##### Table of Contents









UNITED STATES OF AMERICA SECURITIES AND
EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


Form 10-K

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the Fiscal Year ended June 30,
    2003                                                 
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission file number: 1-71341

Mercury Air Group, Inc.

(Exact Name of Registrant as Specified in Its
Charter)


|                                                                                              |  |                                            
|--------------------------------------------------------------------------------------------- |  | -------------------------------------------
|Delaware                                                                                      |  | 11-1800515                                 
|(State or Other Jurisdiction of
    Incorporation or Organization)                            |  | (I.R.S. Employer
    Identification Number)
|                                                                                             
|5456 McConnell Avenue
    Los Angeles, California(Address of Principal Executive
    Offices) |  | 90066(Zip Code)                            

Registrants Telephone Number, Including
Area Code:

(310) 827-2737


Securities Registered Pursuant to
Section 12(b) of the Act:

|                              |  |                                          
|----------------------------- |  | -----------------------------------------
|Title of Each Class           |  | Name of Each Exchange on Which Registered
|                              |  |                                          
|Common Stock  Par Value $.01 |  | American Stock Exchange                  
|                              |  | Pacific Stock Exchange                   

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 o          No þ

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.     Yes o          No þ

Indicate by check
mark whether the registrant is an accelerated filer (as defined
by Rule 12b-2 of the
Act).     Yes o          No þ

As of
December 5, 2003, 3,298,418 shares of the Registrants
Common Stock were outstanding. Of these shares, 968,974 shares
were held by persons who may be deemed to be affiliates. The
2,329,444 shares held by non-affiliates as of December 5,
2003 had an aggregate market value (based on the closing price
of these shares on the American Stock Exchange of $7.34 per
share on December 31, 2002) of $17,098,119. As of
December 5, 2003, there were no non-voting shares of common
stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the
Proxy Statement which is to be distributed in connection with
the Annual Meeting of Stockholders scheduled to be held in
February 2004 are incorporated by reference into Part III
of this Form 10-K.

(The Exhibit Index May Be Found at Page 36)



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TABLE OF CONTENTS



|              |                                                                                                |  |  |  |  |  |  | 
|------------- | ---------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. Business                                                                              
|              | Item 2. Properties.                                                                           
|              | Item 3. Legal Proceedings.                                                                    
|              | Item 4. Submission of Matters to a Vote of Security Holders.                                  
|PART II      
|              | Item 5. Market for Registrants Common Equity and Related Stockholder Matters.                
|              | Item 6. Selected Financial Data.                                                              
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
|              | Item 7A. Quantitative and Qualitative Disclosures About Market Risk.                          
|              | Item 8. Financial Statements and Supplementary Data.                                          
|              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 
|              | Item 9A. Control and Procedures.                                                              
|PART III     
|              | Item 10. Directors and Executive Officers of the Registrant.                                  
|              | Item 11. Executive Compensation.                                                              
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management.                      
|              | Item 13. Certain Relationships and Related Transactions.                                      
|              | Item 14. Principal Accountant Fees and Services.                                              
|PART IV      
|              | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.                     
|SIGNATURES   
|EXHIBIT 4.17 
|EXHIBIT 4.18 
|EXHIBIT 4.19 
|EXHIBIT 4.20 
|EXHIBIT 10.34
|EXHIBIT 21.1 
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 



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PART I






|        |         
|------- | --------
|Item 1. | Business

Mercury Air Group, Inc., a Delaware Corporation,
was organized in 1956 as a New York Corporation and provides a
broad range of services to the aviation industry through four
principal operating units: Mercury Air Centers, Inc. (Air
Centers), a California Corporation, Mercury Air Cargo,
Inc. (Air Cargo), a California Corporation,
MercFuel, Inc. (MercFuel), a Delaware Corporation
and Maytag Aircraft Corporation (Maytag or
Government Contract Services), a Colorado
Corporation, a provider of government contract services. The Air
Centers operations consist of aviation fuel sales, commercial
aircraft refueling operations (into-plane), aircraft
ground support services, aircraft hangar services, aircraft
parking (aircraft tie-down services) and aircraft
maintenance at certain Air Center locations, known as fixed base
operations (FBOs) for commercial, private,
general aviation and United States Government aircraft
(collectively FBO services). Air Cargos
operations consist of cargo handling, the sale of cargo capacity
on other airlines (Cargo Space Logistics), and
general cargo sales agent services. MercFuels operations
consist of the sale and delivery of fuel, primarily aviation
fuel, to domestic and international commercial airlines,
corporate aviation and air freight airlines. Maytags
government contract services consist of the following services
primarily for agencies of the United States Government: aircraft
refueling and fuel storage operations, base operations support
(BOS) services, air terminal and ground handling
services and weather observation and forecasting services. The
Company also had a fifth operating unit, RPA Automation
Services, Inc. (RPA) which was sold on July 3,
2001 and is reflected as a discontinued operation in the
consolidated statements of operations.

On October 28, 2003, the Company announced
that it had entered into a definitive agreement, subject to the
Companys stockholders approval, completion of due
diligence, and regulatory agencies approvals and consents,
to sell 100% of the outstanding common stock of Air Centers to
Allied Capital Corporation (Allied) for
$70 million, subject to adjustments. In accordance with the
terms of the definitive agreement, as amended, closing of the
transaction is to occur on January 16, 2004 but the closing
date can be extended, at Allieds discretion, to
April 16, 2004. The Company expects closing to occur in the
Companys third quarter of fiscal 2004. For more
information on this pending transaction, refer to the Narrative
Description of the Business for Air Centers.

