoption of Statement 123(R) will not have a material effect on the Company’s results of operations.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 is a replacement for APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. Statement 154 applies to all voluntary changes in accounting principle and changes the accounting for and reporting of changes for and reporting of a change in accounting principle. Statement 154 requires retrospective application of prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effort effect of changing to the new accounting principle. Statement 154 requires that a change in method of depreciation, amortization, or depletion for long-lived non-financial assets be accounted for as a change in accounting estimate that is affected by a change in accounting principle. Opinion 20 previously required that such a change be reported as a change in accounting principle. This Statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

From time to time, information provided by us, statements made by our employees or information included in our filings with the Securities and Exchange Commission (including this Form 10-K) may contain statements that are not historical facts, so-called “forward-looking statements”, which involve risks and uncertainties. Such forward-looking statements are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended. In some cases you can identify forward-looking statements by terminology such as “may”, “should”, “could”, “will”, “expect”, “intend”, “plans”, “predict”, “anticipate”, “estimate”, “continue”, “believe” or the negative of these terms or other similar words. These statements discuss future expectations, contain projections of results of operations or of financial condition or state other forward-looking information. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Form 10-K.

The Company’s actual future results may differ significantly from those stated in any forward-looking statements. Factors that may cause such differences include, but are not limited to, the factors discussed below. Each of these factors, and others, are discussed from time to time in the Company’s filings with the Securities and Exchange Commission.

The Company’s operating results may fluctuate because of a number of factors, many of which are beyond its control. If operating results are below the expectations of public market analysts or investors, then the market price of the Company’s common stock could decline. Some of the factors that affect quarterly and annual results, but which are difficult to control or predict, are:

The Company’s net losses applicable to common shareholders for the fiscal years ended July 2, 2005 and July 3, 2004 were $106.9 million and $77.7 million, respectively. The respective periods’ net losses were $49.8 million and $47.8 million. Additional amounts of $57.0 million and $29.9 million, resulting from beneficial conversion charges increased such respective period losses to the aforementioned levels of net losses applicable to common shareholders.

The Company’s contracts with its commercial customers typically have a term of one to three years, but are terminable upon 30 or 60 days notice. Early termination of these contracts could have a material adverse effect on the Company’s business, financial condition and results of operations.

The market for same-day delivery and logistics services has been and is expected to remain highly competitive. Competition is often intense, particularly for basic delivery services. High fragmentation and low barriers to entry characterize the industry. Other companies in the industry compete with the Company not only for provision of services but also for qualified drivers. Some of these companies have longer operating histories and greater financial and other resources than the Company. Additionally, companies that do not currently operate delivery and logistics businesses may enter the industry in the future.

As of July 2, 2005, the Company utilized the services of approximately 3,176 drivers and messengers. From time to time such persons are involved in accidents or other activities that may give rise to liability claims. The Company currently carries liability insurance with a per-occurrence and an aggregate limit of $5 million. Owner-operators are required to maintain liability insurance of at least the minimum amounts required by applicable state or provincial law. The Company also has insurance policies covering property and fiduciary trust liability, which coverage includes all drivers and messengers. There can be no assurance that claims against the Company, whether under the liability insurance or the surety bonds, will not exceed the applicable amount of coverage, that the Company’s insurer will be solvent at the time of settlement of an insured claim, or that the Company will be

able to obtain insurance at acceptable levels and costs in the future. If the Company were to experience a material increase in the frequency or severity of accidents, liability claims, workers’ compensation claims or unfavorable resolutions of claims, the Company’s business, financial condition and results of operations could be materially adversely affected. In addition, significant increases in insurance costs could reduce the Company’s profitability.

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

The Company’s sales and earnings are especially sensitive to events that affect the delivery services industry including extreme weather conditions, economic factors affecting the Company’s significant customers and shortages of or disputes with labor, any of which could result in the Company’s inability to service its clients effectively or the inability of the Company to profitably manage its operations. In addition, downturns in the level of general economic activity and employment in the U.S. or Canada may negatively impact demand for the Company’s services.

Although certain aspects of the transportation industry have been significantly deregulated, the Company’s delivery operations are still subject to various federal (U.S. and Canadian), state, provincial and local laws, ordinances and regulations that in many instances require certificates, permits and licenses. Failure by the Company 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 the Company’s authority to conduct certain of its operations.

The Company’s success is largely dependent on the skills, experience and performance of certain key members of its management. The loss of the services of any of these key employees could have a material adverse effect on the Company’s business, financial condition and results of operations. The Company’s future success and plans for growth also depend on its ability to attract and retain skilled personnel in all areas of its business. There is strong competition for skilled personnel in the same-day delivery and logistics businesses.

meet the needs of its operations. The Company competes in markets in which unemployment is generally relatively low and the competition for owner-operators and other employees is intense. The Company must continually evaluate and upgrade its pool of available owner-operators to keep pace with demands for delivery services. There can be no assurance that qualified delivery personnel will continue to be available in sufficient numbers and on terms acceptable to the Company. The inability to attract and retain qualified delivery personnel could have a material adverse impact on the Company’s business, financial condition and results of operations.

Prices for the Company’s common stock will be determined in the marketplace and may be influenced by many factors, including the depth and liquidity of the market for the common stock, investor perception of the Company and general economic and market conditions. Variations in the Company’s operating results, general trends in the industry and other factors could cause the market price of the common stock to fluctuate significantly. In addition, general trends and developments in the industry, government regulation and other factors could have a significant impact on the price of the common stock. The stock market has, on occasion, experienced extreme price and volume fluctuations that have often particularly affected market prices for smaller companies and that often have been unrelated or disproportionate to the operating performance of the affected companies, and the price of the common stock could be affected by such fluctuations.

The owner-operators utilized by the Company are responsible for all vehicle expense including maintenance, insurance, fuel and all other operating costs. The Company makes every reasonable effort to include fuel cost adjustments in customer billings that are paid to owner-operators to offset the impact of fuel price increases. If future fuel cost adjustments are insufficient to offset owner-operators’ costs, the Company may be unable to attract a sufficient number of owner-operators that may negatively impact the Company’s business, financial condition and results of operations.

Achieving the Company’s financial goals involves maximizing the effectiveness of the variable cost model, the implementation of customer-driven technology solutions and continued leverage of the consolidated back office SG&A platform. To date, the Company has primarily relied upon debt and equity investments to fund these activities.

Additionally, at July 2, 2005, the Company was in violation of certain non-financial affirmative covenants under the revolving credit facility and its senior subordinated debt facility with respect to furnishing financial statements on a timely basis to the respective lenders. The Company’s ability to fund operations is dependent on its ability to maintain the financing under the revolving credit agreement and its subordinated debt facility. The Company has obtained waivers with respect to the aforementioned debt covenants.

The Company’s operations are not currently subject to material market risks for interest rates, foreign currency rates, or other market price risks. However, the Company has revolving debt of $27.8 million at July 2, 2005 that is subject to variable interest rates. A one percent change in the interest rate would result in an impact of $0.3 million on interest expense.

We have audited the accompanying consolidated balance sheets of Velocity Express Corporation and subsidiaries as of July 2, 2005 and July 3, 2004, and the related consolidated statements of operations, shareholders’ equity and comprehensive loss, and cash flows for each of the three years in the period ended July 2, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but are not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Velocity Express Corporation and subsidiaries at July 2, 2005, and July 3, 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended July 2, 2005 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE LOSS—(continued)

Velocity Express Corporation (formerly known as United Shipping & Technology, Inc.) and its subsidiaries (collectively, the “Company”) are engaged in the business of providing same-day time-critical logistics solutions to individual consumers and businesses. The Company operates primarily in the United States with limited operations in Canada. The Company currently operates in a single-business segment and thus additional disclosures under Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures About Segments of an Enterprise and Related Information, are not required.

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

The Company’s fiscal year ends the Saturday closest to June 30^th. Each quarter consists of a 13-week period ending on a Saturday. In fiscal years consisting of 53 weeks, the final quarter will consist of 14 weeks. Fiscal 2004 was a 53 week year, 2005 and 2003 each consisted of 52 weeks.

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

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

The Company places its cash with federally insured financial institutions. At times, such cash balances may be in excess of the federally insured limit. Concentrations of credit risk with respect to accounts receivable is limited due to the wide variety of customers to which the Company’s services are sold and the dispersion of those services across many industries and geographic areas. Further, the Company does not have any one customer that accounts for 10% or more of its revenues. The Company performs credit evaluation procedures on its customers and generally does not require collateral on its accounts receivable. An allowance for doubtful accounts is reviewed periodically based on management’s evaluation of collectibility, historical experiences, and other economic factors.

Property and equipment are recorded at cost and are depreciated over their estimated useful lives using the straight-line method. The estimated useful lives of buildings and leasehold improvements are the shorter of 40 years or the life of the lease and are three to seven years for furniture, equipment, vehicles and computer software.

The Company reviews long-lived assets for impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable. The Company evaluates potential impairment by comparing the carrying amount of the assets with the estimated undiscounted cash flows associated with them. If an impairment exists, the Company measures the impairment utilizing discounted cash flows.

The Company accounts for its goodwill in accordance with the provisions of Financial Accounting Standards Board (FASB) SFAS No. 142, “Goodwill and Other Intangible Assets.” Under these rules, goodwill and other intangible assets deemed to have indefinite useful lives are no longer amortized but are subject to impairment tests at least annually, or more frequently if circumstances occur that indicate impairment may have occurred.

The Company completed its annual goodwill impairment evaluation during 2005, and concluded that no impairment existed.

Deferred financing costs relate to the cost incurred in the arrangement of the Company’s debt agreements and are being amortized using the straight-line method over the terms of the related debt. Accumulated amortization of deferred financing costs was $1.2 million and $0.3 million at July 2, 2005 and July 3, 2004, respectively. Amortization included in the consolidated statement of operations as a component of interest expense was $1.6 million and $1.2 million for the fiscal years ended July 2, 2005 and July 3, 2004, respectively.

The carrying amounts of cash, accounts receivable and accounts payable approximate fair value because of their short maturities. At July 2, 2005, the Company had $27.8 million outstanding under its revolving credit facility with Bank of America and Merrill Lynch Capital, and $6.0 million outstanding under its senior subordinated note agreement with BET Associates, LP. The carrying amount of these borrowings approximates fair value as the rate of interest on the revolving credit facility and the senior subordinated note approximate current market rates of interest for similar instruments with comparable maturities, and the interest rate is variable.

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

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 comprehensive income (loss) within the Shareholders equity section of the Consolidated Balance Sheets. Income and expense items are translated at average exchange rates for the year.

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

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

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions for the fiscal years shown: [No options were granted during fiscal 2005 or 2004]

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can

materially affect the fair value estimate, in management’s opinion, the existing models may not necessarily provide a reliable single measure of the fair value of its employee stock options. Under the forgoing assumptions, the weighted-average fair value of each option granted during fiscal year 2003 was $66.00. There were no options granted in fiscal years 2005 or 2004.

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

In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Shared-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes ABP Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB No. 95, Statement of Cash Flows. Generally the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Proforma disclosure will no longer be an alternative. The provisions in Statement 123(R) are effective for all stock options or other equity-based awards to employees or directors that vest or become exercisable in the Company’s first quarter of fiscal 2006. The Company will adopt Statement 123(R) at that time and report its first fiscal quarter of 2006 in accordance with the new standard. The adoption of Statement 123(R) will not have a material effect on the Company’s results of operations.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 is a replacement for APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. Statement 154 applies to all voluntary changes in accounting principle and changes the accounting for and reporting of changes for and reporting of a change in accounting principle. Statement 154 requires retrospective application of prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effort effect of changing to the new accounting principle. Statement 154 requires that a change in method of depreciation, amortization, or depletion for long-lived non-financial assets be accounted for as a change in accounting estimate that is effected by a change in accounting principle. Opinion 20 previously required that such a change be reported as a change in accounting principle. This Statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

On April 29, 2005 the Company sold its Ottawa, Ontario operations, and certain assets, to its respective senior management for approximately $280,000 resulting in a non-cash loss of approximating $80,000. As the sale included assets which were pledged as security when the Company executed and delivered a guarantee dated January 25, 2002 to Fleet to guarantee the indebtedness, liabilities and obligations of certain borrowers, a partial release was required from Fleet as a condition of sale. Fleet granted such partial release in contemplation of the sale, requiring that net proceeds be remitted to apply against loans outstanding under the revolving credit facility. Remittance of proceeds was made direct to Fleet by the Purchaser coincidental with the close of the transaction. Gross revenues for the Ottawa operation approximate $3.0 million annually and the impact on the Company’s Results from Operations is diminimus.

During fiscal 2004 the Company relocated its headquarters and financial functions to Westport Connecticut from Minnesota. The costs of relocation, employee acquisition, training and severance were recognized as period costs. Approximately $243,000 of severance pay liability remained at July 3, 2004 and was reflected as pertaining to that fiscal year. At July 2, 2005 all of the severance pay liability had been satisfied.

At the end of the 3rd quarter of fiscal 2005 Company management moved to redefine the business model to take advantage of the Company’s strengths in service delivery its local markets. Approximately 40 operating centers were designated for closure and employee headcount was reduced by about 200. At that time, the Company recorded a charge of $602,000 related to the restructuring; mostly reflective of severance costs. During the fourth quarter of fiscal 2005 the Company ceased use of most of the named facilities and recorded an additional $550,000 in net lease contract termination costs and fixed asset impairments; as well as $100,000 in severance, and an estimated $300,000 charge was recorded to recognize the cost of spare cell phone service contracts that have no future economic benefit to the Company.

A summary of the restructuring liabilities and the activity for the years ended July 2, 2005 and July 3, 2004 is as follows (amounts in thousands):

At July 2, 2005, the Company has classified approximately $0.4 million of this restructuring liability as long-term representing lease commitments that are not due in the succeeding twelve-month period.

During May 2004 the Company entered into a business venture designed to provide both the manpower and the vehicle fleet to service, first—a major customer and, subsequently—a growing market demand. This major customer’s desire to outsource its delivery operation and related vehicle fleet provided the genesis for this new business venture, named Peritas. It was formed by MCG Global (“MCG”), one of the Company’s largest investors with a strategic objective to acquire a fleet of vehicles and to lease such vehicles to Independent Contractors (“ICs”) to service outsourced customer business endeavors. Velocity provides administrative services to Peritas for a fee and Peritas provides vehicle leases to ICs interested in providing outsource services to some customers on behalf of Velocity.

Velocity arranged the initial purchase of $799,000 of customer vehicles, for Peritas, with an offset against account receivable balances due from the aforementioned customer. For the fiscal year ended July 3, 2004 the Company consolidated the operations of Peritas in accordance with FIN No. 46R. In fiscal 2004 net sales were $36,000.

has a variable interest in Peritas that is at risk of disproportionate loss pursuant to its voting rights. Accordingly, Peritas was deconsolidated from the Company’s financial statements upon the completion of these transactions.

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

On January 25, 2002, the Company entered into a revolving credit facility with Fleet Capital Corporation (“Fleet”), which replaced the credit facility with GE Capital. Borrowings under the revolving note were limited to the lesser of $40 million or an amount based on a defined portion of receivables. Interest was payable monthly at a rate of prime plus 1.25%, or, at the Company’s election, at LIBOR plus 3%. Further, the Company had the ability to lower these margins by 0.5% over the remainder of the agreement provided it met certain conditions as defined in the agreement. The facility was scheduled to mature January 2004, but amended as discussed below.

On November 26, 2003, the Company amended and restated the revolving credit facility with Fleet and Merrill Lynch Capital. Borrowings under this new arrangement are limited to the lesser of $42.5 million or an amount based on a defined portion of eligible receivables. Interest is payable monthly at a rate, which is adjustable annually by an amount not exceeding 25 basis points depending on the Company’s achieving certain conditions as defined in the agreement, of prime plus 1.25% (7.75% at July 2, 2005), or, at the Company’s election, at LIBOR plus 3.25%. As of July 2, 2005, the Company has 53.9% of the facility usage under LIBOR contracts at an average interest rate of 6.50%. In addition, the Company is required to pay a commitment fee of 0.375% on unused amounts of the total commitment, as defined in the agreement. Commitment fees paid during fiscal 2005 and 2004 were minimal. The facility terminates on December 31, 2006. Due to the characteristics of the revolving credit facility, in accordance with current accounting pronouncements, the Company has classified the amount outstanding under the revolving credit facility as a current liability.

During fiscal year 2002 the Company entered into a senior subordinated note with Bayview Capital which called for interest payable quarterly at 12% per annum and was due September 30, 2004. The note was subordinate to the revolving note. The initial carrying value of the senior subordinated note was reduced by $1.7 million for the fair value of the common stock warrant issued to the senior subordinated lender. The unamortized discount was $0.4 million at June 28, 2003, was being amortized over the remaining term of the note. As noted below the note was paid on November 26, 2003. The unamortized balance of the original issue discount was recognized as a period expense and reported as a component of interest expense for the year ended July 3, 2004. The related warrant has an exercise price of $6.71 per share and entitles the holder to acquire, in whole or in part, 674,540 shares of the Company’s common stock, as adjusted to reflect certain anti-dilution rights as defined in the warrant purchase agreement.