As used in this Annual Report, the term
Company or Mercury refers to Mercury Air
Group, Inc. and, unless the context otherwise requires, its
subsidiaries. The Companys principal executive offices are
located at 5456 McConnell Avenue, Los Angeles, California, 90066
and its telephone number is (310) 827-2737.



| |            
| | -----------
| | Restatement

This filing includes a restatement of the
Companys fiscal 2002 and 2001 financial statements, each
of the first three quarters of fiscal 2003 financial information
and the corresponding Managements Discussion and
Analysis related to the following items: (1) To
record as of June 30, 2002 an accrual of $459,000
(representing increased rent expense of $789,000 net of
retroactive recoverable sublease rental income of $330,000) for
a rent increase related to one of Air Cargos warehouse
facilities at Los Angeles International Airport which is
retroactive to June 18, 2001. The Company had previously
recognized no accrual for this retroactive rent increase in its
fiscal 2002 financial statements, as the Company was disputing
the amount of the increase; however, the Company subsequently
determined that it had received information regarding the
proposed rent increase prior to the issuance of its fiscal 2002
financial statements which provided substantial evidence that an
obligation existed at the balance sheet date and that the amount
of the liability could be reasonably estimated; (2) To
record additional compensation expense of $430,000 during the
fourth quarter of fiscal 2002 in connection with the 2002
Management Stock Purchase Plan, pursuant to which the Company
had loaned certain officers in May 2002 a total of
$3.9 million to purchase shares of the Companys stock
from CFK Partners (which is owned by three of the Companys
directors) at $15.00 per share, as adjusted for the one-for-two
reverse stock split effective June 18, 2003. The trading
price of the shares at this time was $9.80 per share. A full
recourse loan was made to the Companys Chief Executive
Officer (CEO) in the amount

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of $2.9 million, and non-recourse loans
totaling $1 million were made to the other executives
(Other Executives). The Company originally recorded
a compensation charge of $356,000 in connection with this
transaction to write down the non-recourse loans based on the
difference between the purchase price paid by the Other
Executives for the shares and the market value of such shares at
that time. The Company has determined that it was proper to
record the compensation expense of $356,000 to reflect the
benefit received by CFK Partners represented by the purchase
price paid by the Other Executives in excess of the market value
of such shares at that time; however, the non-recourse loans
should not have been written-down, but rather additional paid-in
capital should have been credited for $356,000. In addition, the
Company determined that it should have recorded additional
compensation expense of $436,000 related to the recourse loan
and the shares purchased by the CEO to also reflect the benefit
received by CFK Partners represented by the purchase price paid
by the CEO for his shares in excess of the market value of such
shares at that time. The benefit attributed to the CEOs
interest in CFK Partners has been deducted in determining the
compensation expense related to these loans. Accordingly, the
fiscal 2002 financial statements have been restated to record in
the fourth quarter of fiscal 2002 the reversal of the write-down
of the non-recourse loans and a credit to additional paid-in
capital for $356,000, and to record additional compensation
expense of $436,000. The non-recourse loans are being accounted
for as a variable stock plan pursuant to Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to
Employees, and the recourse loan is being accounted for as
a fixed stock plan; (3) To reverse the sale-leaseback
accounting associated with the sale of a building housing the
Companys corporate headquarters and accounting for this
transaction as a financing effective January 2002. The Company
sold the corporate headquarters to CFK Realty Partners, LLC
(CFK Realty), a wholly owned subsidiary of CFK
Partners, and concurrently entered into a ten-year lease of the
property. However, the Company has determined that CFK Realty
was not sufficiently capitalized to permit sale-leaseback
accounting and the non-consolidation of CFK Realty. Accordingly,
the fiscal 2002 financial statements have been restated to fully
consolidate CFK Realty effective in the third quarter of fiscal
2002, resulting in land and building totaling $1.8 million,
net of accumulated depreciation, being reinstated on the books
of the Company, recording of debt related to a loan of
$3.2 million incurred by CFK Realty to finance the
acquisition, reversal of a deferred gain of $2.1 million
recorded by the Company at the time of the transaction, and the
reversal of rent expense and the recording of depreciation
resulting in additional pre-tax expense of $23,000 for the third
and fourth quarters of fiscal 2002 combined; and (4) to
adjust opening retained earnings by $363,000 to correct for
income tax adjustments that should have been recorded in years
prior to 2001.


The fiscal 2002 restatement resulted in a
reduction in previously recorded net income of $516,000. The
restatement for fiscal 2002 reduced previously reported basic
and diluted net income per share by $0.15 and $0.16,
respectively. The Companys fiscal 2002 and 2001 financial
statements, previously audited by other independent auditors,
were re-audited by PricewaterhouseCoopers LLP.

Narrative Description of the
Business



| |            
| | -----------
| | Air Centers

Mercury currently provides Fixed Base Operations
(FBO) services at 19 airports throughout the
United States through its wholly owned subsidiary, Mercury Air
Centers, Inc. At each FBO location, Air Centers:
1) conducts retail aviation fuel sales and aircraft
refueling operations which service principally corporate,
private and fractional ownership aircraft and to some extent
refueling operations to commercial aircraft, 2) provides
aircraft hangar rental, except at William B. Hartsfield
International Airport in Atlanta (Hartsfield
Airport) and Los Angeles International Airport
(LAX), and aircraft tie-down services, and
3) at a few FBO sites, provides aircraft maintenance. At
each FBO site, except at LAX and Long Beach International
Airport, the Company maintains administrative offices and
provides rental office space for its customers. Air Centers owns
and leases refueling vehicles and maintains fuel storage tanks
as required to support the fuels sales and into-plane fueling
operations. During the fiscal year ended June 30, 2003, the
Company sold 34 million gallons through its aviation fuel
sales operations. Air Centers revenue for the year ended
June 30, 2003 increased 1.9% from the 2002 fiscal year to
$96.2 million, representing 22.4% of the Companys
total revenue for the year. Air Centers properties and
facilities are leased from the respective airport authorities.