On November 26, 2003, the Company entered into a new senior subordinated note agreement with BET Associates, LP which replaced the senior subordinated debt facility with the former lender, Bayview Capital. The initial carrying value of the senior subordinated note was $6.0 million and was reduced by $0.6 million for the fair value of Series I Preferred Stock issued to the senior subordinated lender. The unamortized discount was $0.4 million at July 2, 2005, and is being amortized over the remaining term of the note. The Company also incurred fees of $0.2 million, $0.1 million of which were satisfied through the issuance of Series I Preferred Stock. These fees were recorded as deferred financing costs and will be amortized over the life of the loan. The senior subordinated note has monthly interest payable 15% per annum (to be reduced to 12% upon the occurrence of certain events), and includes a requirement of quarterly principal repayments of $0.5 million beginning January 31, 2005 if agreed to by the primary lender. To date no principal payments have been made. Further, the Company is required to pay a service fee of $5,000 per month related to the acquisition and management of the indebtedness. The senior subordinated note is due October 31, 2007. The note is subordinate to the revolving credit facility.

Substantially all of the Company’s assets have been pledged to secure borrowings under the revolving credit facility and senior subordinated note. The Company is subject to certain restrictive covenants under the agreements, the more significant of which include limitations on capital asset expenditures, dividends, acquisitions, new indebtedness in excess of $0.5 million and changes in capital structure At July 2, 2005, the Company had in place waivers of its financial debt covenants relating to its revolving credit facility and its senior subordinated debt facility. These waivers are in effect through January 1, 2007.

On March 31, 2004, July 1, 2004, and December 21, 2004 the Company entered into the third, fourth, and fifth amendments, respectively, to the amended and restated revolving credit facility with Fleet. The purpose of these amendments was to reset certain of the financial covenants provided for in the agreement discussed above.

At July 2, 2005, the following shares of the Company’s $0.004 par value stock were issued and outstanding:

In February 2004, the Company’s Board of Directors authorized the sale of up to $12.0 million of Series J Convertible Preferred Stock (“Series J Preferred”) through a private placement. Pursuant to Stock Purchase Agreements entered into during March and April 2004, the Company contracted to issue 3,088,126 shares of Series J Preferred to investors for $1.50 per share for net proceeds of approximately $4.6 million. The Series J Preferred was deemed to have contained a beneficial conversion amounting to $4.6 million which was recognized as a deemed dividend to preferred shareholders. The Company began selling its Series J Preferred on March 30, 2004 and completed the sale of the Series J Preferred in the first quarter of fiscal 2005. Upon completion of the sale of the Series J Preferred, the Company was required to recognize a charge against net loss available to common shareholders of approximately $7.4 million to reflect the beneficial conversion in the Series J Preferred. Upon shareholder approval of the Series M transaction at the shareholders’ meeting on February 14, 2005 all Series J Preferred were converted to shares of Company common stock based upon the specific conversion features of its initial placement.

On June 30, 2004, the Company’s Board of Directors authorized the sale of up to $25 million of Series K Convertible Preferred Stock (“Series K Preferred”) through a private placement. Pursuant to a Stock Purchase Agreement entered into on August 23, 2004, the Company sold, pending shareholder approval, 7,266,666 shares of Series K Preferred to investors for $1.50 per share and received net proceeds of approximately $10.9 million. This sale of Series K Preferred was deemed to have contained a beneficial conversion amounting to $10.9 million which was recognized as a deemed dividend to preferred shareholders at the time of the sale. The Company began selling its Series K Preferred on August 23, 2004. On December 21, 2004, the Company sold 2,584,800 additional shares of its Series K Preferred for net proceeds of approximately $3.9 million to complete its sales of Series K Preferred. Upon completion of the sale of the Series K Preferred in the second fiscal quarter of 2005, the Company was required to recognize a charge against net loss available to common shareholders of approximately $3.9 million to reflect the beneficial conversion in the Series K Preferred. Upon shareholder approval of the Series M transaction at the shareholders’ meeting on February 14, 2005 all Series K Preferred were converted to shares of Company common stock based upon the specific conversion features of its initial placement.

The Company executed a Stock Purchase Agreement on December 21, 2004, pursuant to which the Company sold 7,000,000 shares of Series L Preferred to investors for $1.00 per share. Based on the pricing of the Series L Preferred, the sale of Series L Preferred resulted in a beneficial conversion amounting to $7.0 million which was recognized as a deemed dividend to preferred shareholders at the time of the sale and a charge against net loss available to common shareholders. Upon shareholder approval of the Series M transaction [described below] at the shareholders meeting on February 14 2005 all series L Preferred were converted to shares of Company common stock based upon the specific conversion features of its initial placement.

Company’s shareholders at on February 14, 2005. The proceeds were used for general working capital needs. The Preferred Series M Stock accrues cumulative PIK dividends equal to 6% per annum. As part of the transaction, the investors required that the Company’s charter be amended in a number or respects, including a requirement that all previously issued preferred equity be converted to common stock. In the event of any liquidation or winding up of the Company, the holders of the Preferred Series M will be entitled to a preference on liquidation equal to one times (1x) the original purchase price of the Series M Preferred plus accrued and unpaid dividends. A consolidation or merger of the Company or a sale of substantially all of its assets shall be treated as liquidation for these purposes. The Company sold an additional $1,910,000 of Series M Convertible Notes during January of 2005. Mr. Alexander Paluch, a member of the Company’s Board of Directors, purchased $40,000 of the Additional Notes and East River II, LP, an investment fund for which Mr. Paluch serves as a General Partner, purchased $250,000 of the Additional Notes in this offering.

Subsequent to formal shareholder approval at the shareholders’ meeting held on February 14, 2005 the amounts of the total Series M Preferred investment, plus accrued dividends, $23.1 million, was reclassified on the Company’s balance sheet as components of shareholders’ equity. The Series M Preferred was deemed to contain a beneficial conversion amounting to $23.1 million which was recognized as a charge against net loss available to common shareholders at the time that the notes converted to equity.

As part of the above-described Series M private placement, the new investors required that THLPV reach an agreement to extend, for a two-year period, the July 1, 2004 capital contribution agreement previously entered into between THLPV and the lenders. Under the terms of the capital contribution agreement, in the event that THLPV elects to not provide further financial support for the Company, THLPV is required to notify the Company’s lenders of such decision and provide specific levels of financial support for a thirty (30) day period following the notification. In exchange for entering in to the capital contribution agreement, the lenders agreed to waive certain financial covenants under the Company’s credit facilities. At the time, THLPV did not receive any compensation in exchange for entering into the capital contribution agreement. As part of the extension of the capital contribution agreement the Company agreed to issue to THLPV a warrant to purchase shares of common stock equal to 1% of the fully diluted common stock of the Company on a fully converted basis. The term of the warrant will be five years and will have an exercise price of $0.0001 per share. Due to the value of the warrant, the Company recorded $2.3 million as a deferred financing cost.

Pursuant to a Stock Purchase Agreement executed on April 28, 2005, the Company contracted to sell to nine institutional and accredited investors 2,544,097 shares of Series N Convertible Preferred Stock (“Series N Preferred”) for $3.685 per share for net proceeds of $9,375,000. Each share of Series N Convertible Preferred is convertible into one share of the Company’s common stock, and had an initial conversion price of $3.685 per share subject to certain adjustments. The proceeds are being used for general working capital needs. The Series N Convertible Preferred Stock is entitled to receive in preference to holders of all other classes of stock, other than holders of the Series M Preferred Stock, a dividend at the rate of six percent per annum of the Series N stated value. Upon any liquidation, dissolution or winding up of the Company the holders of the shares of Series N Convertible Preferred Stock shall rank senior to the holders of the Common Stock, but junior to the holders of the Series M Preferred Stock, as to such distributions, and shall be entitled to be paid an amount per share equal to the Series N stated value plus any accrued and unpaid dividends. The approval of Investors holding at least 62.5% of the outstanding shares of the Series N Convertible Preferred Stock is required for certain significant corporate actions, including mergers and sales of substantially all of the Company’s assets. Based on the pricing of the Series N Preferred, the sale of Series N Preferred contained a beneficial conversion amounting to $4.8 million which was recognized as a deemed dividend to preferred shareholders at the time of the sale and a charge against net loss available to common shareholders.

On July 20, 2005, the Company executed Stock Purchase Agreements with seven institutional and accredited investors to provide for the private placement of 1,400,000 shares of a newly authorized series of the Company’s preferred stock (the “Series O Preferred Stock”) in exchange for aggregate gross proceeds of $5,600,000. Based on the pricing of the Series O Preferred, the sale of Series O Preferred contained a beneficial conversion amounting to $3.1 million which was recognized in the first quarter of fiscal 2006 as a deemed dividend to preferred shareholders at the time of the sale and a charge against net loss available to common shareholders.

The Series O Preferred Stock is entitled to receive in preference to holders of all other classes of stock, other than holders of the Series M and N Preferred Stock, a dividend at the rate of six percent per annum of the Series O stated value. Upon any liquidation, dissolution or winding up of the Company the holders of the shares of Series O Preferred Stock shall rank senior to the holders of the Common Stock, but junior to the holders of the Series M and N Preferred Stock, as to such distributions, and shall be entitled to be paid an amount per share equal to the Series O stated value plus any accrued and unpaid dividends (the “Liquidation Preference”). In addition to being junior the Series M and N Preferred Stock from the standpoint of liquidation, the Series O Preferred also has reduced voting rights. For example, the approval of at least 62.5% of the outstanding shares of Series O Preferred is not required in order for the Company to merge, dispose of substantial assets, engage in affiliate transactions, pay dividends, authorize new stock options plans, license or sell its intellectual property or change the number of board of directors.

In each instance of security sale, it is the opinion of the Company that the offering was fair, to the shareholders at the time of the transaction. For Series M such opinion is supported by a fairness opinion obtained by the Company.

During fiscal 2005, the Company issued approximately 12,835,000 shares of common stock as a result of shareholder conversions of Series B, C, D, F, G, H, I, J, K, and L Convertible Preferred Stock in accordance with shareholder approval of Series M Convertible Preferred Stock on February 14, 2005.

During fiscal 2004, the Company issued 74,869 shares, 6,484 shares and 15,836 shares of common stock as a result of shareholder conversions of Series F Preferred, Series G Preferred and Series H Preferred, respectively.

During fiscal 2004, the Company issued 850 shares of restricted common stock to members of the board of directors for their service to the board. The stock vests one year from the date of grant. The Company recorded a charge of approximately $44,570 in the statement of operations based on the fair market value of the common stock as determined on the date of grant using the closing price of the Company’s common stock as quoted on the NASDAQ system.

Pursuant to the Company’s discussions with the NASDAQ, shareholder approval was granted for a 1:50 reverse stock split at the annual shareholders’ meeting held on February 14, 2005. Such reverse stock split became effective with the trading of shares on February 16, 2005.

The Company currently sponsors the 1995 Stock Option Plan, the 2000 Stock Option Plan and the 1996 Director Stock Option Plan. These plans provide for the issuance of up to 50,255 shares. Options may be granted to employees, directors and consultants. With the exception of the 2000 Stock Option Plan, option prices are not less than the fair market value of the Company’s common stock on the date of grant. In the case of the 2000 Stock Option Plan, non-statutory options may be granted at not less than 85% of the fair market value of the Company’s common stock on the date of grant. The majority of the options vest annually in equal amounts over a three-year period. The 2000 Stock Option Plan also allows for the issuance of performance shares or restricted

stock. As of July 2, 2005, and July 3, 2004, there were 850 shares of restricted stock outstanding. No restricted stock or performance shares were outstanding as of June 28, 2003 or June 29, 2002.

The Company has 31,243 shares available for grants under the option plans at July 2, 2005.

A summary of the status of the Company’s stock option plans as of July 2, 2005 and activity during the three fiscal years then ended is presented below:

During fiscal 2003, the Company issued 480,750 incentive stock options to employees in consideration for the employees entering into non-compete agreements. The fair value of these stock options amounted to approximately $382,000 and is being recognized as expense in the statement of operations over the three-year vesting period of the options. Expense recognized in fiscal 2005, 2004 and 2003 related to these stock options was $127,000 each year.

During fiscal 2002, the Company issued 150,000 non-statutory stock options to two of the its board members at 85% of the fair market value of the Company’s common stock on the date of grant. The expense associated with the options amounted to approximately $338,000 and is being recognized in the statement of operations over the three-year vesting period of the options. Expense recognized in fiscal 2005, 2004 and 2003 related to these stock options was $28,000, $113,000 and $112,000, respectively.

In fiscal 2002, the Company issued four non-qualified stock options outside of the Company’s 2000 Stock Option Plan to four employees for the purchase of 400 shares of common stock at a purchase price of $312.50 per share.

As part of the above-described Series M private placement, the new investors required that THLPV reach an agreement to extend, for a two-year period, the July 1, 2004 capital contribution agreement previously entered into between THLPV and the lenders. Under the terms of the capital contribution agreement, in the event that THLPV elects to not provide further financial support for the Company, THLPV is required to notify the Company’s lenders of such decision and provide specific levels of financial support for a thirty (30) day period following the notification. In exchange for entering into the capital contribution agreement, the lenders agreed to waive certain financial covenants under the Company’s credit facilities. At the time, THLPV did not receive any compensation in exchange for entering into the capital contribution agreement. As part of the extension of the capital contribution agreement the Company agreed to issue to THLPV a warrant to purchase shares of common stock equal to 1% of the fully diluted common stock of the Company on a fully converted basis. The term of the warrant is five years and the warrant will have an exercise price of $0.005 per share. Due to the value of the warrant, the Company recorded $2.3 million as a deferred financing cost.

As described above in the sections entitled Series C Convertible Preferred Stock and Series D Convertible Preferred Stock, the Company issued certain warrants to purchase preferred stock to the Holders of both the Series C & D Convertible Preferred Stock. The warrants are subject to adjustments to prevent dilution under the same terms as the Series C & D Convertible Preferred Stock.

A summary of the common stock warrants outstanding at July 2, 2005 is as follows:

On February 12, 2004, the Company issued 69,133 common stock warrants to certain members of the Company’s management. The warrants are initially exercisable into one share of common stock per warrant, have an exercise price of $0.50 per share and a term of seven years. Warrants granted in connection with offers of employment are immediately exercisable upon their grant. All other warrants granted are not exercisable until shareholder approval of their issuance is obtained.

In fiscal 2003, the Company issued 600 common stock warrants at an exercise price of $154.00 per share and 200 common stock warrants at an exercise price of $412.50 per share to consultants in exchange for services rendered. The term of the warrants is five years. The fair value of the warrants was approximately $78,000 and was included in compensation expense in the statement of operations.

The Company has defined contribution retirement plans (the “Plans”) in accordance with Section 401(k) of the Internal Revenue Code. All full-time employees of the Company and its subsidiaries are eligible to

participate in the Plans. Company contributions to these plans are discretionary. The Company made no matching contributions for fiscal years 2005, 2004 or 2003.

Basic loss per share is computed based on the weighted average number of common shares outstanding 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 all periods presented, diluted net loss per share is equal to basic net loss per share because the effect of including such securities or obligations would have been antidilutive.

The following table presents a reconciliation of the numerators and denominators of basic and diluted loss per share for fiscal 2005, 2004 and 2003:

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

The significant components of deferred income tax assets and liabilities, primarily long-term, were as follows (amounts in thousands):

At July 2, 2005 the Company had net operating loss carry forwards for income tax purposes of approximately $188.0 million, which expire 2006 through 2025. Usage of a portion of the losses may be limited pursuant to Internal Revenue Code Section 382.

The change in the valuation allowance was an increase of $17.7 million, $17.9 million and $4.9 million in fiscal years 2005, 2004 and 2003, respectively, and resulted principally from net operating loss carry forwards.

The difference between the U.S. federal statutory income tax rate and the Company’s effective tax rate on loss before income taxes is:

The Company leases equipment, vehicles, and buildings under non-cancelable leases.

The following is a schedule by years of future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of July 2, 2005:

The following is a schedule by years of future minimum lease payments under capital leases together with present value of the net minimum lease payments as of July 3, 2005 (amounts in thousands):

Rent expense was $16.9 million, $19.6 million and $16.5 million during the years ended July 2, 2005, July 3, 2004 and June 28, 2003, respectively, offset by sublease rental income of $0.5 million, $1.0 million and $1.0 million, respectively.

The Company is partially self-insured for automobile, workers’ compensation and cargo claims. The Company has elected to retain a portion of expected losses through the use of deductibles. Provisions for losses expected under these programs are recorded based upon the Company’s estimates of the aggregate liability for claims incurred. These estimates include the Company’s actual experience based on information received from the Company’s insurance carriers and historical assumptions of development of unpaid liabilities over time. As of July 2, 2005 and July 3, 2004, the Company has deposits recorded of $3.5 million and $6.3 million, respectively.