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In June 2002, the Company sold its Air
Centers FBO at Bedford, Massachusetts to Signature Flight
Support Corp. for $15.5 million, resulting in a pre-tax
gain of $8.9 million. During the fiscal year ended
June 30, 2002, the Bedford FBO had retail aviation fuel
sales volume of 2.9 million gallons, or 8.2% of Air
Centers retail sales volume for fiscal 2002. The net
proceeds from this sale were used to reduce the outstanding
principal of long-term debt.

The Companys Air Centers have grown through
a combination of organic growth by facility enhancements and
expansion and through the strategic acquisition of additional
operating locations. In fiscal 2001, the Company acquired the
leasehold interest and other assets of an FBO in Birmingham,
Alabama at a cost of approximately $6.6 million, which was
funded through the Companys then existing senior credit
facility. Also, the Company acquired the leasehold interest and
other assets of an FBO located in Tulsa, Oklahoma for
$6.2 million which was also funded through the
Companys then existing senior debt facility. In fiscal
2000, the Company acquired FBO operations located in Fort Wayne,
Indiana, and in South Carolina at the Charleston International
Airport and the Johns Island Executive Airport.

In its continuing effort to expand and improve
the quality of service provided through its Air Centers
network, the Company is currently: 1) constructing a new
hangar at its Charleston, South Carolina FBO; 2) finalizing
plans to relocate and upgrade its FBO facilities at Los Angeles
International Airport; 3) developing plans to upgrade and
expand its FBO operations in Santa Barbara, California;
4) converting an existing hangar at the Ontario
International Airport to better accommodate private corporate
aircraft; and 5) effective August 1, 2003 has started
providing fueling services at Long Beach International Airport
and is developing plans to expand this operation into a full
service FBO with a financial partner.

On October 28, 2003, the Company announced
that it had entered into a definitive agreement, subject to the
Companys stockholders approval, completion of due
diligence and regulatory agencies approvals and consents,
to sell 100% of the outstanding common stock of Air Centers to
Allied for $70 million (the FBO Sale). The
actual cash proceeds to be received by the Company is subject to
the establishment of an escrow account of $8.3 million
associated with the month-to-month lease terms of the Air
Centers FBO located at the Hartsfield Airport,
reimbursement for certain FBO capital investments made by the
Company, minimum Air Center working capital at closing and other
customary terms and conditions. In accordance with the terms of
the definitive agreement, as amended, the FBO Sale is to close
on January 16, 2004 but the closing date can be extended,
at Allieds discretion, to April 16, 2004. The Company
expects the FBO Sale to close in the Companys third
quarter of fiscal 2004.



| |                     
| | --------------------
| | Air Cargo Operations

The Companys Air Cargo operations are
conducted through its wholly-owned subsidiary, Mercury Air
Cargo, Inc. which provides the following services: cargo
handling, cargo space logistics services, and general cargo
sales agent services. As operations in fiscal 2002 were
adversely impacted by the tragic events of September 11,
2001 and the general decline in worldwide economic conditions,
Air Cargo revenue for the fiscal year ended June 30, 2003
increased 16.2% from the 2002 fiscal year to $32.7 million,
representing 7.6% of the Companys total revenue for the
year. The revenue improvement was largely due to increased
volume, partially offset by downward price pressures on the
services Air Cargo provides. Volumes were also favorably
impacted by a west coast dock strike during the Companys
second quarter of fiscal 2003 that resulted in the increased use
of air cargo due to the closure of ocean ports. These factors
resulted in an increase in Air Cargo gross margin in 2003 to
$2.6 million, an increase of $1.7 million from fiscal
2002.



| |               
| | --------------
| | Cargo Handling

Air Cargo provides domestic and international air
cargo handling, air mail handling and bonded warehousing
(collectively Cargo Handling). Air Cargo handles
cargo at Los Angeles International Airport (LAX), William B.
Hartsfield International Airport (ATL  Atlanta, GA),
Dorval International Airport (YUL  Montreal, Canada),
Mirabel International Airport (YMX  Montreal, Canada)
and Lester B. Pearson International Airport (YYZ 
Toronto, Canada). Since February 2001, operations at ATL have
been handled by Lufthansa Handling under the terms of a ten-year
sub-lease of a 104,646 square foot

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warehouse and operations area. Air Cargo
continues to provide cargo handling at ATL utilizing Lufthansa
Handling as a sub-contract service provider for the operations.
In fiscal 2003, the Cargo Handling operations comprised 78% of
Air Cargos revenue.


Air Cargo provides cargo handling services at
four warehouse locations at LAX making Air Cargo the largest
independent cargo handling company at LAX and one of a small
number of non-airline air cargo service providers of contractual
cargo containerization and palletization for domestic and
international airlines as well as cargo airlines at the airport.
The largest of Air Cargos warehouses at LAX is a 174,000
square foot warehouse (the Avion Warehouse) at which
the Company completed an extensive renovation of a previously
existing airport facility and commenced operations in April
1998. The lease for this warehouse facility is currently
scheduled to expire in 2006.