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

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

The Company brought action against SVT, Inc (“SVT”), a company that had previously supplied significant information technology functions to Velocity. The Company successfully sought injunctive relief and money damages. SVT counterclaimed for amounts it said Velocity owed to SVT for services already provided. In the damage portion of the case SVT sought to recover approximately $2.5 million and Velocity sought in excess of $3.0 million. On December 3, 2004 the case settled in favor of SVT for $1.25 million, and payment was made by Velocity in January 2005.

On August 1, 2005, the Company received notice from the Superior Court for the State of California, County of Santa Clara, that the Court had entered an order granting certain motions for summary judgment against the Company in the matter styled Velocity Express, Inc. v. Banc of America Commercial Finance Corporation, Banc of America Leasing and Capital, LLC, John Hancock Life Insurance Company and John Hancock Mezzanine Lenders, LP, Charles F. Short III, Sidewinder Holdings Ltd. and Sidewinder N. A. Ltd. Corp., (the “Plaintiffs”) The motions sought to resolve the substantive liability issues in the case and to recover in excess of $10 million for breach of contract, fees, interest and other charges arising from a contract entered into in 1997 between Corporate Express Delivery Systems, Inc. and Mobile Information Systems, Inc. (“MIS”) By granting the motions, the court did resolve the liability issues and hold that BOA/Hancock is entitled to recover the amounts sued for. The parties have reached a negotiated settlement outside of the court; with the Company making scheduled payments totaling $2.9 million after an initial good faith payment of $0.3 million. In addition, the Plaintiffs will receive 500,000 shares of the Company’s common stock, guaranteed at a $6.00 per share minimum value subject to future conditions. As part of the final settlement, the Company will seek waivers of financial covenants of the Company’s Amended and Restated Loan and Security Agreement with Fleet Capital Corporation and Merrill Lynch Capital (the “Senior Lender”) and with BET Associates, LP relative to waiver of certain financial covenants of its Subordinated Debt. The total accrued settlement cost approximates $5.7 million at July 2, 2005.

The MIS and Harland settlement commitments are reflected on the Company’s balance sheet at July 2, 2005 as a component of current liabilities.

Mr. Vincent A. Wasik serves as the Company’s Chief Executive Officer pursuant to a Contractor Services Agreement, effective as of July 28, 2003, between the Company and MCG Global LLC. Mr. Wasik is an owner and principal of MCG Global LLC and was a shareholder and Chairman of the Board of the Company at the time this Contractor Services Agreement was authorized and entered into. The Service Agreement sets forth the rights and duties of both the Company and Mr. Wasik and directs the Company’s Compensation Committee to establish, on an annual basis, Mr. Wasik’s compensation level and eligibility for salary increases, bonuses, benefits and grants of equity. The Service Agreement also allows Mr. Wasik to contract to provide similar services to other businesses as long as Mr. Wasik abides by his confidentiality obligations under the Service Agreement. Furthermore, the Company has agreed to indemnify and hold harmless MCG, its officers, directors, employees and agents, including Mr. Wasik, from liabilities arising out of any services rendered by MCG to the

Company, other than as a result of gross negligence or willful misconduct. The Company also agreed to cause MCG and Mr. Wasik to be named as additional insured parties under its Directors and Officers Liability insurance policies. The Service Agreement does not contain any fixed term and may be terminated by either party at any time upon written notice. Other than payment of outstanding fees and expenses owed to MCG at termination, the Service Agreement does not contain any obligation upon the Company to pay severance in the event the agreement is terminated by the Company. During the fiscal year 2005, Mr. Wasik and MCG were reimbursed $62,000 and $96,000, respectively for expenses incurred on the Company’s behalf. In addition the Company paid $600,000 and issued $300,000 of Preferred Stock to MCG in lieu of cash, for continuing and specific services rendered in addition to Mr. Wasik’s compensation; of these amounts the Company recorded compensation expense of $900,000 to Mr. Wasik through MCG for these services. During fiscal 2005, the Company also reimbursed a major investor, THLPV $59,000 for expenses incurred on the Company’s behalf. THLPV also provides the Company with a standby Letter of Credit guarantee of $7.5 million in support of the Company’s revolving credit facility.

As part of the extension of the capital contribution agreement the Company agreed to issue to THLPV a warrant to purchase shares of common stock equal to 1% of the fully diluted common stock of the Company on a fully converted basis. The term of the warrant is five years and the warrant will have an exercise price of $0.0001 per share. Due to the value of the warrant, the Company recorded $2.3 million as a deferred financing cost. [See footnote 9 EQUITY COMPENSATION PLANS]

The Company has an agency relationship with Peritas, a vehicle rental company wholly owned by THLPV. Peritas was initially formed and owned by MCG Global, LLC. MCG established Peritas to accommodate the Company’s need for the Peritas services pending a new owner. Neither MCG nor Mr. Wasik has received any revenue, compensation or benefit from short term ownership or management of Peritas and Peritas was transferred to THLPV for no consideration. The business of Peritas is to rent delivery vehicles to independent contractors who perform services for the Company and other companies. [See footnote 5 CONSOLIDATED FINANCIAL INTEREST ENTITY]

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

In fiscal 2002, the Company granted a total of 245,000 warrants to purchase common stock. 200,000 of the warrants are five-year common stock warrants with an exercise price of $2.00 per share. The fair value of the warrants was determined on the date of grant using the Black-Scholes option pricing model, assuming expected volatility of 121%, a risk-free interest rate of 4%, and expected life of five years. The remaining 45,000 warrants are five-year warrants, having an exercise price of $8.10 per share, and were priced at fair market value on the date of grant based on the closing price of the Company’s common stock as quoted on the NASDAQ system. Cash and warrant-based compensation for these services amounted to $1.8 million in fiscal 2002.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company reported a loss from operations of approximately $45.7 million for the year ended July 2, 2005; and, had negative working capital of approximately $36.5 million at July 2, 2005.

On December 21, 2004 the Company obtained covenant waivers and consents from its lenders. The lenders waived all then existing defaults and delayed the start date for the financial covenants for both minimum EBITDA and interest coverage ratio until the earlier of January 1, 2007 and the date upon which the

(a) Company’s EBITDA for each of two consecutive months equals or exceeds the Company’s fixed charges (interest expense and scheduled principal payments due with respect to Money Borrowed) for the applicable month and (b) availability under the credit facility for each day of the immediate preceding thirty days is greater than or equal to $1,000,000.

At July 2, 2005, the Company was in violation of certain non-financial affirmative covenants under the revolving credit facility and its senior subordinated debt facility with respect to furnishing financial statements on a timely basis to the respective lenders. The Company’s ability to continue as a going concern is dependent on its ability to finance its operations under the revolving credit agreement and its subordinated debt facility. The Company has obtained waivers with respect to the aforementioned debt covenants.

On October 14, 2005 the Company entered into a Stock Agreement, pursuant to which the Company sold 3,099,513 shares of Series P Preferred Convertible Stock (“Series P Preferred Stock”) to investors for $3.34 per share for net proceeds of approximately $10.4 million (see footnote 16 SUBSEQUENT EVENTS).

On July 20, 2005 the Company entered into a Stock Agreement, pursuant to which the Company sold 1,400,000 shares of Series O Preferred Convertible Stock (“Series O Preferred Stock”) to investors for $4.00 per share for net proceeds of approximately $5.6 million. Based on the pricing of the Series O Preferred, the sale of Series O Preferred contained a beneficial conversion amounting to $3.1 million which was recognized as a deemed dividend to preferred shareholders at the time of the sale and a charge against net loss available to common shareholders. [See footnote 8 SHAREHOLDERS’ EQUITY]

the outstanding stated value of the Series P Preferred plus accrued dividends, and (2) 100% of the stated value of the Series P plus all accrued dividends, plus 50% of the difference between the conversion price then in effect and the average closing price of the Company’s common stock for the 30 calendar days preceding such redemption. Each investor also received an A Warrant and B Warrant, each a warrant to purchase up to 20% of the amount of Series P Preferred purchased. The exercise of the A Warrant and B Warrant are subject to the prior approval of the Company’s shareholders. The exercise price for both warrants is $4.00, subject to adjustments. Additionally, the B Warrant is only exercisable in the event that a registration statement, allowing for the sale of the Series P Preferred, is not declared effective within 270 days of closing. The Company has the option to redeem both warrants in the event that the Company’s common stock maintains a closing price of at least $7.00 for twenty consecutive trading days. The Investors are also parties to a Registration Rights Agreement (the “Rights Agreement”). The Rights Agreement requires the filing of a registration statement no later than 90 days after the closing date, and that it be effective within 180 days.

Unaudited summarized financial data by quarter for fiscal years 2005 and 2004 is as follows (in thousands, except per share data):

The Company’s Audit Committee and its Chief Executive Officer and Chief Financial Officer (the “Certifying Officer”) have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this annual report on Form 10-K. Based on this evaluation, the Certifying Officer concluded that these disclosure controls and procedures were deficient to ensure that the information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 (as amended) is accurate, and is recorded, processed, summarized and reported within the requisite time periods.

In connection with the preparation of the Company’s consolidated financial statements for the year ended July 2, 2005 certain material weaknesses became evident to management including the inability to fully reconcile cash applications on a timely basis, and due to resource constraints, the inability to close the Company’s books in a timely manner on a month to month basis. 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.

Vincent A. Wasik was appointed as the Company’s Chairman of the Board in August 2001 and was further appointed the Company’s President and Chief Executive Officer on July 28, 2003. In 1995, Mr. Wasik co-founded MCG Global, a private equity firm sponsoring leveraged buyout acquisitions and growth capital investments and has served as Principal of MCG Global since that time. From 1988 to 1991, Mr. Wasik served as Chairman and CEO of National Car Rental System, Inc. From 1980 to 1983, he served as President and CEO of Holland America Line. Mr. Wasik currently serves as an advisory board member of Mitchells/Richards, the largest upscale clothing retailer in Connecticut.

James G. Brown was elected to the Company’s Board in July 2000. Mr. Brown is a founder and Managing Director of TH Lee Putnam Ventures, L.P., a $1 billion private equity fund focused exclusively on Internet and eCommerce companies. Previously, from 1995 to 1999, he served as a Senior Vice President and Industry Leader of GE Equity where he was responsible for strategic and financial investments in eCommerce/Internet, consumer services and media/entertainment companies. Prior to joining GE Equity, Mr. Brown worked with Lehman Brothers as a Vice President from 1994 to 1995. Before that, he served at Bain & Co., an international consulting firm, from 1992 to 1994. He began his career in the media industry, serving two years with A.C. Nielsen in research and two years with CBS Television Network in marketing. In addition to the Company, Mr. Brown is a director of HomePoint Corp., FaceTime Communications, Inc., Prescient Markets, RealPulse.com, Inc. and LN Holdings, Inc.

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

Richard A. Kassar was appointed to the Board in August 2002. Mr. Kassar has been employed as Senior Vice President and Chief Financial Officer of The Meow Mix Company since 2002. From 2001 to 2002, he was self-employed as a consultant to venture capital firms, advising them primarily on the acquisition of consumer brands. From 1999 to 2001, Mr. Kassar was employed as Co-President and Chief Financial Officer of Global Household Brands. From 1986 to 1999, he was employed by Chock Full O’Nuts in various positions, and had served as Senior Vice President and Chief Operating Officer. Mr. Kassar also serves as a director for World Fuel Services, Inc.

Leslie E. Grodd was appointed to the Board in January 2003. A Certified Public Accountant, Mr. Grodd has been a Principal in the law firm of Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut since 1974. Prior

to forming the law firm, Mr. Grodd was associated with the firm of Coopers & Lybrand (now PricewaterhouseCoopers). Mr. Grodd is the former chair of both the Federal Tax Committee of the Connecticut Society of Certified Public Accountants and the Executive Committee of the Tax Section of the Connecticut Bar Association. Mr. Grodd holds a Master of Business Administration Degree from New York University, a Bachelor of Arts Degree from the University of Vermont and a Juris Doctor Degree from the St. John’s University School of Law.

John J. Perkins was appointed to the Board in August of 2004. Since 1984 Mr. Perkins has served as the President of International Insurance Group, Ltd. and is currently the Chairman of the Board of that company. Beginning in 1974 Mr. Perkins has also served as a Trustee of the City of Boston Retirement Fund. Between 1974 and 1984, Mr. Perkins was the President of Corroon and Black of Massachusetts. Additionally, Mr. Perkins is the President of Somerset Corporate Advisors, a financial advisory firm, and is a member of the Advisory board of Glasshouse Technologies, Aircuity, Inc., and Tuckerbrook Alternative Investments. Mr. Perkins is a graduate of Boston College with a degree in Economics.

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

Andrew B. Kronick joined the Company in December 2001 as its Senior Vice President of National Accounts and Logistics Services. In fiscal 2004, Mr. Kronick was named Senior Vice President, Sales. Prior to joining the Company, from 1999 to 2001, Mr. Kronick served as President of Veredex Logistics and was co-founder of deliverEnow.com, both technology and same-day logistics solutions companies. Prior to that, from 1995 to 1999, he served as Corporate Vice President of Sales and Marketing of Consolidated Delivery & Logistics, a national provider of time-critical logistics solutions, a company of which he was a founding member.

Kay Perry Durbin joined the Company in February 2000 as its Director of Compensation and Benefits. In November 2001, she was named the Company’s Vice President of Compensation and Benefits. In September 2002, she was named Vice President Human Resources, and served in that capacity until August 2004 when she was named Senior Vice President, Workforce Resources. Prior to joining the Company, Ms. Durbin was the Manager Compensation and Benefits for Fleetwood Retail Corporation.

Jeffrey Hendrickson joined the Company in December 2003 as its President and Chief Operating Officer. Prior to joining Velocity Express, from 2002 to 2003, Mr. Hendrickson was President and Chief Executive Officer of Sport & Health Company, a privately held company headquartered in McLean, Virginia. From 2000 to 2002, Mr. Hendrickson was the President and Chief Operating Officer of BC Harris Publishing Company, Inc. During 2000, Mr. Hendrickson served as Executive Vice President, Operations for Park N’ View, Inc. Park N’ View, Inc. filed for protection under Chapter 11 of the Federal Bankruptcy Laws in December 2000. He has also served in a senior executive capacity for such organizations as Brinks, Inc., National Car Rental System, Inc., Chase Manhattan Corporation, and Hertz Corporation.

Daniel R. DeFazio joined the Company in August 2004 as the Senior Vice President, Finance and Controller. In January 2005 he was named the Company’s Chief Financial Officer. Mr. DeFazio is a seasoned finance executive with over 19 years of experience in challenging, highly competitive businesses. Mr. DeFazio most recently served as CFO and Financial Services Partner for Richards Capital & Associates in Miami, Florida. Prior to that he functioned in the roles of CFO, COO and Executive Vice President at VirtualCom, Inc. He has also held other positions in finance with Xerox, Pitney Bowes and PricewaterhouseCoopers. Mr. DeFazio has a Bachelor of Science from Ithaca College in Accounting and Economics, and is also a Certified Public Accountant.

There are no family relationships between directors or executive officers of the Company.

The Company’s Audit Committee consists of the following individuals: Richard A. Kassar, Chairman, Leslie E. Grodd, and John J. Perkins. The Board of Directors has determined that each Audit Committee member has sufficient knowledge in financial and auditing matters to serve on the Committee. In addition, the Board has determined that Richard A. Kassar is an “audit committee financial expert” as defined by Securities and Exchange Commission (“SEC”) rules. The members are independent and have met twenty-two times in discussion and review of the Company’s audit efforts.

In October 2004, the Board approved the establishment of the Nominating Committee. The Nominating Committee recommends new director nominees to the Board. The Nominating Committee operates under a written charter, which was adopted in October 2004, and serves to identify and recommend individuals qualified to become members of the Board. The Nominating Committee charter is posted on the Company’s web site at www.velocityexp.com under “Investor Info—Governance.” All of the Nominating Committee members meet the independence requirements of the NASDAQ listing standards. The Nominating Committee met once during fiscal 2005.

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors and officers and the holders of 10% or more of the Company’s stock to file with the Securities and Exchange Commission initial reports of changes in ownership of equity securities of the Company. Based on the Company’s review of copies of such reports received by it, or written representations from reporting persons, the Company believes that during fiscal 2004, its directors, executive officers and holders of 10% or more of the Company’s stock filed all reports on a timely basis.

The Company has adopted a Code of Business Conduct and Ethics (“Code of Ethics”) which applies to the Company’s directors, officers and employees. The Code of Ethics is filed as an exhibit to this Annual Report on Form 10-K and is published on the Company’s website at www.velocityexp.com under “Investor Info.” Any amendments to the Code of Ethics and waivers of the Code of Ethics for the Company’s Chief Executive Officer or Chief Financial Officer will be published on the Company’s website. You may request a copy of the Code of Ethics at no cost by writing to us at the following address: Velocity Express Corporation, One Morningside Drive North, Building B, Suite 200, Westport, CT 06880 Attention: Corporate Secretary.

The following table sets forth, for the fiscal years ended July 2, 2005, July 3, 2004 and June 28, 2003, the aggregate compensation paid or accrued with respect to the Company’s Chief Executive Officer and up to the four most highly compensated executive officers other than the Chief Executive Officer who were serving as executive officers as of July 2, 2005 (the “Named Executive Officers”), based upon salary and bonus earned by such executive officers and individuals in fiscal 2005.

Cash Compensation. During the 4^th quarter of fiscal 2005 directors’ compensation was modified to include a combination of cash and stock options. Only the outside directors will receive the cash portion of the compensation. Cash compensation for calendar 2005 was $91,000.

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

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

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

Effective May 2004, directors and committee members were to be granted, on an annual basis, shares of restricted stock as compensation for board and committee service. The shares were to vest one year from the date of grant of the restricted stock. The number of shares of restricted stock was determined by dividing the amount of compensation by the closing price of the Company’s common stock on the date of grant according to the following compensation schedule. Directors were awarded $25,000, and the Chairman of the Board was granted an additional $12,500. Audit Committee members were granted $25,000. Executive and Compensation Committee members were granted $15,000, and Technology Committee members were granted $3,000. Effective October 23, 2004, Nominating Committee members were granted an additional $15,000. The chairperson of each committee received an additional $6,000. No grants were made under this schedule.

Effective April 14, 2005, directors and committee members are granted, on an annual basis, options to purchase shares of the Company’s common stock and, for certain members, cash as compensation for board and committee service. This compensation was also used to compensate directors for calendar year 2004. Only three directors, Richard Kassar, Leslie Grodd and John Perkins receive cash compensation. The cash compensation is made according to the following compensation schedule. Directors are awarded $10,000. Audit Committee members are granted $10,000 and the chairman receives an additional $4,000. Compensation Committee members are granted $8,000. Nominating Committee members are granted $8,000 and the chairperson receives an additional $3,000. The options shares vest one year from the date of grant and have an exercise price equal to the closing market price of the Company’s common stock on the day of the grant. The number of options granted is calculated by dividing the following amounts by the closing market price of the Company’s common stock on the day of the grant. Directors are granted $7,000 and the chairman is granted an additional $3,500. Audit Committee members are granted $7,000 and the chairman receives an additional $3,500. Compensation Committee members are granted $4,000 and the chairman receives an additional $1,000. Nominating Committee members are granted $4,000 and the chairperson receives an additional $1,000.

The Company has employment contracts and severance agreements in effect with Vincent Wasik, its Chairman and Chief Executive Officer, Wesley C. Fredenburg, its General Counsel and Secretary, Drew Kronick, its Senior Vice President, Sales, Jeffrey Hendrickson, its President, Chief Operating Officer and Daniel DeFazio, its Chief Financial Officer. The Company’s Board of Directors appointed Mr. Wasik as the Company’s Chief Executive Officer on July 28, 2003, with the understanding that the Company and MCG Global, LLC (“MCG”) would enter into a Contractor Services Agreement for Mr. Wasik’s services as the Chief Executive Officer of the Company. On October 20, 2004, the Company and MCG entered into a Contractor Services Agreement, effective as of July 28, 2003 (the “Service Agreement”). Mr. Wasik is an owner and principal of MCG and was a stockholder and Chairman of the Board of the Company at the time this Services Agreement was authorized and executed.

The Service Agreement sets forth the rights and duties of both the Company and Mr. Wasik and directs the Company’s Compensation Committee to establish, on an annual basis, Mr. Wasik’s compensation level and eligibility for salary increases, bonuses, benefits and grants of equity. The Service Agreement also allows Mr. Wasik to contract to provide similar services to other businesses as long as Mr. Wasik abides by his confidentiality obligations under the Service Agreement. Furthermore, the Company has agreed to indemnify and hold harmless MCG, its officers, directors, employees and agents, including Mr. Wasik, from liabilities arising out of any services rendered by MCG to the Company, other than as a result of gross negligence or willful misconduct. The Company also agreed to cause MCG and Mr. Wasik to be named as additional insured parties under its Directors and Officers Liability insurance policies. The Service Agreement does not contain any fixed term and may be terminated by either party at any time upon written notice. Other than payment of outstanding fees and expenses owed to MCG at termination, the Service Agreement does not contain any obligation upon the Company to pay severance in the event the agreement is terminated by the Company.

The Company and Mr. Kronick are parties to an employment agreement dated November 28, 2001, governing his employment with the Company. The agreement sets forth Mr. Kronick’s compensation level and eligibility for salary increases, bonuses, benefits and option grants under stock option plans and the terms of a non-solicitation and non-competition agreement. Pursuant to the agreement, Mr. Kronick’s employment is voluntary and may be terminated by the Company with or without written notice, or by Mr. Kronick with two months’ prior notice. The agreement is not for a fixed period of time. If the agreement is terminated by the Company for reasons other than cause, the Company will pay Mr. Kronick an amount equal to his base salary per month at the end of each of the twelve months following the date of his termination. The Company may immediately terminate Mr. Kronick’s employment for cause upon written notice without any further obligation to Mr. Kronick.

The Company and Mr. Fredenburg are parties to an employment agreement dated November 15, 2003, governing his employment with the Company. The agreement sets forth Mr. Fredenburg’s compensation level and eligibility for salary increases, bonuses, benefits and option grants under stock option plans. Pursuant to the agreement, Mr. Fredenburg’s employment is voluntary and may be terminated by the Company with or without written notice, or by Mr. Fredenburg with two months’ prior notice. The agreement is for a period of two years and, at its expiration, can be renewed at the option of the Company. If the agreement is not renewed, the Company may, at its option and in exchange for Mr. Fredenburg executing a non-competition agreement, offer to pay an amount equal to his base salary per month at the end of each of the twelve months following the date of his termination. The Company may immediately terminate Mr. Fredenburg’s employment for cause upon written notice without any further obligation to Mr. Fredenburg.

The Company and Mr. Hendrickson are parties to an employment agreement dated December 15, 2003, governing his employment with the Company. The agreement sets forth Mr. Hendrickson’s compensation level and eligibility for salary increases, bonuses, benefits and option grants under stock option plans. Pursuant to the agreement, Mr. Hendrickson’s employment is voluntary and may be terminated by the Company with or without

written notice, or by Mr. Hendrickson with two months’ prior notice. The agreement is for a period of two years and, at its expiration, can be renewed at the option of the Company. If the agreement is not renewed the Company will, in exchange for Mr. Hendrickson executing a non-competition agreement, offer to pay an amount equal to his base salary per month at the end of each of the twelve months following the date of his termination. The Company may immediately terminate Mr. Hendrickson’s employment for cause upon written notice without any further obligation to Mr. Hendrickson.

The Company and Mr. DeFazio are parties to an employment agreement dated March 8, 2005, governing his employment with the Company. The agreement with Mr. DeFazio is “at will” and, therefore, does not have a stated term, and may be terminated by the Company with or without written notice, or by Mr. DeFazio with 30 days’ prior written notice. The agreement sets forth Mr. DeFazio’s compensation level and eligibility for salary increases, bonuses, benefits, and option grants under stock purchase plans. The agreement also provides for Mr. DeFazio’s participation in the Company’s employee benefit programs and other benefits. In the event of termination of Mr. DeFazio’s employment by reason of his death or by his resignation for any reason, the Company shall provide payment to Mr. DeFazio of the earned but unpaid portion of his base salary through the termination date and the pro-rated portion of any bonus due Mr. DeFazio pursuant to any bonus plan or arrangement established prior to the termination of his employment. In the event Mr. DeFazio’s employment was terminated by the Company for cause (as defined in the Employment Agreement), the Company shall provide payment to Mr. DeFazio of the earned but unpaid portion of his base salary through the termination date. In the event Mr. DeFazio’s employment was terminated by the Company without cause, the Company will pay to Mr. DeFazio the earned but unpaid portion of his base salary through the termination date and offer Mr. DeFazio a severance option (the “Severance Option”). The Severance Option will entail the Company (i) paying Mr. DeFazio, as severance pay each month, for twelve consecutive months following the termination of his employment, beginning one month after termination from employment, Mr. DeFazio’s monthly base salary in effect at the time of separation, less customary withholdings; (ii) continuing to pay Mr. DeFazio’s group health and dental insurance coverage for the term of the severance payments or 12 months, whichever is greater; and (iii) causing the immediate vesting of any unvested stock options or stock grants held by Mr. DeFazio at the time of the termination of his employment. The Severance Option is conditioned on Mr. DeFazio executing the Company’s standard general release, without revocation, upon the termination of his employment, and for Mr. DeFazio to comply with a restrictive non-competition covenant for a period of twelve months.

During fiscal 2005, the Compensation Committee of the board consisted of James G. Brown, and Richard A. Kassar. Neither Mr. Brown nor Mr. Kassar was at any time during fiscal 2005 or at any other time, an officer or employee of the Company or any of its subsidiaries. No executive officer of the Company serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of the board or the compensation committee of the Company. Through his position as Managing Director of TH Lee Putnam Ventures, L.P., James G. Brown had relationships with the Company requiring disclosure under Item 404 of SEC Regulation S-K. See “Certain Relationships and Related Party Transactions.”

The following is the report of the compensation committee of the board describing compensation policies and rationales applicable to the Company’s executive officers with respect to the compensation paid to such executive officers for the fiscal year ended July 2, 2005.

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

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

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

Bonus. Some of the Company’s executive officers are eligible for an annual cash bonus. Individual and corporate performance objectives are established at the beginning of each year, and eligible executives are assigned target bonus levels.

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

Compensation of Chief Executive Officer. The compensation committee approved the compensation of Vincent Wasik for fiscal 2005 by way of an agreement between the Company and MCG Global, LLC. Mr. Wasik is an owner and principal of MCG Global, LLC. Compensation in fiscal 2005 under the agreement amounted to $900,000. The compensation committee determined the Chief Executive Officer’s compensation after considering the same factors used to determine the compensation of other executive officers. In determining Mr. Wasik’s base salary, the Committee evaluated his performance by considering the Company’s financial and operating performance for fiscal 2004 as well as Mr. Wasik’s leadership, his ability to foster and maintain a strong, positive and high integrity culture, and his continued ability to develop and implement strategies to enhance shareholder value over the long-term. The Committee also considered Mr. Wasik’s personal performance in a number of additional areas, including growth, innovation, productivity improvement, new ventures, organizational development, diversity and customer and stockholder relations.

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

COMPENSATION COMMITTEE

James G. Brown

Richard A. Kassar

In accordance with Exchange Act regulations, the following performance graph compares the cumulative total shareholder return on the company’s common stock to the cumulative total return on the NASDAQ Stock Market and a selected group of peer issuers over the same period. The peer issuers consist of Consolidated Delivery and Logistics, Inc. and Dynamex. The graph assumes that the value of the investment in the Company’s common stock and each index was $100 in 2000 and that all dividends were reinvested. The information contained in the performance graphs shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference into such filing.

As of September 1, 2005, the Company had issued and outstanding 15,318,865 shares of Common Stock, 5,239,546 shares of Series M Preferred, 1,940,248 shares of Series N Preferred and 800,000 shares of Series O Preferred. The following tables contain certain information known to the Company regarding beneficial ownership of its outstanding voting securities as of September 1, 2005, by (i) each person who is known to the Company to own beneficially more than five percent of each class of the Company’s voting securities, (ii) each of the Company’s directors and nominee directors, (iii) each of the Company’s named executive officers, and (iv) all executive officers and directors as a group. Beneficial ownership listed in the tables below based on ownership of the Company’s convertible preferred shares reflects Common Stock equivalents. Each share of Common Stock is entitled to one vote. For purposes of voting as of September 1, 2005, each holder of Series M Preferred Stock, Series N Preferred Stock and Series O Preferred Stock shall be entitled to vote a number of votes equal to the ratio of the Series M Preferred Stock, Series N Preferred Stock and Series O Preferred Stock Stated Value to the Market Price multiplied by the number of shares held by such holder, rounded down to the nearest whole number.

Unless otherwise noted and subject to applicable community property laws, each person identified below has sole voting and investment power with respect to such shares and the address of each person identified below is Velocity Express Corporation, One Morningside Drive North, Building B, Suite 300, Westport, Connecticut 06880. Beneficial ownership is determined in accordance with the rules of the SEC and includes the class of capital stock identified on each table and securities convertible into or exercisable for the class of capital stock identified on each table owned by or for, among others, the spouse, children or certain other relatives of such person as well as other securities as to which the person has or shares voting or investment power or has the right to acquire within 60 days of September 1, 2005.

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

The following table sets for information about the Company’s equity compensation plans as of July 2, 2005. For more information about the Company’s stock option plans, see footnote 9 to the Consolidated Financial Statements.

Pursuant to a Stock Purchase Agreement entered into on December 21, 2004 and January 31, 2005, and subject to the Company’s fifty-to-one reverse stock split effective February 16, 2005, the Company contracted to issue, upon shareholder approval of its issuance and certain other related proposals, 6,271,567 shares of Series M Convertible Preferred Stock (“Series M Preferred”) for $3.685 per share for proceeds of $22.9 million. Of the total proceeds, approximately $22.6 million was received in cash, and $360,000 was in exchange for services performed for the Company. The initial conversion price of the Series M Preferred was $3.685, and, at the time the Stock Purchase Agreement was entered into, each share of Series M Preferred was convertible into one share of the Company’s common stock.

The Company sold the Series M Preferred to the following directors, officers and/or beneficial owners of 5% or more of any class of the Company’s voting securities: TH Lee Putnam Ventures holds more than 5% of each of Common Stock. Two of its executive officers are also serving on the Company’s Board. Vincent Wasik, the founder and principal of MCG Global LLC and the Chairman of the Board and CEO, owns more than 5% of Common Stock.

As part of the Series M Preferred private placement, THLPV agreed to extend for a two-year period the July 1, 2004 capital contribution agreement previously entered into between THLPV and the Company’s lenders in support of the Company’s revolving credit facility. Under the terms of the capital contribution agreement, in the event that THLPV elects to not provide further financial support for the Company, THLPV is required to notify the Company’s lenders of such decision and provide specific levels of financial support for a thirty-day period following the notification. In exchange for entering into the capital contribution agreement, the lenders agreed to waive certain financial covenants under the Company’s credit facilities. At the time, THLPV did not receive any compensation in exchange for entering into the capital contribution agreement. As part of the extension of the capital contribution agreement, the Company agreed to issue to THLPV, subject to shareholder approval which granted on February 14, 2005, a warrant to purchase 9,677,553 pre-reverse stock split shares of common stock. The term of the warrant will be five years, and the warrant will have an exercise price of $0.0001 per share. Due to the value of the warrant, the Company recorded $2.3 million as a deferred financing cost.

Pursuant to a Stock Purchase Agreement entered into on April 28, 2005, the Company contracted to issue to nine institutional and accredited investors 2,544,097 shares of Series N Convertible Preferred Stock (“Series N Preferred”) for $3.685 per share for net proceeds of $9,375,000. Each share of Series N Preferred is convertible into one share of the Company’s common stock, and had an initial conversion price of $3.685 per share subject to certain adjustments.

Pursuant to a Stock Purchase Agreement entered into on July 20, 2005, the Company contracted to issue to seven institutional and accredited investors 1,400,000 shares of Series O Convertible Preferred Stock (“Series O Preferred”) for $4.00 per share for net proceeds of $5.6 million. Each share of Series O Preferred is convertible into one share of the Company’s common stock, and had an initial conversion price of $4.00 per share subject to certain adjustments.

The Company has entered into Contractor Services Agreement (the “agreement”) with MCG Global, LLC and its related entities (“MCG”), effective as of July 27, 2003 under which Vincent A. Wasik provides all services as Chief Executive Officer of the Company. Vincent A. Wasik was a shareholder and Chairman of the Board of the Company at the time the agreement was entered into. The agreement provides that the Compensation Committee on an annual basis shall establish the compensation for these services. On January 15, 2005 the Compensation Committee modified the agreement with MCG by eliminating the grant of warrants to purchase shares of the Company’s common stock. In fiscal 2004, the Company recorded compensation expense of $900,000 for these services.

The Company subleases a portion of its headquarters office space in Westport Connecticut from MCG. The sublease agreement was approved by the Company’s Audit Committee who determined that the terms of the sublease were at market rates. The Company also reimburses MCG for limited use of MCG’s personnel and for office expenses.