In April 2002, the Company received a notice from
Los Angeles World Airports (LAWA) of a proposed rent
increase for the Avion Warehouse retroactive to June 18,
2001. In response to this notice, the Company submitted protests
to the LAWA Staff and Board of Commissioners regarding the
proposed increase on the basis that: 1) the Company had
made a substantial investment in the warehouse facility and the
proposed rental increase would greatly reduce the Companys
ability to achieve an acceptable rate of return on the
Companys investment to date; 2) if any increase is to
be made, it should be determined based on the Company being the
developer of the facility and not strictly a tenant; and
3) that the amount of the proposed increase is not
justified given the general business environment of the air
cargo handling operations. In response to the Companys
protests to the proposed increase, in September 2002 the Company
received a revised notice from LAWA of a reduced proposal for a
rental increase for the Avion Warehouse. The LAWA Staff intend
to present their recommended rental increase to the LAWA Board
of Commissioners for approval in late January 2004. From
June 18, 2001 through June 30, 2003, the accumulated
amount of the retroactive rent increase is $1,579,000 which will
be partially offset by recoverable retroactive sublease rental
income of $661,000. The LAWA Staff has indicated that the
retroactive portion of the rent increase would be payable by the
Company in equal month installments over the remaining term of
the lease agreement, which is scheduled to expire in June 2006.
The proposed monthly rent, on a go-forward basis, would increase
by $64,600, or 35%, from the existing monthly rent. The Company
has accrued $459,000 for the retroactive rent adjustment, which
is net of increased recoverable retroactive sublease rental
income, as of June 30, 2002 and has accrued an additional
$114,750 on a quarterly basis in fiscal 2003, resulting in a
total accrual of $918,000 as of June 30, 2003. As discussed
in Item 1. Business under Restatement and Note 1 to
the consolidated financial statements, the fiscal 2002 financial
statements and each of the first three quarters of fiscal 2003
were restated related to this retroactive rent increase.

Air Cargo competes in the cargo handling business
based on the quality and timeliness of the service it provides
along with a competitive pricing structure. Long-term growth in
Air Cargos handling business will be realized by
continuing to add new customers to its existing cargo handling
locations or by increased volume from its existing customer base.



| |                           
| | --------------------------
| | Space Logistics Operations

Air Cargo brokers cargo space on flights within
the United States and on international flights to Europe, Asia,
the Middle East, Australia, Mexico and Central and South
America. Space logistics involves the contracting for bulk cargo
space on airlines and selling that space to customers with
shipping needs. Air Cargo has an established network of shipping
agents who assist in obtaining cargo for shipment on space
purchased from various airlines, and who facilitate the delivery
and collection of freight charges for cargo shipped by Air
Cargo. In fiscal 2003, the space logistics revenue comprised 8%
of Air Cargos revenue.

Air Cargos contract with South African
Airways (SAA) to utilize all of SAAs cargo
capacity on its passenger flights from the United States to
South Africa was automatically extended for another year
beginning in April 2003. Air Cargos one-year commitment
for these routes is approximately $4.6 million. This
contract allows Air Cargo to effectively arrange and schedule
cargo shipments and optimize the return to SAA and to its
freight forwarders while providing a reasonable margin to Air
Cargo.

Unlike a cargo airline which operates its own
aircraft, Air Cargos space logistics business arranges for
the purchase of cargo space on scheduled flights or supplemental
flights at negotiated rates. Air Cargo is thereby

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able to profit from the sale of air cargo space
worldwide without the overhead cost of owning and operating an
aircraft. In some instances, Air Cargo has entered into fixed
minimum commitments for cargo space resulting in exclusive or
preferred rights to broker desirable cargo space profitably. Due
to the large volume of cargo space contracted, Air Cargo is able
to secure air cargo space at rates lower than an individual
freight forwarder could arrange. Air Cargo is then able to pass
on these lower rates to its customers and still realize a profit.




| |                             
| | ----------------------------
| | General Sales Agent Services

Air Cargo also serves as a general sales agent
(GSA) directly through its subsidiaries, Hermes
Aviation, Inc., Hermes Aviaciaon de Mexico, S.A. de C.V., and
Aero Freightways, Inc. of Canada for airlines in the Far East,
Canada, Mexico, Central and South America and in the United
States. In this capacity, Air Cargo sells the transportation of
cargo on its clients airline flights, using our
clients own airway bills. Air Cargo earns a commission
from the airlines for selling their cargo space. In fiscal 2003,
the GSA business revenue comprised 9% of Air Cargos total
revenue. As with its space logistics business, the growth for
Air Cargos GSA business is not constricted by requirements
for physical facilities or by large capital commitments.



| |                    
| | -------------------
| | Mercury World Cargo

Using its Part 135 cargo airline certificate,
which qualifies Mercury World Cargo (MWC) as an
airline certified to transport cargo in accordance with Federal
Aviation Administration and the Department of Transportation
regulations, MWC is able to enter into interline agreements
(contracts between carriers for transportation of cargo) with
other airlines worldwide. MWC operates a small plane under this
certificate. Using the MWC airway bill (an airway bill is a bill
of lading for the airline industry) as the cargo transportation
document and the other airlines air cargo capacity, MWC is
able to provide a service for both freight forwarders and
airlines. Effectively, MWC provides a secondary brand to
airlines that prefer not to utilize their own brand for
discounted freight. During its first full year of operations,
MWC had revenues of approximately $1 million. Revenue in
fiscal 2004 is expected to increase as MWC realizes the full
year benefit of agreements signed in fiscal 2003.



| |         
| | --------
| | MercFuel

The Companys fuel sales operations, except
for aviation fuel sales through the Companys Air
Centers business unit, are handled through MercFuel, Inc.,
a wholly owned subsidiary of the Company. The Company
transferred all of its assets and business activities associated
with its fuel sales operations to MercFuel in October 2000.
MercFuel facilitates the management and distribution of aviation
fuel serving as a reseller of aviation fuel for major oil
companies, affording the oil companies indirect access to
certain customers without the credit risk or administrative
costs associated with the management of these customer accounts.
MercFuel competes based on the quality of its services by
offering a combination of reliable and timely supply,
competitive pricing and credit terms, and a real time analysis
of the availability, quantity and pricing of fuel in airports
and terminals throughout the world. Mercfuel works through third
party suppliers for fuel storage and into-plane delivery.