The Company has an agency relationship with Peritas, LLC (“Peritas”), a vehicle rental company wholly-owned by TH Lee Putnam Ventures (“THLPV”). Peritas was initially formed and owned by MCG Global, LLC. The founder and principal of MCG Global LLC is Vincent Wasik, the Chairman of the Board and CEO of the Company. MCG established Peritas to accommodate the Company’s need for the Peritas services pending a new owner. Neither MCG nor Mr. Wasik has received any revenue, compensation or benefit from short-term ownership or management of Peritas, and Peritas was transferred to THLPV for no consideration. The business of Peritas is to rent delivery vehicles to independent contractors who perform services for the Company and other companies.

THLPV provides the Company with a standby Letter of Credit guarantee of $7.5 million in support of the Company’s revolving credit facility.

The following table sets forth the approximate aggregate fees billed to the Company for fiscal years 2005 and 2004 by Ernst & Young LLP, the Company’s principal accountant:

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services Provided by the Company’s Independent Auditors

The Audit Committee is responsible for appointing, setting compensation for and overseeing the work of the independent auditors. The Audit Committee has established a policy for pre-approving the services provided by the Company’s independent auditors in accordance with the auditor independence rules of the Securities and Exchange Commission. This policy requires the review and pre-approval by the Audit Committee of all audit and permissible non-audit services provided by the independent auditors and an annual review of the financial plan for audit fees.

To ensure that auditor independence is maintained, the Audit Committee annually pre-approves the audit services to be provided by the independent auditors and the related estimated fees for such services, as well as the nature and extent of specific types of audit-related, tax and other non-audit services to be provided by the independent auditors during the year.

As the need arises, other specific permitted services are pre-approved on a case-by-case basis during the year. A request for pre-approval of services on a case-by-case basis must be submitted by the Company’s Chief Financial Officer, providing information as to the nature of the particular service to be provided, estimated related fees and management’s assessment of the impact of the service on the auditor’s independence. The Audit Committee will not delegate to management the pre-approval of services to be performed by the independent auditors.

All of the services provided by the independent auditors in fiscal 2005, including services related to the Audit-Related Fees, Tax Fees and All Other Fees described above, were approved by the Audit Committee under its pre-approval policies.

The consolidated financial statements required by this item are listed in Item 8, “Financial Statements and Supplementary Data” herein.

II—Valuation and Qualifying Accounts—years ended July 2, 2005, July 3, 2004 and June 28, 2003.

All other schedules for which provision is made in the applicable regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.

The Company filed one report on Form 8-K during the fiscal quarter ended July 2, 2005, as follows:

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Westport, state of Connecticut on October 26, 2005.


VELOCITY EXPRESS CORPORATION

By		/s/ VINCENT A. WASIK
		Vincent A. Wasik
		Chairman of the Board, Chief Executive Officer

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

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

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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

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 9, 2005, there were 15,663,745 shares of common stock of the registrant issued and outstanding.

Velocity Express Corporation and its subsidiaries (collectively, the “Company”) are engaged in the business of providing same-day transportation and distribution/logistics services to individual consumers and businesses. The Company operates primarily in the United States with limited operations in Canada. The Company currently operates in a single-business segment and thus additional disclosures under Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures About Segments of an Enterprise and Related Information, are not required.

Basis of Presentation—The 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 October 1, 2005, and the results of its operations for the three months ended October 1, 2005 and October 2, 2004, and its cash flows for the three months ended October 1, 2005 and October 2, 2004 have been included. The results of operations for the three months ended October 1, 2005 are not necessarily indicative of the results that may be expected for the fiscal year ending July 1, 2006. 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 July 2, 2005, 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 year ended July 2, 2005 certain material weaknesses became evident to management including the inability to fully reconcile cash applications on a timely basis, and due to resource constraints, the inability to close the Company’s books in a timely manner on a month to month basis. 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. If the Company is unable to correct these weaknesses in a timely manner it will represent a risk.

Principles of Consolidation—The consolidated financial statements include the accounts of Velocity Express Corporation and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated in the consolidation. The consolidated financial statements for the three month period ended October 2, 2004 also include Peritas as required by FASB Interpretation No. 46, Consolidation of Variable Interest Entities [“FIN No. 46”]. In November 2004 the Company no longer had a variable interest in Peritas that was at risk of disproportionate loss pursuant to its voting rights. Accordingly, Peritas was deconsolidated from the Company’s financial statements as of January 2, 2005, which had an insignificant effect on the period’s results.

Reclassifications—Certain reclassifications have been made to the prior period consolidated financial statements to conform to the current period presentation.

Comprehensive Loss—Comprehensive loss was $(3.5) million and $(6.3) million for the three months ended October 1, 2005 and October 2, 2004, respectively. The difference between net loss and total comprehensive loss in the respective periods related to foreign currency translation adjustments.

Reverse Stock Split—Shareholder approval was granted for a 1:50 reverse stock split at the shareholders’ meeting held on February 14, 2005. Such reverse stock split became effective at open of trading on February 16, 2005. All such share amounts reflect the reverse stock split.

Loss Per Share—Basic loss per share is computed based on the weighted average number of common shares outstanding 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. As the Company has net losses applicable to common shareholders in each of the interim periods presented, all outstanding options, warrants and convertible preferred shares have been excluded from the diluted loss per share calculation as they are anti-dilutive.

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

The following table presents securities that would have been included in the diluted earnings per share calculation if the Company had net income for the quarters ended October 1, 2005 and October 2, 2004:

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Shared-Based Payment (“SFAS 123(R)”), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and amends SFAS No. 95, Statement of Cash Flows. Generally the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.

On July 3, 2005, the Company adopted SFAS 123(R) using a modified prospective method resulting in the recognition of share-based compensation expense of $62,000. Prior period amounts have not been restated. Under this modified prospective method, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Prior to the adoption of SFAS 123(R), we accounted for share-based compensation using APB 25 and related interpretations in accounting for our plans.

The following table details the effect on net loss applicable to common shareholders and basic and diluted loss per share had compensation expense for the employee share-based awards been recorded in the three months ended October 2, 2004 based on the fair value method under SFAS 123:

The Company currently sponsors the 1995 Stock Option Plan, the 2000 Stock Option Plan, the 1996 Director Stock Option Plan, and the 2004 Stock Option Plan. These plans provide for the issuance of up to 7,670,996 shares. Options may be granted to employees, directors and consultants. With the exception of the 2000 Stock Option Plan, option exercise prices are not less than the fair market value of the Company’s common stock on the date of grant. In the case of the 2000 Stock Option Plan, non-statutory options may be granted at not less than 85% of the fair market value of the Company’s common stock on the date of grant. The majority of the options vest annually in equal amounts over a three-year period. The 2000 Stock Option Plan also allows for the issuance of performance shares or restricted stock. As of October 1, 2005, there were 850 shares of restricted stock outstanding. No restricted stock or performance shares were outstanding as of October 2, 2004. All outstanding restricted stock was vested as of July 2, 2005. The Company has 31,243 shares available for grants under the option plans at October 1, 2005.

The fair value of each option grant is calculated on the date of the grant using the Black-Scholes option-pricing model. The key assumptions for this pricing model include the expected term of the option, stock price volatility, risk-free interest rate, dividend yield, exercise price, and forfeiture rate. Many of these assumptions are judgmental and highly sensitive in the determination of compensation expense.

There were no stock options issued, exercised or forfeited during the three month period ended October 1, 2005. All outstanding options at October 1, 2005 are exercisable.

A summary of the status of outstanding stock options as of October 1, 2005 is presented below:

In the three month period ended October 1, 2005, the Company granted 58,035 common stock warrants to certain employees for services provided. The Company calculated the fair value of the common stock warrants using the Black-Scholes option-pricing model using the following assumptions:

Term—This is the period of time over which the warrants granted are expected to remain outstanding. The warrants issued in the three month period ended October 1, 2005 have a maximum contractual term of either five or seven years. An increase in the expected term will increase compensation expense.

Volatility—This is a measure of the amount by which a price has fluctuated or is expected to fluctuate. Volatility is based on historical volatility of the Company’s common stock value and other factors, such as expected changes in volatility arising from planned changes in the Company’s business operations. An increase in the expected volatility will increase compensation expense.

Risk-Free Interest Rate—This is the U.S. Treasury rate for the week of the grant having a term equal to the expected term of the warrant. An increase in the risk-free interest rate will increase compensation expense.

Dividend Yield—The Company has not made any dividend payments during the last five fiscal years and has no plans to pay dividends in the foreseeable future. An increase in the dividend yield will decrease compensation expense.

Forfeiture Rate—This is the estimated percentage of warrants granted that are expected to be forfeited or canceled before becoming fully vested. As the warrants were fully-vested at the grant date, the forfeiture rate is zero. An increase in the forfeiture rate will decrease compensation expense.

Based on the assumptions used, the fair value of the warrants granted to employees in the three month period ended October 1, 2005 was $54,552. Also, in the three month period ended October 1, 2005, the Company issued 142,333 common stock warrants to a broker in connection with costs of a prior period issue of preferred stock. The Company recorded the warrants at $895,000 which was the fair value of the services received.

A summary of the status of the Company’s common stock warrants outstanding as of October 1, 2005 and activity during the three month period then ended is presented below:

At the end of the third quarter of fiscal 2005, the Company’s management moved to redefine the business model to take advantage of the Company’s strengths in service delivery to its local markets. Approximately 40 operating centers were designated for closure and employee headcount was reduced by about 200. At that time, the Company recorded a charge of $602,000 related to the restructuring, mostly reflective of severance costs. During the fourth quarter of fiscal 2005, the Company ceased use of most of the named facilities and recorded an additional $550,000 in net lease contract termination costs and fixed asset impairments; as well as $100,000 in severance, and an estimated $300,000 charge was recorded to recognize the cost of spare cell phone service contracts that have no future economic benefit to the Company. Approximately $1.0 million of the liability remained accrued at October 1, 2005, of which $0.8 million is included with current accrued liabilities.

Changes in the restructure liabilities, for the three months ended October 1, 2005, follow:

During fiscal 2004, the Company relocated its headquarters and financial functions to Westport, Connecticut from Minneapolis, Minnesota. The costs of relocation, employee acquisition, training and severance were recognized as period costs. Approximately $123,000 of severance pay liability remained accrued at October 2, 2004. At July 2, 2005, all of the fiscal 2004 severance pay liability had been satisfied.

The Company maintains a revolving credit facility with Fleet Capital Corporation that allows for borrowings up to the lesser of $42.5 million or an amount based on a defined portion of eligible receivables. Interest is payable monthly at a rate, which is adjusted annually by an amount not exceeding 25 basis points depending upon the Company’s achieving certain conditions as defined in the agreement, of prime plus 1.25% (8.25% at October 1, 2005), or, at the Company’s election, at LIBOR plus 3.25%. As of October 1, 2005, the Company has 45% of the facility usage under LIBOR contracts at an interest rate of 7.0%. In addition, the Company is required to pay a commitment fee of 0.375% on unused amounts of the total commitment, as defined in the agreement. The facility terminates on December 31, 2006. The Company’s accounts receivable have been pledged to secure borrowings under the revolving note. The Company is subject to certain restrictive covenants, the more significant of which include limitations on dividends, acquisitions, new indebtedness and changes in capital structure. The Company is also required to maintain financial covenants related to capital expenditures and to maintain definitive levels of minimum availability. Unused availability was $3.6 million at October 1, 2005. Due to the characteristics of the revolving credit facility, in accordance with current accounting pronouncements, the Company has classified the amount outstanding under the revolving credit facility as a current liability.

On March 31, 2004, July 1, 2004, and December 21, 2004, the Company entered into the third, fourth, and fifth amendments, respectively, to the amended and restated revolving credit facility with Fleet. The purpose of these amendments was to reset certain of the financial covenants provided for in the agreement discussed above.

At July 2, 2005, and October 1 2005, the Company was in violation of certain non-financial affirmative covenants under the revolving credit facility and its senior subordinated debt facility with respect to furnishing financial statements on a timely basis to the respective lenders. Such violations have been waived through November 30, 2005. [See Note 6, Liquidity].

The Company also maintains a $6.0 million senior subordinated note with interest payable quarterly at 15% per annum (to be reduced to 12% upon the occurrence of certain events). The initial carrying value of the senior subordinated note was $6.0 million and was reduced by $0.6 million for the fair value of Series I Preferred Stock issued to the senior subordinated lender. The unamortized discount was $0.3 million at October 1, 2005, and is being amortized over the remaining term of the note. The Company also incurred fees of $0.2 million, $0.1 million of which were satisfied through the issuance of Series I Preferred Stock. These fees were recorded as deferred financing costs and will be amortized over the life of the loan. The senior subordinated note includes a requirement of quarterly principal repayments of $0.5 million beginning January 31, 2005 if agreed to by the primary lender. To date, no principal payments have been made to the senior subordinated note holder as such payments have not been approved by the primary lender. Further, the Company is required to pay a service fee of $5,000 per month related to the acquisition and management of the indebtedness. The senior subordinated note is due October 31, 2007. The note is subordinate to the revolving credit facility.

Substantially all of the Company’s assets have been pledged to secure borrowings under the revolving credit facility and senior subordinated note. The Company is subject to certain restrictive covenants under the agreements, the more significant of which include limitations on capital asset expenditures, dividends, acquisitions, new indebtedness in excess of $0.5 million and changes in capital structure. At October 1, 2005, the Company had in place waivers of its financial debt covenants relating to its revolving credit facility and its senior subordinated debt facility. These waivers are in effect through January 1, 2007.

Series O Convertible Preferred Stock—On July 20, 2005, the Company executed Stock Purchase Agreements with seven institutional and accredited investors to provide for the private placement of 1,400,000 shares of a newly authorized series of the Company’s preferred stock (the “Series O Preferred”) in exchange for aggregate gross proceeds of $5,600,000. Based on the pricing of the Series O Preferred, the sale of Series O Preferred contained a beneficial conversion feature amounting to $3.1 million which was recognized as a deemed

dividend to preferred shareholders at the time of the sale and a charge against net loss available to common shareholders.

The Series O Preferred is entitled to receive in preference to holders of all other classes of stock, other than holders of the Series M Preferred and N Preferred, a dividend at the rate of 6% per annum of the Series O Preferred stated value. Upon any liquidation, dissolution or winding up of the Company the holders of the shares of Series O Preferred shall rank senior to the holders of the Common Stock, but junior to the holders of the Series M Preferred and N Preferred, as to such distributions, and shall be entitled to be paid an amount per share equal to the Series O Preferred stated value plus any accrued and unpaid dividends (the “Liquidation Preference”). In addition to being junior the Series M Preferred and N Preferred from the standpoint of liquidation, the Series O Preferred also has reduced voting rights. For example, the approval of at least 62.5% of the outstanding shares of Series O Preferred is not required in order for the Company to merge, dispose of substantial assets, engage in affiliate transactions, pay dividends, authorize new stock options plans, license or sell its intellectual property or change the number of board of directors.

Each of the investors has the right, at its option at any time, to convert any such shares of Series O Preferred into such number of fully paid and no assessable whole shares of Common Stock as is obtained by multiplying the number of shares of Series O Preferred so to be converted by the Liquidation Preference per share and dividing the result by the conversion price of $4.00 per share subject to certain adjustments.

The Company is managing to a plan to achieve positive cash flow in the current fiscal year. Key components of the plan are improving gross margin through continued utilization of Company’s routing optimization software and reduced expenses by gaining efficiencies through the centralization of certain administrative functions. In addition, the Company is pursuing profitable revenue growth opportunities with numerous existing and potential customers in targeted vertical segments.

As of October 1, 2005, the Company had $2.1 million in cash and $3.6 million of available borrowing under its revolving credit facility. Borrowings under the revolving credit facility are classified as current liabilities because the Company is required to maintain a lockbox account with the lender. In turn, the lender may apply funds received against outstanding borrowings. However, as such funds are applied to outstanding borrowings then additional borrowing capacity becomes available to the Company. Through September 2006 the Company does not expect to repay, on a net basis, any of the 22,055,000 outstanding at October 1, 2005 and included in current liabilities. The revolving credit agreement expires on December 31, 2006. In addition, as noted in the subsequent events, the Company raised $10.3 million through the issuance of preferred shares on October 14, 2005. The proceeds of the preferred stock issuance coupled with the availability under its revolving credit facility is expected to provide the Company with sufficient liquidity for operations through September 2006.

Series P Convertible Preferred Stock—On October 14, 2005, the Company entered into Stock Purchase Agreements (the “Purchase Agreements”) with one group of institutional investment funds and one accredited investor (the “Investors”). The Purchase Agreements provide for the private placement of 3,099,513 shares of a newly authorized series of the Company’s preferred stock (the “Series P Preferred”) in exchange for aggregate gross proceeds of $10,352,370. The Series P Preferred has a term of three years (the “Term”) and is entitled to receive a dividend at the rate of 8% per annum of the Series P Preferred stated value, payable quarterly, in cash or PIK shares of Series P Preferred at the option of the Company. Under certain events of default, the dividend rate will convert to 18%. To the extent that the issuance of such PIK shares would result in the Company issuing in excess of 20% of its outstanding Common Stock, the issuance will require the prior approval of the Company’s shareholders. Upon any liquidation, dissolution or winding up of the Company, the Investors of the

shares of Series P Preferred shall rank on parity with the holders of the Company’s Series M Preferred Stock. Each of the Investors has the right, at its option at any time, to convert any shares of Series P Preferred into shares of Common Stock at the conversion price of $3.34 per share subject to certain adjustments. At any time after the effective date of the Registration Statement and (i) prior to the Term, or (ii) upon a Change of Control, the Company shall have the right, but not the obligation, to redeem all or a portion of the shares of Series P Preferred by tendering to the Holder 130% of the stated value of the outstanding Series P Preferred together with all accrued dividends. At the Term, the Company shall have the right, but not the obligation, to redeem all or a portion of the shares of Series P Preferred by tendering to the Holder 100% of the Conversion Price together with all accrued but unpaid dividends. In the event that the Company elects to redeem the Series P Preferred prior to the Registration Statement becoming effective, the Company may redeem the Series P Preferred by paying to the Investor the greater of: (1) 130% of the outstanding stated value of the Series P Preferred plus accrued dividends, and (2) 100% of the stated value of the Series P Preferred plus all accrued dividends, plus 50% of the difference between the conversion price then in effect and the average closing price of the Company’s Common Stock for the 30 calendar days preceding such redemption. Each Investor also received an A Warrant and B Warrant, each to purchase up to 20% of the amount of Series P Preferred purchased. The exercise of the A Warrant and B Warrant are subject to the prior approval of the Company’s shareholders. The exercise price for both warrants is $4.00, subject to adjustments. Additionally, the B Warrant is only exercisable in the event that a registration statement, allowing for the sale of the Series P Preferred, is not declared effective within 270 days of closing. The Company has the option to redeem both warrants in the event that the Company’s common stock maintains a closing price of at least $7.00 for twenty consecutive trading days. The Investors are also parties to a Registration Rights Agreement (the “Rights Agreement”). The Rights Agreement requires the filing of a registration statement no later than 90 days after the closing date, and that it be effective within 180 days.

In accordance with the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995, the Company notes that certain statements in this Form 10-Q and elsewhere that are forward-looking and that provide other than historical information, involve risks and uncertainties that may impact the Company’s results of operations. These forward-looking statements include, among others, statements concerning the Company’s general business strategies, financing decisions, and expectations for funding capital expenditures and operations in the future. When used herein, the words “believe,” “plan,” “continue,” “hope,” “estimate,” “project,” “intend,” “expect,” and similar expressions are intended to identify such forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, no statements contained in this Form 10-Q should be relied upon as predictions of future events. Such statements are necessarily dependent on assumptions, data or methods that may be incorrect or imprecise and may be incapable of being realized. The risks and uncertainties inherent in these forward-looking statements could cause results to differ materially from those expressed in or implied by these statements.

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

The Company’s customers represent a variety of industries and utilize the Company’s services across multiple service offerings. Revenue categories and percentages of total revenue for the quarters ended October 1, 2005 and October 2, 2004 were as follows:

With the enactment of the Federal Law known as Check 21, on October 28, 2004, the Company anticipates continued derogation of financial services revenue as financial institutions will now electronically scan and process checks, without the required need to move the physical documents to the clearing institution. More than off-setting this derogation of revenue in the financial services industry, the Company believes it will continue to benefit from the growth in healthcare and healthcare related services industries within the United States, and be able to effectively leverage their broad coverage footprint to capitalize on this national growth industry.

Revenue for the quarter ended October 1, 2005 decreased $15.4 million or 22.6% to $52.5 million from $67.9 million for the quarter ended October 2, 2004. The decrease in revenue for the quarter ended October 1, 2005 compared to the same period last year was related to lower volume experienced as a result of customer attrition, revenue loss associated with pricing pressure, and customer freight volume fluctuations of approximately $19.0 million. This decline was offset by revenue growth during the quarter from new customer contracts and expansion within existing customers of approximately $3.6 million.

Cost of services for the quarter ended October 1, 2005 was $38.2 million, a decrease of $16.8 million or 30.6% from $55.1 million for the quarter ended October 2, 2004. The reduction in cost was mainly the result of the completion of the Company’s changeover to an IC model and the result of decreased business volumes,

which accounted for a reduction of $12.2 million, As a result, gross margin increased from 18.9% in the prior year quarter to 27.3% for the quarter ended October 1, 2005.

Selling, general and administrative expenses for the quarter ended October 1, 2005 were $14.3 million or 27.2% of revenue, a decrease of $0.7 million or 4.9% as compared with $15.0 million or 22.1% of revenue for the quarter ended October 2, 2004. The decrease in SG&A for the quarter resulted primarily from the Company’s third fiscal quarter 2005 restructure and continuing focused efforts on cost control.

Occupancy charges for the quarter ended October 1, 2005 were $2.9 million, a decrease of $0.5 million or 14.6% from $3.4 million for the quarter ended October 2, 2004. This decrease is also a result of Company’s third fiscal quarter 2005 restructure.

Interest expense for the quarter ended October 1, 2005 increased $0.3 million to $1.1 million from $0.8 million for the quarter ended October 2, 2004. Interest expense related to the Company’s borrowings increased over the same period in the prior year generally as a result of increases in the prime lending rate.

Cash used in operations was $3.1 million for the first quarter of fiscal 2006. Of the $3.1 million of negative cash flow, $2.1 used was as a result of working capital changes. Cash used as a result of the increase in accounts receivable was approximately $1.4 million. Accounts payable used approximately $1.2 million as a result of changes in vendor demands for payments. The remaining use of working capital of $1.3 million was due to funding of insurance, legal and other miscellaneous claims.

Cash used as a result of investing activities was $0.1 million for the first quarter of fiscal 2006 and consisted primarily of capital expenditures for the Company’s continued efforts to leverage technology to provide customer-driven technology solutions.

Cash used as a result of financing activities amounted to $0.5 million during first quarter of fiscal 2006. The primary source of cash was from issuance of preferred stock, net of subscription receivables which provided $5.4 million. Net reductions of long term debt and on borrowings on the revolving credit facility used $5.9 million.

As of October 1, 2005, the Company had no outstanding purchase commitments for capital improvements.

The Company reported a loss from operations of approximately $2.9 million for the first quarter of fiscal 2006 and has negative working capital of approximately $33.4 million at October 1, 2005.

The Company is managing to a plan to achieve positive cash flow in the current fiscal year. Key components of the plan are improving gross margin through continued utilization of Company’s routing

optimization software and reduced expenses by gaining efficiencies through the centralization of certain administrative functions. In addition, the Company is pursuing profitable revenue growth opportunities with numerous existing and potential customers in targeted vertical segments.

At July 2, 2005 and October 1, 2005, the Company was in violation of certain non-financial affirmative covenants under the revolving credit facility and its senior subordinated debt facility with respect to furnishing financial statements on a timely basis to the respective lenders. Such violations have been waived through November 30, 2005.

We are continuing to pursue operational efficiencies through conversion of employee drivers to independent contractors, reducing back office workforce, and pursuing savings in other areas.

Our net losses applicable to common shareholders for the three months ended October 1, 2005 and October 2, 2004 were $6.6 million and $24.6 million, respectively. Such losses include $3.1 million and $18.2 million, respectfully, resulting from beneficial conversion charges, increased such respective period losses to the aforementioned levels of net losses applicable to common shareholders.

As of October 1, 2005, the Company utilized the services of approximately 2,815 drivers and messengers. From time to time such persons are involved in accidents or other activities that may give rise to liability claims. The Company currently carries liability insurance with a per-occurrence and an aggregate limit of $5 million. Owner-operators are required to maintain liability insurance of at least the minimum amounts required by applicable state or provincial law. The Company also has insurance policies covering property and fiduciary trust liability, which coverage includes all drivers and messengers. There can be no assurance that claims against the Company, whether under the liability insurance or the surety bonds, will not exceed the applicable amount of coverage, that the Company’s insurer will be solvent at the time of settlement of an insured claim, or that the Company will be able to obtain insurance at acceptable levels and costs in the future. If the Company were to experience a material increase in the frequency or severity of accidents, liability claims, workers’ compensation claims or unfavorable resolutions of claims, the Company’s business, financial condition and results of operations could be materially adversely affected. In addition, significant increases in insurance costs could reduce the Company’s profitability.

and shortages of or disputes with labor, any of which could result in the Company’s inability to service its clients effectively or the inability of the Company to profitably manage its operations. In addition, downturns in the level of general economic activity and employment in the U.S. or Canada may negatively impact demand for the Company’s services.

The Company is dependent upon its 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 its operations. The Company competes in markets in which unemployment is generally relatively low and the competition for owner-operators and other employees is intense. The Company must continually evaluate and upgrade its pool of available owner-operators to keep pace with demands for delivery services. There can be no assurance that qualified delivery personnel will continue to be available in sufficient numbers and on terms acceptable to the Company. The inability to attract and retain qualified delivery personnel could have a material adverse impact on the Company’s business, financial condition and results of operations.

Prices for the Company’s Common Stock will be determined in the marketplace and may be influenced by many factors, including the depth and liquidity of the market for the Common Stock, investor perception of the Company and general economic and market conditions. Variations in the Company’s operating results, general trends in the industry and other factors could cause the market price of the Common Stock to fluctuate significantly. In addition, general trends and developments in the industry, government regulation and other factors could have a significant impact on the price of the Common Stock. The stock market has, on occasion, experienced extreme price and volume fluctuations that have often particularly affected market prices for smaller companies and that often have been unrelated or disproportionate to the operating performance of the affected companies, and the price of the Common Stock could be affected by such fluctuations.

Additionally, at October 1, 2005, the Company was in violation of certain non-financial affirmative covenants under the revolving credit facility and its senior subordinated debt facility with respect to furnishing financial statements on a timely basis to the respective lenders. The Company’s ability to fund operations is dependent on its ability to maintain the financing under the revolving credit agreement and its subordinated debt facility. The Company has obtained waivers with respect to the aforementioned debt covenants.

The Company has continued to experience net losses of $3.5 million for the three months ended October 1, 2005. In fiscal 2005, the declines in operating income have significantly exceeded the cost saving resulting from improved systems. To achieve profitability, the Company must successfully pursue new revenue opportunities, effectively limit the impact of competitive pressures on pricing and freight volumes, and fully implement its technology initiatives and other cost-saving measures.

The Company has depended, and is likely to continue to depend, on its ability to obtain additional financing to fund its liquidity requirements. The Company may not be able to continue to obtain additional capital when the Company wants it or need it, and capital may not be available on satisfactory terms. If the Company issues additional equity securities or convertible debt to raise capital, the issuance may be dilutive to the holders of the Company’s common or preferred stock. In addition, any additional capital may have terms and conditions that adversely affect the Company’s business, such as financial or operating covenants.

The Company’s operations are not currently subject to material market risks for interest rates, foreign currency rates, or other market price risks. However, the Company has revolving debt of $22.1 million at October 1, 2005. If the entire revolving credit facility were subject to a one percentage point change in the borrowing rate, the corresponding annualized effect on interest expense would be $221,000.

As of the end of the period covered by this report, under the supervision and with the participation of the Company’s management, including the company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO) (the “Certifying Officers”), the Company carried out an evaluation of the effectiveness of its “disclosure controls and procedures” (as the term is defined in the Securities Exchange Act of 1934, as amended (the “Act”) Rules 13a-15(e) and 15d-15(e) to mean controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports it files or submits under the Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosure).

As we reported in our Form 10-K for the fiscal year ended July 1, 2005 (filed October 19, 2005), as amended on October 26, 2005, in connection with the audit of our financial statements for that year, certain material weaknesses became evident to management including the inability to fully reconcile cash applications on a timely basis and, due to resource constraints, the inability to close the Company’s books in a timely manner on a month to month basis. 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. Based on this evaluation, the Certifying Officers concluded that the Company’s disclosure controls and procedures were not effective to ensure that material information was recorded, processed, summarized and reported by management of the Company on a timely basis in order to comply with the Company’s disclosure obligations under the Act, and the rules and regulations promulgated thereunder. Such material weakness and associated ineffectiveness, as reported in Form 10-K under “ITEM 9A. Controls and Procedures”, also existed at October 1, 2005.

As described in section (a) above, on October 19, 2005 we reported a material weakness as of July 1, 2005 which still existed at October 1, 2005. The Company has taken steps to attempt to improve its internal controls and its control environment. The Company has established a cash applications initiative to ensure timely and accurate posting of cash receipts and is aggressively recruiting experienced professionals to augment its existing accounting and finance resources. The Company believes that the corrective steps described herein will enable management to conclude that the internal controls over its financial reporting are effective when they are fully implemented. The Company will continue its efforts to identify, assess and correct any additional weaknesses in internal control.

Warrant to Purchase Common Stock—As part of the Series M Preferred Stock private placement, THLPV agreed to extend for a two-year period the July 1, 2004 capital contribution agreement previously entered into between THLPV and the Company’s lenders in support of the Company’s revolving credit facility. Under the terms of the capital contribution agreement, in the event that THLPV elects to not provide further financial support for the Company, THLPV is required to notify the Company’s lenders of such decision and provide specific levels of financial support for a thirty-day period following the notification. In exchange for entering into the capital contribution agreement, the lenders agreed to waive certain financial covenants under the Company’s credit facilities. At the time, THLPV did not receive any compensation in exchange for entering into the capital contribution agreement. As part of the extension of the capital contribution agreement, the Company issued to THLPV, upon shareholder approval, a warrant to purchase 193,552 shares of Common Stock. The term of the

warrant is five years and has an exercise price of $0.005 per share. Due to the value of the warrant, the Company in fiscal 2005 recorded $2.3 million as a deferred financing cost, subsequently reclassed to offering costs.

As of October 2, 2004, the Company was not in compliance with the minimum availability or interest coverage ratio covenants in the revolving credit facility and the interest coverage ratio covenant in the senior subordinated debt facility. However, the Company had in place waivers of its financial debt covenants related to its revolving credit facility and its senior subordinated debt facility. These waivers were in effect through January 1, 2005; and, pursuant to the Company’s receipt of $21.0 million of investment capital on December 21, 2004 the Company obtained additional waivers and consents from its lenders. The lenders waived all existing defaults and delayed the start date for the financial covenants for both minimum EBITDA and interest coverage ratio until the earlier of January 1, 2007 or the date upon which the (a) Company’s EBITDA for each of two consecutive months equals or exceeds the Company’s fixed charges (interest expense and scheduled principal payments due with respect to money borrowed) for the applicable month and (b) availability under the credit facility for each day of the immediately preceding thirty days is greater than or equal to $1,000,000.

As of October 1, 2005, the Company was not in compliance with certain non-financial covenants relative to the timely remittance of monthly financial statements. The lenders have waived and delayed such timeframe for receipt of the late monthly financial statements until November 30, 2005.

In accordance with the requirements of the Exchange Act, 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 21, 2005.


VELOCITY EXPRESS CORPORATION

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

By		/S/ DANIEL R. DEFAZIO
		Daniel R. DeFazio
		Chief Financial Officer

This proxy is solicited on behalf of the Board of Directors for use at the Special Meeting on Friday, January 27, 2005.

The undersigned, having duly received the Notice of Special Meeting of Shareholders and the Proxy Statement, each dated January __, 2006, hereby appoints VINCENT A. WASIK and WESLEY C. FREDENBURG as proxies (each with the power to act alone and with the power of substitution and revocation), to represent the undersigned and to vote, as designated below, all shares of Common Stock, Series M Convertible Preferred Stock, Series N Convertible Preferred Stock, Series O Convertible Preferred Stock and Series P Convertible Preferred Stock of Velocity Express Corporation (the “Company”) held of record by the undersigned on December 23, 2005, at the Special Meeting of Shareholders to be held at the Stamford Sheraton 2701 Summer Street, Stamford, Connecticut, on Friday, January 27, 2005, at 3:00 p.m., local time, and at any adjournment or postponement thereof, on the following matters that are further described in the Proxy Statement related hereto.

THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTIONS ARE GIVEN, THIS PROXY WILL BE VOTED FOR PROPOSALS 1 THROUGH 3. ABSTENTIONS WILL BE COUNTED TOWARD THE EXISTENCE OF A QUORUM.

1. To approve certain terms of our Series P Convertible Preferred Stock (“Series P”) to permit the Company to (a) issue additional Series P as payment-in-kind dividends, (b) issue additional conversion shares pursuant to anti-dilution provisions of the Series P, and (c) exercise of the A Warrant and B Warrant issuable in connection with the Series P.

2. To approve certain terms of our Series N Convertible Preferred Stock (“Series N”) to permit the Company to issue additional Series N as payment-in-kind dividends, and the issuance of additional conversion shares pursuant to anti-dilution provisions thereof.

3. To approve certain terms of our Series O Convertible Preferred Stock (“Series O”) to permit the Company to issue additional Series O as payment-in-kind dividends, and the issuance of additional conversion shares pursuant to anti-dilution provisions thereof

IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENTS THEREOF, AND, IF A NOMINEE IS UNABLE TO SERVE, FOR A SUBSTITUTE.