MercFuels sales activities continue to
provide a major revenue source for the Company, representing
65.3% of the Companys total revenue for the fiscal year
ended June 30, 2003, an increase from 60.7% of the
Companys total revenue in fiscal 2002. Sales volume in
fiscal 2003 was 286.9 million gallons, basically unchanged
from last year despite the loss of National Airlines Inc.
(National) as a customer in November 2002 due to
Nationals cessation of operations.

|             |  |                     |       |      |  |      |       |      |  |   |       |  |  |   |       | 
|------------ |  | ------------------- | ----- | ---- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|             |  |                    
|             |  | Year Ended June 30,
|             |  |                    
|             |  | 2003                |       | 2002 |  | 2001 |       | 2000
|             |  |                     |       |      |  |      |       |     
|             |  |                    
|             |  | (In millions)      
|Fuel Revenue |  | $                   | 280.1 |      |  | $    | 232.6 |      |  | $ | 318.8 |  |  | $ | 202.8 | 
|Gallons Sold |  |                     | 286.9 |      |  |      | 287.7 |      |  |   | 309.4 |  |  |   | 232.0 | 

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MercFuel is able to leverage its scale of
operations to obtain credit terms and competitive pricing from
its suppliers that may not be afforded to MercFuels
customers on an individual basis. Many of the major oil
companies that provide fuel supply to MercFuel have limited
infrastructure to support the small to medium sized and foreign
carriers that comprise a large portion of MercFuels
customer base. This arrangement allows MercFuel to offer more
competitive pricing and credit terms to its customers than they
would commercially be able to obtain directly from the major oil
companies. With over 24 years of service in the aviation
fuel reselling and distribution industry, MercFuel has
established itself as a reliable and price competitive reseller
which has resulted in the establishment of significant contracts
with smaller and medium sized commercial carriers and business
fleet managers. MercFuels resale service provides an
established distribution network for oil companies worldwide and
through MercFuel provides them access to certain markets and
customers which they do not directly serve. In addition,
MercFuel provides the administrative support required in serving
this customer base which would otherwise be required by the
major oil companies and assumes the credit risk of supplying
this customer base. MercFuels experience in the aviation
fuel reselling industry allows it to assess those risks in a
more effective and efficient manner. For more information on
MercFuels customers, please refer to the section titled
Major Customers and Foreign Customers included in
this Annual Report on Form 10-K.

In many cases, the small to medium sized
commercial carriers and business fleet managers are subject to
securing aviation fuel supply on the spot market, which can vary
significantly on a day-to-day basis. MercFuel provides a
24-hour, 7 days a week single source coordinated
distribution system on a national and international basis
through its network of over 400 third party supply locations
nationally and 1,000 international locations through which
customers can purchase fuel. As a result of this integrated
network, MercFuel is able to provide its customers with reliable
and competitive fuel pricing from airport to airport enabling
its customers to reduce their exposure to the volatile spot
market.

Through its automated on-line system, MercFuel
provides its customers with online pricing, fuel location and
ordering information. Accordingly, MercFuel is able to
streamline its customers fuel purchase process and reduce
their administrative costs associated with fuel logistics by
providing a single source through which fuel procurement can be
arranged and automatically released to the business jet customer.

MercFuels continued success in attracting
and retaining its customer base is due, in part, to its
willingness to extend credit on an unsecured basis to many of
its customers. Otherwise, these customers would be required to
prepay, post letters of credit with their suppliers, or pay on
shorter credit terms. MercFuel recognizes that active oversight
and management of credit risk is essential to the Companys
success. The Companys executive staff and MercFuel
management meet regularly to assess and evaluate MercFuels
credit exposure, in the aggregate and by individual customer.
The Companys credit committee is responsible for approving
credit lines above certain pre-established amounts, and for
setting and maintaining credit standards to ensure overall
credit quality and optimize its credit portfolio.

MercFuel purchases aviation and other fuel at
prices that are generally tied to market based formulas from
several major oil companies and certain independent and state
owned oil companies to meet the expected requirements of its
customers. From time-to-time, MercFuel will commit to purchase a
fixed volume of fuel, at a fixed price, over an established
period of time to meet selected customers purchase
requirements at set locations. MercFuels payment terms
generally range from 10 to 20 days, except for bulk
purchases which are generally payable in shorter periods.
MercFuel has agreements with certain suppliers under which
MercFuel purchases a minimum amount of fuel each month at prices
which approximate the market price. MercFuel also makes
occasional spot purchases of fuel to take advantage of market
differentials. To ensure supply availability, MercFuel maintains
limited inventories at various locations. The amount of
inventory held at any particular point in time varies depending
on market conditions.

Outside of the United States, MercFuel does not
maintain fuel inventory, but arranges to have fuel delivered
directly to its customers aircraft through into-plane
arrangements. Domestically, fuels sales are made on either an
into-plane basis where fuel is supplied directly into
MercFuels customers aircraft with fuel provided by
MercFuels supplier or the fuel is delivered from
MercFuels inventory. While inventory is maintained at
multiple locations, inventory levels are maintained at minimum
levels.

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MercFuel purchases its fuel from suppliers
worldwide at prices that are generally tied to market-based
formulas. MercFuel is currently extended unsecured credit for
its fuel purchases. If MercFuels relationship with any of
these key suppliers terminates, MercFuel may not be able to
obtain sufficient quantity on competitive terms to meet its
customers demands. MercFuel may encounter difficulty
and/or delays in securing aviation fuel from alternative
sources. In addition, financial or supply disruptions
encountered by MercFuels suppliers could also limit the
availability of fuel supplied to MercFuel.

For the fiscal year ended June 30, 2003,
MercFuels average cost of fuel was 94 cents per
gallon, an increase of 17 cents per gallon, or 22% from
fiscal 2002. Although MercFuel believes that there are currently
adequate aviation fuel supplies to meet its customers
needs, events outside of MercFuels control have in the
past resulted in, and could in the future result in, spot
shortages or rapid price changes. Although MercFuel has
generally been able to pass through fuel price changes to its
customers, extended periods of high fuel costs could adversely
affect MercFuels ability to purchase fuel in sufficient
quantities because of credit limits placed on MercFuel by its
fuel suppliers and availability under the Companys credit
facility.



| |                             
| | ----------------------------
| | Government Contract Services

Mercury conducts its government contract services
through its wholly owned subsidiary Maytag Aircraft Corporation,
which is headquartered in Colorado Springs, Colorado. Maytag
provides aircraft refueling, air terminal services, base
operating support, and weather forecasting and data services in
17 countries on four continents.



| |                   
| | ------------------
| | Aircraft Refueling

Maytag provides aircraft refueling and related
services at 12 military bases in the United States, one in
Greece, and one in Okinawa, Japan. Maytags refueling
contracts generally have a term of four years, with expiration
dates ranging from December 2003 to March 2006. Under the terms
of its refueling contracts, Maytag supplies all necessary
personnel and equipment to operate government-owned fuel storage
facilities and provides 24-hour refueling services for a variety
of military and contractor aircraft. All fuel handled in these
operations is government owned. In connection with its
government contract refueling business, Maytag owns, leases, and
operates a fleet of refueling trucks and other support vehicles.
For fiscal 2003, the aircraft refueling contracts generated
revenue and pretax earnings of $8.7 million and
$0.7 million, respectively.



| |                      
| | ---------------------
| | Air Terminal Services

Maytag provides air terminal and ground handling
services to the United States (U.S.) Government at
18 locations under five contracts. The contracts cover two
U.S. military bases (one each in Japan and Korea) and
sixteen international airports in Latin America, Japan, Korea
and Kuwait. Air terminal services contracts are generally for a
base period of up to one year, with government options for
multiple one-year extension periods. The expiration dates for
Maytags air terminal contracts range from March 2004
(Kuwait) to September 2004 (Latin America). Maytags
multi-site Latin America air terminal contract has options to
extend through September 2005. Air terminal and ground handling
services include the loading and unloading of passengers and
cargo, transient alert, and flight planning services. For fiscal
2003, the air terminal services contracts generated revenue and
pretax earnings of $8.2 million and $2.3 million,
respectively.



| |                                
| | -------------------------------
| | Base Operating Support Services

Maytag provides base operating support
(BOS) services on a subcontract basis at Niagara
Falls, NY, Westover, MA, Youngstown, OH and Willow Grove, PA Air
Reserve Facilities and Patrick Air Force Base. Under the terms
of the subcontracts, Maytag provides multi-function services,
including fuel management, traffic management, airfield
management, air terminal operations, vehicle operations and
maintenance services, and meteorological services. Contract
expirations range from March 2004 to September 2004, with one to
three pre-priced one-year options, except for Niagara Falls
which expires in March 2004 and is up for competitive bidding.
Although there can be no assurance, the Company believes the
United States

8



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Government will exercise all options to extend
the contracts. For fiscal 2003, the BOS contracts generated
revenue and pretax earnings of $5.9 million and $40,000,
respectively.




| |                      
| | ---------------------
| | Weather Data Services

Maytag provides weather observation and/or
forecasting services at six locations within the United States
pursuant to six contracts (the Weather Data
Contracts) with the United States Government comprised of
two weather observation and forecasting contracts and two
weather observation contracts. The Weather Data Contracts
provide firm fixed prices for specified services and are
generally for a base period of one year, with multiple one-year
options at the United States Governments election. The
Weather Data Contracts for weather observation have an
expiration date of September 30, 2004 with three pre-priced
option years to follow. The Weather Data Contract for weather
observation and forecasting within the U.S. Air Force
Academy has options to extend through January 2005. For fiscal
2003, the Weather Data Contracts generated revenue and pretax
earnings of $1.6 million and $226,000, respectively.

All of Maytags government contracts are
subject to competitive bidding. Refueling, air terminal, and
weather forecasting contracts are generally awarded to the
offeror with the proposal that represents the best
value to the government. In a best value
competition, the proposals are evaluated on the basis of price,
past performance history of the offeror, and the merit of the
technical proposal, creating a more subjective process. Weather
Data Contracts are generally awarded to the offeror with the
lowest priced technically acceptable proposal.

Maytags contracts are all subject to
termination at the discretion of the United States Government,
in whole or in part. Termination of a contract may occur if the
United States Government determines that it is in its best
interest to discontinue the contract, in which case closure
costs will be paid to Maytag. Termination may also occur if
Maytag defaults under a contract. Maytag has never experienced
any such default termination.

As Maytags business activities are
associated with government contracts that have set termination
dates to enable the government to renew the contracts through a
competitive bid process, one of Maytags business
activities is the participation in the preparation and
submission of contract bids for contracts currently awarded to
Maytag and for new contracts that fit the type of activities
(refueling, base operating support, air terminal services and
weather observation and forecasting) in which Maytag is
involved. In addition, the governmental agencies have the option
to extend the expiration dates of existing contracts at their
discretion. Maytag therefore will have a continuing opportunity
to renew the terms of existing contracts as they expire and/or
engage in new contract activities through a successful bidding
process. However, as the awarding of contracts is based upon the
decision of the government agencys representative for the
contract bids submitted, Maytag may not be able to retain
existing contracts upon expiration and may be unsuccessful in
bidding on new contracts.