YOUR VOTE IS IMPORTANT! PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED ENVELOPE.

Please sign exactly as name appears on this proxy. When shares are held by joint tenants, only one need sign. If signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by president or other authorized officer. If a partnership, please sign in partnership name by an authorized person.


Class Outstanding	Number of Shares of Class Outstanding	Approximate Number of Voting Shares of Common Stock for Each Share of Preferred(1)	Aggregate Number of Outstanding Votes Per Class
Common Stock	16,402,884	1.0	16,402,884
Series M Preferred	5,468,250	1.02	5,586,563
Series N Preferred	1,945,941	1.02	1,991,168
Series O Preferred	510,068	1.04	532,944

Total Outstanding Votes			24,513,559


Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership	Percentage Owned(1)
TH Lee Putnam Ventures(2) 200 Madison Avenue, Suite 2225, New York, NY 10016	11,112,942	67.7	%

James G. Brown(3) 200 Madison Avenue, Suite 2225, New York, NY 10016	11,113,212	72.2	%

Alexander I. Paluch(4)	388,396	2.4	%

Vincent A. Wasik(5)	422,242	2.6	%

East River Ventures II, LP(6) 645 Madison Avenue, Ste 2200, New York, NY 10022	356,426	2.2	%

MCG Global LLC(7) One Morningside Drive N., Ste 200, Westport, CT 06880	166,128	1.0	%

Jeffrey Hendrickson 5674 Shaddlelee Lane W., Fort Meyers, FL 33919	36,254	*

Andrew B. Kronick(8)	13,634	*

Wesley C. Fredenburg(9)	19,358	*

Richard A. Kassar	280	*

Leslie E. Grodd	—	*

John J. Perkins	—	*


Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership	Percentage Owned(1)

Daniel R. DeFazio	—	*

All directors and officers as a group (10 persons)(10)	12,013,068	73.2	%


Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership	Percentage Owned(1)
Pequot(2) 500 Nyala Farm Road, Westport, CT 06880	1,755,428	31.4	%
Scorpion Capital Partners, L.P.(3) 245 Fifth Avenue, 25th Floor, New York, NY 10016	1,725,968	30.8	%
Special Situations Private Equity Fund, L.P.(4) 153 E. 53rd Street, 55th Floor, New York, NY 10022	511,103	9.1	%
Special Situations Fund III, L.P.(4) 153 E. 53rd Street, 55th Floor, New York, NY 10022	341,458	6.1	%
TH Lee Putnam Ventures(5) 200 Madison Avenue, Suite 2225, New York, NY 10016	595,161	10.6	%
James G. Brown(6) 200 Madison Avenue, Suite 2225, New York, NY 10016	595,161	10.6	%
Vincent A. Wasik	148,791	2.6	%
Alex Paluch	85,761	1.5	%
Richard A. Kassar	—	*
Leslie E. Grodd	—	*
John J. Perkins	—	*
Wesley C. Fredenburg	—	*
Andrew B. Kronick	—	*
Jeffrey Hendrickson	—	*
Daniel R. DeFazio	—	*
All directors and executive officers as a group (10 persons)(7)	829,713	14.8	%


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

One Morningside Drive North, Bldg. B, Suite 300, Westport, Connecticut		06880
(Address of Principal Executive Offices)		(Zip Code)


Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership	Percentage Owned(1)
Longview Fund, L.P	2,423,154	77.2	%
Longview Equity Fund, LP	405,878	12.9	%
Longview International Equity Fund	199,910	6.3	%
James G. Brown	—	*
Vincent A. Wasik	—	*
Alex Paluch	—	*
Richard A. Kassar	—	*
Leslie E. Grodd	—	*
John J. Perkins	—	*
Wesley C. Fredenburg	—	*
Andrew B. Kronick	—	*
Jeffrey Hendrickson	—	*
Daniel R. DeFazio	—	*
All directors and executive officers as a group (10 persons)	—	*


PART I.		D-3

ITEM 1.	Description of Business	D-3
ITEM 2.	Description of Property	D-8
ITEM 3.	Legal Proceedings	D-9
ITEM 4.	Submission of Matters to a Vote of Security Holders	D-10

PART II.		D-11

ITEM 5.	Market for Common Equity and Related Stockholder Matters	D-11
ITEM 6.	Selected Financial Data	D-15
ITEM 7.	Management’s Discussion and Analysis	D-16
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	D-31
ITEM 8.	Financial Statements and Supplementary Data	D-32
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	D-61
ITEM 9A.	Controls and Procedures	D-61

PART III.		D-62

ITEM 10.	Directors & Executive Officers of the Registrant	D-62
ITEM 11.	Executive Compensation	D-65
ITEM 12.	Security Ownership of Certain Beneficial Owners & Management	D-71
ITEM 13.	Certain Relationships and Related Transactions	D-76
ITEM 14.	Principal Accounting Fees and Services	D-78

PART IV.		D-79

ITEM 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	D-79

SIGNATURES		D-80

POWER OF ATTORNEY		D-80

FINANCIAL STATEMENT SCHEDULES		D-81

EXHIBIT INDEX		D-82


State	Number of Leased Facilities	State	Number of Leased Facilities
Alabama	2	Nevada	1
Arizona	4	New Jersey	2
Arkansas	4	New Mexico	1
California	6	New York	12
Colorado	1	North Carolina	9
Connecticut	2	North Dakota	1
Florida	5	Ohio	1
Georgia	3	Oklahoma	4
Idaho	3	Oregon	1
Illinois	1	Pennsylvania	5
Indiana	1	South Carolina	2
Iowa	3	South Dakota	2
Kentucky	2	Tennessee	3
Louisiana	7	Texas	12
Maryland	1	Utah	1
Massachusetts	2	Virginia	8
Michigan	4	Washington	1
Minnesota	4	Wisconsin	3
Mississippi	3	Total facilities in U.S.	127


Period	High		Low
Fiscal 2005:
First Quarter	$	31.50	$	16.50
Second Quarter		25.00		9.50
Third Quarter		18.00		3.59
Fourth Quarter		12.13		3.78

Fiscal 2004:
First Quarter	$	45.00	$	30.50
Second Quarter		41.50		28.50
Third Quarter		51.00		25.50
Fourth Quarter		35.00		14.50


	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance
Equity compensation plans approved by security holders	125,984	(1)	$	139.71	31,243	(2)
Equity compensation plans not approved by security holders(3)	320,980			15.28	NA

Total	446,964			50.36	31,243


	Year Ended
	July 2, 2005			July 3, 2004			June 28, 2003			June 29, 2002			June 30, 2001
	(In thousands, except per share data)
Selected Statements of Operations Data:
Revenue	$	256,662		$	287,918		$	307,138		$	342,727		$	471,682
Cost of services		208,342			238,320			241,136			264,766			377,498

Gross profit		48,320			49,598			66,002			77,961			94,184
Operating expenses(1)(2)		92,395			92,402			74,001			75,549			116,277
Restructuring charge(3)		1,603			356			—			—			7,060

Operating (loss) income(1)(2)(3)		(45,678	)		(43,160	)		(7,999	)		2,412			(29,153	)
Interest expense, net		(4,750	)		(4,567	)		(3,959	)		(13,068	)		(6,482	)
Common stock warrant charge		—			—			—			(1,048	)		—
Other income (expense)		584			(109	)		(301	)		1,225			364

Net loss(1)(2)(3)	$	(49,844	)	$	(47,836	)	$	(12,259	)	$	(10,479	)	$	(35,271	)

Net loss applicable to common shareholders(1)(2)(3)	$	(106,869	)	$	(77,683	)	$	(15,609	)	$	(20,357	)	$	(35,022	)

Basic and diluted loss per common share(1)(2)(3)(4)	$	(21.01	)	$	(551.89	)	$	(169.44	)	$	(290.81	)	$	(525.38	)

Basic and diluted weighted average number of common shares outstanding(4)		5,087			141			92			70			67

	As of
	July 2, 2005			July 3, 2004			June 28, 2003			June 29, 2002			June 30, 2001
Balance Sheet Data
Working capital (deficit)		(36,450	)	$	(35,543	)	$	(20,419	)	$	21,155		$	(2,809	)
Total assets		87,356			93,676			106,489			113,889			158,375
Long-term debt and capital leases		2,829			5,235			4,602			38,756			61,242
Redeemable preferred stock		—			—			—			—			35,421
Shareholders’ equity (deficit)		10,429			6,476			22,450			29,315			(31,592	)


	Fiscal year ended:
	July 2, 2005		July 3, 2004
Commercial & office products	45.8	%	34.9	%
Financial services	21.5	%	31.0	%
Healthcare	20.2	%	20.1	%
Transportation & logistics	7.2	%	7.5	%
Energy	4.1	%	4.7	%
Technology	1.2	%	1.7	%


	Years ended July
	2005			2004
Net cash used in operating activities	$	(45,275	)	$	(14,404	)
Net cash used in investing activities		(1,937	)		(5,485	)
Net cash provided by financing activities		51,798			19,520

Total increase (decrease) in cash	$	4,586		$	(369	)


	Payment Due by period												Total
Contractual Obligations	2006		2007		2008		2009		2010		Thereafter		Total
Operating leases	$	7,416	$	5,670	$	3,009	$	1,158	$	634	$	709	$	18,596
Capital leases		20		20		9		4		—		—		53
Debt		3,477		2,176		627		—		—		—		6,280

Total	$	10,913	$	7,866	$	3,645	$	1,162	$	634	$	709	$	24,929


	Expiration by period												Total
Commitment Expiration	2006		2007		2008		2009		2010		Thereafter		Total
Line of Credit	$	27,829	$	—	$	—	$	—	$	—	$	—	$	27,829

Total	$	27,829	$	—	$	—	$	—	$	—	$	—	$	27,829


CONTENTS		PAGE
Report of Independent Registered Public Accounting Firm		E-33

Consolidated Financial Statements

Consolidated Balance Sheets		E-34

Consolidated Statements of Operations		E-35

Consolidated Statement of Shareholders’ Equity		E-36

Consolidated Statements of Cash Flows		E-39

Notes to Consolidated Financial Statements		E-40


	July 2, 2005			July 3, 2004
ASSETS
Current assets:
Cash	$	5,806		$	1,220
Accounts receivable, net of allowance of $9,879 and $4,743 at July 2, 2005 and July 3, 2004, respectively		19,736			27,419
Accounts receivable—other		809			592
Prepaid workers’ compensation and auto liability insurance		3,462			6,289
Other prepaid expenses		1,983			2,185
Other current assets		290			317

Total current assets		32,086			38,022
Property and equipment, net		9,486			11,362
Goodwill		42,830			42,830
Deferred financing costs, net		1,821			235
Other assets		1,133			1,227

Total assets	$	87,356		$	93,676

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	18,962		$	26,481
Accrued insurance and claims		3,206			3,697
Accrued wages and benefits		2,623			3,738
Accrued legal and claims		7,252			2,926
Related party liabilities		2,446			—
Other accrued liabilities		2,721			5,715
Current portion of long-term debt		31,326			31,008

Total current liabilities		68,536			73,565
Long-term debt		2,829			5,235
Accrued insurance and claims		4,775			8,400
Restructuring liabilities		354			—
Other long-term liabilities		433			—
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $0.004 par value, 299,515 shares authorized 8,958 and 32,919 shares issued and outstanding at July 2, 2005 and July 3, 2004, respectively		31,548			91,051
Preferred warrants, 1,042 outstanding at July 3, 2004		—			7,600
Common stock, $0.004 par value, 700,000 shares authorized 13,065 and 208 shares issued and outstanding at July 2, 2005 and July 3, 2004, respectively		52			42
Stock subscription receivable		(7,543	)		(100	)
Additional paid-in-capital		286,896			101,120
Accumulated deficit		(300,553	)		(193,058	)
Accumulated other comprehensive income (loss)		29			(179	)

Total shareholders’ equity		10,429			6,476

Total liabilities and shareholders’ equity	$	87,356		$	93,676


	Series B Preferred Stock					Series C Preferred Stock					Series D Preferred Stock					Series F Preferred Stock					Series G Preferred Stock					Series H Preferred Stock
	Shares		Amount			Shares		Amount			Shares		Amount			Shares		Amount			Shares		Amount			Shares		Amount
Balance at June 29, 2002	2,807		$	24,304		2,000		$	13,600		1,830		$	10,808		1,066		$	11,389		5,865		$	4,379		—		$	—
Payments against stock subscription receivable	—			—		—			—		—			—		—			—		—			—		—			—
Stock option expense	—			—		—			—		—			—		—			—		—			—		—			—
Common Stock warrants issued for services rendered	—			—		—			—		—			—		—			—		—			—		—			—
Warrant exercises	—			—		—			—		—			—		—			—		—			—		—			—
Offering costs	—			—		—			—		—			—		—			—		—			(2	)	—			(386	)
Issuance of Series H Convertible Preferred Stock	—			—		—			—		—			—		—			—		—			—		500			5,000
Value of Common Warrants issued in connection with sale of Series H Preferred	—			—		—			—		—			—		—			—		—			—		—			(1,505	)
Beneficial conversion of Series H Preferred Stock	—			—		—			—		—			—		—			—		—			—		—			875
Value of Common Warrants issued in connection with sale of Series H Preferred	—			—		—			—		—			—		—			—		—			—		—			—
Conversion of Series D to Common Stock	—			—		—			—		(313	)		(2,500	)	—			—		—			—		—			—
Conversion of Series F to Common Stock	—			—		—			—		—			—		(140	)		(1,540	)	—			—		—			—
Net loss	—			—		—			—		—			—		—			—		—			—		—			—
Foreign currency translation	—			—		—			—		—			—		—			—		—			—		—			—
Comprehensive loss	—			—		—			—		—			—		—			—		—			—		—			—

Balance at June 28, 2003	2,807			24,304		2,000			13,600		1,517			8,308		926			9,849		5,865			4,377		500			3,984
Stock option expense	—			—		—			—		—			—		—			—		—			—		—			—
Issuance of restricted stock	—			—		—			—		—			—		—			—		—			—		—			—
Common Stock warrants issued for services rendered	—			—		—			—		—			—		—			—		—			—		—			—
Warrant exercises	—			—		—			—		—			—		—			—		—			—		—			—
Offering costs	—			—		—			—		—			—		—			—		—			—		—			(1	)
Conversion of preferred to common stock	—			—		—			—		—			—		(186	)		(2,047	)	(387	)		(290	)	(22	)		(222	)
Issuance of Series I Preferred Stock	—			—		—			—		—			—		—			—		—			—		—			—
Conversion of debt and interest to Series I Preferred Stock	—			—		—			—		—			—		—			—		—			—		—			—
Series I Preferred Stock issued for services rendered	—			—		—			—		—			—		—			—		—			—		—			—
Series I Preferred Stock issued for fees related to senior subordinated note	—			—		—			—		—			—		—			—		—			—		—			—
Beneficial conversion of Series I Preferred Stock	—			—		—			—		—			—		—			—		—			—		—			—
Issuance of Series J Preferred Stock	—			—		—			—		—			—		—			—		—			—		—			—
Series J Preferred Stock issued for services rendered	—			—		—			—		—			—		—			—		—			—		—			—
Beneficial conversion of Series J Preferred Stock	—			—		—			—		—			—		—			—		—			—		—			—
Payments against stock subscription receivable	—			—		—			—		—			—		—			—		—			—		—			—
Net loss	—			—		—			—		—			—		—			—		—			—		—			—
Foreign currency translation	—			—		—			—		—			—		—			—		—			—		—			—
Comprehensive loss	—			—		—			—		—			—		—			—		—			—		—			—