RPA

On July 3, 2001, the Company sold
substantially all of the assets of RPA (now Jupiter Airlines
Automation Services, Inc.) for cash consideration of
$3.6 million. The Company realized an after tax loss of
approximately $0.5 million on the sale of this discontinued
operation.

Major Customers and Foreign
Customers

During fiscal 2003, EVA Airways Corporation
accounted for approximately 13% of Air Cargos revenue.
AirTran Airways represented approximately 29% of MercFuels
revenue, and 19% of consolidated revenue, for fiscal 2003.
During fiscal 2003, government contract services consisted
entirely of revenues from agencies of the United States
Government which represented approximately 6% of the
Companys consolidated revenue. No other customer accounted
for over 10% of Mercurys consolidated revenue or 10% of
revenues for any of the four reporting units.

9



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The Company does business with a number of
foreign airlines, principally in the sale of aviation fuels. For
the most part, such sales are made within the United States and
utilize the same assets and generally the same personnel as are
utilized in the Companys domestic business. Revenues
related to these foreign airlines amounted to approximately 23%,
18% and 18% of consolidated revenues for the fiscal years ended
June 30, 2003, 2002 and 2001, respectively.

National, a customer of MercFuel, ceased
operations on November 6, 2002. The Company had been
providing fuel to National since May 1999. In December 2000,
National filed for Chapter 11 bankruptcy protection and the
Company continued to sell fuel to National on a secured basis
under the auspices of the bankruptcy court. Sales to National
represented approximately 6%, 13% and 14% of consolidated
revenues for fiscal 2003, 2002 and 2001, respectively. Due to
the secured nature of MercFuels sales to National,
MercFuel incurred virtually no loss due to Nationals
cessation of operations.

Seasonal Nature of Business

Mercurys commercial fuel sales, Air Centers
and aircraft support operations are seasonal in nature, being
relatively stronger during the months of April through December
in its fueling operations and FBOs than during the winter
months due in part to weather conditions, and stronger during
the summer months due in part to additional commercial and
charter flights. Air Cargos business is lower during the
months of January and February and increases from March through
June and September through December. The cargo business is
affected by the fluctuations in international trade. Operations
at military facilities are not seasonal but may vary with the
needs of the military.

Potential Liability and Insurance

Mercurys business activities subject it to
risk of significant potential liability under federal and state
statutes, common law and contractual indemnification agreements.
Mercury reviews the adequacy of its insurance on an on-going
basis. Mercury believes it follows generally accepted standards
for its lines of business with respect to the purchase of
business insurance and risk management practices. The Company
purchases airport liability and general and auto liability in
amounts which the Company believes are adequate for the risks of
its business.

Competition

MercFuel competes with approximately five
independent fuel suppliers, of which the largest is World Fuel
Services Corporation. Additionally, MercFuel competes with other
aircraft support companies which maintain their own sources of
aviation fuel. Many of MercFuels competitors have greater
financial, technical and marketing resources than Mercury. In
addition, certain airlines provide cargo and fueling services
comparable to those furnished by Mercury. At LAX, Mercury
competes with, in addition to the airlines, three fuel delivery
providers and with three non-airline entities with respect to
the air cargo handling business. Generally, Air Centers have a
minimum of one competitor at each airport, some of which are
national multi-location chains. Mercury has many principal
competitors with respect to government contracting services,
including certain small disadvantaged businesses which receive a
ten percent cost advantage with respect to certain bids and set
asides of certain contracts. Recently, the FBO market has seen
the emergence of increased competition among several national
FBO chains owned by major corporations whose total sales and
financial resources exceed those of Mercury. Substantially all
of Mercurys services are subject to competitive bidding.
Mercury competes on the basis of price, quality of service,
historical relationships with customers, and credit terms.

Environmental Matters

Mercury must continuously comply with federal,
state and local environmental statutes and regulations
associated with its fuel storage tanks and fueling operations.
These requirements include, among other things, tank and pipe
testing for integrity and soil sampling for evidence of leaking
and remediation of detected leaks and spills.

10



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##### Table of Contents



In late 1998, Mercury, and many other companies
operating on Southern California airports received notice of
potential violations of California Environmental Protection
Agency  Air Resources Board regulations. This notice
alleged that such companies had violated the act by fueling
airport service vehicles with Jet A fuel. Mercury
immediately brought all of its operations into full compliance
with all applicable regulations and has entered into a
settlement agreement with the State of California. In addition,
it has undertaken a review of federal and state regulations to
ensure future compliance. In fiscal 1999, Mercury spent
$3.4 million to comply with certain federal mandates
regarding below ground fuel tanks.

In early 2001, the Company agreed to provide
certain environmental remediation on property formerly leased by
the Company in Anaheim, California. The Company terminated
operations on this leased property in fiscal 1987 at which time
a closure letter was in effect. The Company has installed an
approved remediation system including but not limited to soil
vapor extraction and monitoring wells, and has incurred costs of
approximately $318,000 through June 30, 2003. The
Companys environment consultant has recommended site
closure and the Company expects future costs of approximately
$100,000 for site closure and continued monitoring.