Balance at July 3, 2004	2,807			24,304		2,000			13,600		1,517			8,308		740			7,802		5,478			4,087		478			3,761
Stock option expense	—			—		—			—		—			—		—			—		—			—		—			—
Issuance of restricted stock	—			—		—			—		—			—		—			—		—			—		—			—
Warrants issued to contractors for services	—			—		—			—		—			—		—			—		—			—		—			—
Warrant exercises—Common Stock	—			—		—			—		—			—		—			—		—			—		—			—
Warrant exercises—Preferred Stock	—			—		825			4,953		217			1,191		—			—		—			—		—			—
Offering costs	—			—		—			—		—			—		—			—		—			—		—			—
Payments against stock subscription receivable	—			—		—			—		—			—		—			—		—			—		—			—
Additional subscription receivable	—			—		—			—		—			—		—			—		—			—		—			—
Issuance of Series J Preferred Stock	—			—		—			—		—			—		—			—		—			—		—			—
Issuance of Series K Preferred Stock	—			—		—			—		—			—		—			—		—			—		—			—
Issuance of Series L Preferred Stock	—			—		—			—		—			—		—			—		—			—		—			—
Issuance of Series M Preferred Stock	—			—		—			—		—			—		—			—		—			—		—			—
Series M Preferred Stock issued for services rendered	—			—		—			—		—			—		—			—		—			—		—			—
Series M Preferred Stock issued for interest PIK	—			—		—			—		—			—		—			—		—			—		—			—
Issuance of Series N Preferred Stock	—			—		—			—		—			—		—			—		—			—		—			—
Series n Preferred Stock issued for interest PIK	—			—		—			—		—			—		—			—		—			—		—			—
Beneficial conversion of Series J Preferred Stock	—			—		—			—		—			—		—			—		—			—		—			—
Beneficial conversion of Series K Preferred Stock	—			—		—			—		—			—		—			—		—			—		—			—
Beneficial conversion of Series L Preferred Stock	—			—		—			—		—			—		—			—		—			—		—			—
Beneficial conversion of Series M Preferred Stock	—			—		—			—		—			—		—			—		—			—		—			—
Beneficial conversion of Series N Preferred Stock	—			—		—			—		—			—		—			—		—			—		—			—
Conversion of Series B to Common Stock	(2,807	)		(24,304	)	—			—		—			—		—			—		—			—		—			—
Conversion of Series C to Common Stock	—			—		(2,825	)		(18,553	)	—			—		—			—		—			—		—			—
Conversion of Series D to Common Stock	—			—		—			—		(1,734	)		(9,499	)	—			—		—			—		—			—
Conversion of Series F to Common Stock	—			—		—			—		—			—		(740	)		(7,802	)	—			—		—			—
Conversion of Series G to Common Stock	—			—		—			—		—			—		—			—		(5,478	)		(4,087	)	—			—
Conversion of Series H to Common Stock	—			—		—			—		—			—		—			—		—			—		(478	)		(3,761	)
Conversion of Series I to Common Stock	—			—		—			—		—			—		—			—		—			—		—			—
Conversion of Series J to Common Stock	—			—		—			—		—			—		—			—		—			—		—			—
Conversion of Series K to Common Stock	—			—		—			—		—			—		—			—		—			—		—			—
Conversion of Series L to Common Stock	—			—		—			—		—			—		—			—		—			—		—			—
Reverse Common Stock Split-1 for 50
Net loss	—			—		—			—		—			—		—			—		—			—		—			—
Foreign currency translation	—			—		—			—		—			—		—			—		—			—		—			—

Comprehensive loss	—			—		—			—		—			—		—			—		—			—		—			—

Balance at July 2, 2005	—		$	—		—		$	—		—		$	—		—		$	—		—		$	—		—		$	—


Series I Preferred Stock					Series J Preferred Stock					Series K Preferred Stock					Series L Preferred Stock					Series M Preferred Stock				Series N Preferred Stock				Preferred Stock Warrants					Common Stock
Shares		Amount			Shares		Amount			Shares		Amount			Shares		Amount			Shares	Amount			Shares	Amount			Shares		Amount			Shares		Amount
—		$	—		—		$	—		—		$	—		—		$	—		—	$	—		—	$	—		1,042		$	7,600		3,663		$	15
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		200			1
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—

—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—

—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		820			4
—			—		—			—		—			—		—			—		—		—		—		—		—			—		705			2
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—

—			—		—			—		—			—		—			—		—		—		—		—		1,042			7,600		5,388			22
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		43			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		125			—
—			(657	)	—			(1	)	—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		4,859			20
15,153			22,730		—			—		—			—		—			—		—		—		—		—		—			—		—			—
901			1,351		—			—		—			—		—			—		—		—		—		—		—			—		—			—
279			419		—			—		—			—		—			—		—		—		—		—		—			—		—			—

477			715		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		3,021			4,532		—			—		—			—		—		—		—		—		—			—		—			—
—			—		67			100		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—

16,810			24,558		3,088			4,631		—			—		—			—		—		—		—		—		1,042			7,600		10,415			42
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		1,094			4
—			—		—			—		—			—		—			—		—		—		—		—		(1,042	)		(7,600	)	—			—
—			—		—			—		—					—					—		(1,043	)	—		(418	)	—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		4,912			7,368		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		9,852			14,777		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		7,000			7,000		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		6,120		22,550		—		—		—			—		—			—
—			—		—			—		—			—		—			—		98		360		—		—		—			—		—			—
—			—		—			—		—			—		—			—		196		724		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		2,544		9,375		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		24,120			96
—			—		—			—		—			—		—			—		—		—		—		—		—			—		16,898			68
—			—		—			—		—			—		—			—		—		—		—		—		—			—		25,518			102
—			—		—			—		—			—		—			—		—		—		—		—		—			—		21,806			87
—			—		—			—		—			—		—			—		—		—		—		—		—			—		6,724			27
—			—		—			—		—			—		—			—		—		—		—		—		—			—		23,967			96
(16,810	)		(24,558	)	—			—		—			—		—			—		—		—		—		—		—			—		249,160			997
—			—		(8,000	)		(11,999	)	—			—		—			—		—		—		—		—		—			—		97,561			390
—			—		—			—		(9,852	)		(14,777	)	—			—		—		—		—		—		—			—		106,006			424
—			—		—			—		—			—		(7,000	)		(7,000	)	—		—		—		—		—			—		70,000			280
																																	(640,204	)		(2,561	)
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—
—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—

—			—		—			—		—			—		—			—		—		—		—		—		—			—		—			—

—		$	—		—		$	—		—		$	—		—		$	—		6,414	$	22,591		2,544	$	8,957		—		$	—		13,065		$	52


	Stock Subscription Receivable			Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (loss)			Total
	Stock Subscription Receivable			Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (loss)			Total
Balance at June 29, 2002	$	(26	)	$	57,152	$	(99,766	)	$	(140	)	$	29,315
Payments against stock subscription receivable		18			—		—			—			18
Stock option expense		—			239		—			—			239
Common Stock warrants issued for services rendered		—			78		—			—			78
Warrant exercises		—			399		—			—			400
Offering costs		—			—		—			—			(388	)
Issuance of Series H Convertible Preferred Stock		(30	)		—		—			—			4,970
Value of Common Warrants issued in connection with sale of Series H Preferred		—			1,505		—			—			—
Beneficial conversion of Series H Preferred Stock		—			—		(875	)		—			—
Value of Common Warrants issued in connection with sale of Series H Preferred		—			2,475		(2,475	)		—			—
Conversion of Series D to Common Stock		—			2,496		—			—			—
Conversion of Series F to Common Stock		—			1,538		—			—			—
Net loss		—			—		(12,259	)		—			(12,259	)
Foreign currency translation		—			—		—			77			77

Comprehensive loss		—			—		—			—			(12,182	)

Balance at June 28, 2003		(38	)		65,882		(115,375	)		(63	)		22,450
Stock option expense		—			240		0			0			240
Issuance of restricted stock		—			45		0			0			45
Common Stock warrants issued for services rendered		—			2,566		0			0			2,566
Warrant exercises		—			1		0			0			1
Offering costs		—			—		0			0			(659	)
Conversion of preferred to common stock		—			2,539		0			0			0
Issuance of Series I Preferred Stock		—			—		0			0			22,730
Conversion of debt and interest to Series I Preferred Stock		—			—		0			0			1,351
Series I Preferred Stock issued for services rendered		—			—		0			0			419
Series I Preferred Stock issued for fees related to senior subordinated note		—			—		0			0			715
Beneficial conversion of Series I Preferred Stock		—			25,215		(25,215	)		0			0
Issuance of Series J Preferred Stock		(155	)		—		0			0			4,377
Series J Preferred Stock issued for services rendered		—			—		0			0			100
Beneficial conversion of Series J Preferred Stock		—			4,632		(4,632	)		0			0
Payments against stock subscription receivable		93			—		0			0			93
Net loss		—			—		(47,836	)		0			(47,836	)
Foreign currency translation		—			—		0			(116	)		(116	)

Comprehensive loss		—			—		0			0			(47,952	)

Balance at July 3, 2004		(100	)		101,120		(193,058	)		(179	)		6,476
Stock option expense		—			156		—			—			156
Issuance of restricted stock		—			—		—			—			—
Warrants issued to contractors for services		—			787		—			—			787
Warrant exercises—Common Stock		—			7		—			—			11
Warrant exercises—Preferred Stock		—			1,466		—			—			10
Offering costs		—			—		—			—			(1,461	)
Payments against stock subscription receivable		57			—		—			—			57
Additional subscription receivable		(7,500	)		—		—			—			(7,500	)
Issuance of Series J Preferred Stock		—			—		—			—			7,368
Issuance of Series K Preferred Stock		—			—		—			—			14,777
Issuance of Series L Preferred Stock		—			—		—			—			7,000
Issuance of Series M Preferred Stock		—			—		—			—			22,550
Series M Preferred Stock issued for services rendered		—			—		—			—			360
Series M Preferred Stock issued for interest PIK		—			—		(523	)		—			201
Issuance of Series N Preferred Stock		—			—		—			—			9,375
Series n Preferred Stock issued for interest PIK		—			—		(102	)		—			(102	)
Beneficial conversion of Series J Preferred Stock		—			7,368		(7,368	)		—			—
Beneficial conversion of Series K Preferred Stock		—			14,777		(14,777	)		—			—
Beneficial conversion of Series L Preferred Stock		—			7,000		(7,000	)		—			—
Beneficial conversion of Series M Preferred Stock		—			23,111		(23,111	)		—			—
Beneficial conversion of Series N Preferred Stock		—			4,770		(4,770	)		—			—
Conversion of Series B to Common Stock		—			24,208		—			—			—
Conversion of Series C to Common Stock		—			18,485		—			—			—
Conversion of Series D to Common Stock		—			9,397		—			—			—
Conversion of Series F to Common Stock		—			7,715		—			—			—
Conversion of Series G to Common Stock		—			4,060		—			—			—
Conversion of Series H to Common Stock		—			3,665		—			—			—
Conversion of Series I to Common Stock		—			23,561		—			—			—
Conversion of Series J to Common Stock		—			11,609		—			—			—
Conversion of Series K to Common Stock		—			14,353		—			—			—
Conversion of Series L to Common Stock		—			6,720		—			—			—
Reverse Common Stock Split-1 for 50					2,561								—
Net loss		—			—		(49,844	)		—			(49,844	)
Foreign currency translation		—			—		—			208			208

Comprehensive loss		—			—		—			—		$	(49,636	)

Balance at July 2, 2005	$	(7,543	)	$	286,896	$	(300,553	)	$	29		$	10,429


	2005			2004			2003
	(In thousands, except per share amounts)
Net loss applicable to common shareholders, as reported	$	(106,869	)	$	(77,683	)	$	(15,609	)
Add: Stock-based employee compensation expense included in reported net loss applicable to common shareholders		155			240			239
Deduct: Stock-based compensation expense determined under fair value method for all awards		(189	)		(391	)		(1,696	)

Pro forma	$	(106,903	)	$	(77,834	)	$	(17,066	)

Basic and diluted loss per common share:
As reported	$	(21.01	)	$	(551.89	)	$	(169.44	)

Pro forma	$	(21.02	)	$	(554.96	)	$	(186.26	)


	2003
Expected dividend yield	0	%
Expected stock volatility	118	%
Risk-free interest rate	2.8	%
Expected life of options	3


	Restructuring Liabilities 6/28/03		Restructuring Charges		Payments			Restructuring Liabilities 7/3/04		Restructuring Charges		Payments			Restructuring Liabilities @ 7/2/05
Employee termination benefits	$	—	$	321	$	(113	)	$	208	$	703	$	(391	)	$	520
Lease termination costs		—		—		—			—		559		—			559
Other		—		35		—			35		341		(65	)		311

	$	—	$	356	$	(113	)	$	243	$	1,603	$	(456	)	$	1,390


	July 2, 2005			July 3, 2004
	(Amounts in thousands)
Land	$	194		$	194
Buildings and leasehold improvements		1,942			1,610
Furniture, equipment and vehicles		6,169			6,851
Computer software		13,567			11,941

		21,872			20,596
Less accumulated depreciation		(12,386	)		(9,234	)

Total	$	9,486		$	11,362


	Revolving Line of Credit		Senior Subordinated Note		Other		Total
Fiscal year:
2006	$	27,829	$	3,000	$	496	$	31,325
2007		—		2,000		190		2,190
2008		—		627		9		636
Thereafter		—		—		4		4

	$	27,829	$	5,627	$	699	$	34,155


		Issued and Outstanding at July 2, 2005
Series N Convertible Preferred Stock		2,544,097
Series M Convertible Preferred Stock		6,413,538
Common Stock		13,065,375


	Options Outstanding Under the Plan *				Weighted- Average Exercise Price *
	ISO		NSO		Weighted- Average Exercise Price *
Balance at June 29, 2002	12,252		11,112		$	695.00
Granted	9,615		—			94.50
Forfeited	(3,681	)	(860	)		367.50

Balance at June 28, 2003	18,186		10,252			544.00
Forfeited	(8,674	)	(303	)		313.50

Balance at July 3, 2004	9,512		9,949			650.50
Forfeited	(1,107	)	(191	)		260.15

Balance at July 2, 2005	8,405		9,758			676.04


Options Outstanding					Options Exercisable
Range of Exercise Price	Number	Weighted- Average Remaining Contractual Life (in Years)	Weighted- Average Exercise Price		Number	Weighted- Average Exercise Price
$— –$ 100.00	7,335	5.98	$	97.62	5,570	$	98.89
$290.00–$ 492.25	6,635	5.64		328.71	6,135		331.05
$547.00–$ 677.50	140	3.42		526.86	140		526.86
$812.50–$2,718.75	4,052	4.73		2,307.68	4,052		2,307.68

	18,162	5.56		678.45	15,897		755.29


Common Stock Warrants Outstanding
Range of Exercise Price	Number	Weighted- Average Remaining Contractual Life (in Years)	Weighted- Average Exercise Price
$ 0.005– 2.50	409,220	4.15	$	0.27
11.00– 180.00	13,014	1.40		141.66
212.50– 437.50	3,667	0.90		420.96
732.50–3,231.25	301	1.01		1,610.16

	426,202	4.04	$	9.34


	July 2, 2005			July 3, 2004
Deferred Assets:
Federal net operating loss carryforward	$	71,437		$	54,148
Bad Debt		3,754			3,460
Accrued Legal		2,756			1,006
Accrued Compensation		445			236
Restructure Costs		491			—
Self Insurance		1,385			3,593
Other		12			120

Total deferred tax benefit		80,280			62,563
Deferred tax liabilities		—			—

		80,280			62,563
Less valuation allowance		(80,280	)		(62,563	)

Net deferred tax asset	$	—		$	—


	Fiscal Year Ended
	July 2, 2005		July 3, 2004		June 28, 2003
US federal statutory tax (benefit) rate	(34.0	)%	(34.0	)%	(34.0	)%
State tax (benefit), net of federal	(3.3	)%	(4.2	)%	(8.4	)%
Non-deductible items	0.1	%	0.7	%	2.4	%
Deferred valuation allowance	37.2	%	37.5	%	40.0	%

Effective tax rate	0.0	%	0.0	%	0.0	%


Year Ending June 30:
2006	$	7,416
2007		5,670
2008		3,009
2009		1,158
2010		634
Thereafter		709

Total minimum payments required(1)	$	18,596


	Three Months Ended
	July 2, 2005			April 2, 2005 (5)			January 1, 2005			October 2, 2004
Revenue	$	57,101		$	66,137		$	65,511		$	67,913
Gross profit	$	11,943			12,019			11,497			12,861
Loss from operations(1)(2)(3)	$	(18,849	)		(12,739	)		(8,528	)		(5,562	)
Net loss applicable to common shareholders(1)(2)(3)	$	(24,563	)		(37,618	)		(20,088	)		(24,600	)
Basic and diluted net loss per share(1)(2)(3)(4)	$	(1.88	)	$	(5.49	)	$	(75.71	)	$	(109.19	)


	Three Months Ended (1)
	July 3, 2004			March 27, 2004			December 27, 2003			September 27, 2003
Revenue	$	72,023		$	67,986		$	71,270		$	76,639
Gross profit	$	9,087			11,463			13,461			15,587
Loss from operations	$	(25,580	)		(9,085	)		(8,009	)		(486	)
Net loss applicable to common shareholders	$	(31,247	)		(9,786	)		(34,877	)		(1,773	)
Basic and diluted net loss per share	$	(204.58	)	$	(65.27	)	$	(318.98	)	$	(16.34	)


Name	Age	Position
Vincent A. Wasik	61	Chairman of the Board and Chief Executive Officer
James G. Brown	41	Director
Alex Paluch	49	Director
Richard A. Kassar	58	Director
Leslie E. Grodd	59	Director
John J. Perkins	74	Director
Wesley C. Fredenburg	54	General Counsel and Secretary
Andrew B. Kronick	42	Senior Vice President, Sales
Kay Perry Durbin	45	Senior Vice President, Workforce Services
Jeffrey Hendrickson	60	President and Chief Operating Officer
Daniel R. DeFazio	42	Chief Financial Officer