On May 1, 2002, Mercury received a Notice of
Violation (NOV) from the EPA for its Fort Wayne,
Indiana facility alleging that Mercurys Spill Prevention,
Control and Countermeasure Plan (SPCC) does not meet
certain federal regulations. On March 14, 2003, Mercury
received a Notice of Violation from the United States
Environmental Protection Agency, Region 5 (the
EPA) alleging certain deficiencies in the Spill
Prevention, Control and Countermeasure (SPCC) Plan for its
Fort Wayne, Indiana facility, submitted to the EPA in November
2002. Mercury believes that it has resolved all deficiencies
except for alleged deficiencies related to: 1) secondary
containment for refueler trucks, and 2) secondary
containment for discrete fuel loading areas. Pursuant to an
agreement detailed in a letter submitted to the EPA on
April 16, 2003, Mercury has been permitted to suspend
modifications to its SPCC Plan regarding the installation
of secondary containment for its refueler trucks, pending
resolution of federal regulatory issues associated with
secondary containment for such trucks. The EPA has also extended
national compliance with regulations related to discrete loading
areas until August 17, 2004. In the opinion of management,
the ultimate resolution of this matter is not expected to have a
material effect on the Companys consolidated financial
statements.

There has been no material negative impact on
Mercurys earnings or competitive position in performing
such compliance and related remediation work. Mercury knows of
no other basis for any notice of violation or cease and
abatement proceeding by any governmental agency as a result of
failure to comply with applicable environmental laws and
regulations.

Employees

As of July 31, 2003, Mercury employed 1,401
full-time and 299 part-time persons in the following operating
units: MercFuel, 42 full-time and five part-time persons;
Corporate, 34 full-time and one part-time persons; Air Cargo
operations, 455 full-time and 61 part-time persons; Air Centers,
518 full-time and 53 part-time persons; and government contract
services, 352 full-time and 179 part-time persons. Maytag has
collective bargaining agreements which effect approximately 183
employees in its weather and base support operations. Air Cargo
has collective bargaining agreements which affect approximately
55 employees in its ground handling operations. Management
believes that, in general, wages, hours, fringe benefits and
other conditions of employment offered throughout Mercurys
operations are at least equivalent to those found elsewhere in
its industry and that its general relationships with its
employees is satisfactory.

11



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|        |            
|------- | -----------
|Item 2. | Properties.

Listed below are the significant properties
leased or owned by Mercury as of June 30, 2003

|                                                                                     |  |          |        |        |  |            |           |             |  |             |                |  |  |                                                                      |  |                                                                                                    |  |  |  | 
|------------------------------------------------------------------------------------ |  | -------- | ------ | ------ |  | ---------- | --------- | ----------- |  | ----------- | -------------- |  |  | -------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------- |  |  |  | 
|                                                                                     |  | LEASED   |        | ANNUAL |  | EXPIRATION |           | ACTIVITIES  |  | FACILITY   
|LOCATION                                                                             |  | OR OWNED |        | RENTAL |  | OF LEASE   |           | AT FACILITY |  | DESCRIPTION
|                                                                                     |  |          |        |        |  |            |           |             |  |            
|CORPORATE HEADQUARTERS
    5456 McConnell
    Los Angeles, CA(2)                     |  |          | Leased |        |  | $          | 440,000   |             |  |             | December 2006  |  |  | Landlord, executive and support personnel offices                    |  | 22,500 sq. ft. building                                                                           
|                                                                                    
|MAYTAG OPERATIONS
    6145 Lehman Drive
    Suite 300
    Colorado Springs, CO(1)    |  |          | Owned  |        |  |            | N/A       |             |  |             | N/A            |  |  | Landlord, executive and support personnel offices                    |  | 8,000 sq. ft. of offices                                                                          
|                                                                                    
|HARTSFIELD ATLANTA INTL AIRPORT
    Cargo Building A
    South Cargo Area         |  |          | Leased |        |  | $          | 924,000   |             |  |             | January 2011   |  |  | Landlord and cargo handling warehouse with offices                   |  | 60,597 sq. ft. of cargo warehouse facility with 9,785 sq. ft. of office space on 2.4 acres of land
|                                                                                    
|LOS ANGELES INTL AIRPORT
    6851 W. Imperial Highway,
    Los Angeles, CA          |  |          | Leased |        |  | $          | 774,000   |             |  |             | December 2004  |  |  | Cargo hangar, with offices and executive offices rented to customers |  | 70,245 sq. ft. of offices and cargo warehouse facility on 5.4 acres                               
|6040 Avion Drive
    Los Angeles, CA                                                 |  |          | Leased |        |  | $          | 3,006,000 |             |  |             | June 2006      |  |  | Cargo handling warehouse with offices                                |  | 207,000 sq. ft. of offices and cargo warehouse facility                                           
|7000 World Way West
    Los Angeles, CA                                              |  |          | Leased |        |  | $          | 295,000   |             |  |             | Month-to-month |  |  | Service and refueling of private aircraft                            |  | 2,000 sq. ft. of executive terminal on 1.93 acres                                                 
|                                                                                    
|LESTER B. PEARSON INTL AIRPORT
    Vista Cargo Center
    6500 Silver Dart, Toronto |  |          | Leased |        |  | $          | 823,000   |             |  |             | November 2010  |  |  | Cargo handling warehouse with offices                                |  | 5,670 sq. ft. office space and 50,342 sq. ft. of warehouse space                                  
|                                                                                    
|DORVAL INTL AIRPORT
    800 Stuart Graham Blvd.
    South Dorval, Quebec            |  |          | Leased |        |  | $          | 528,000   |             |  |             | November 2007  |  |  | Cargo handling warehouse with offices                                |  | 51,000 sq. ft. warehouse and 2,432  sq. ft. of office space                                       
|                                                                                    
|MIRABEL INTL AIRPORT
    12005, Rue Cargo
    A-3, Suite 102
    Mirabel, Quebec    |  |          | Leased |        |  | $          | 21,000    |             |  |             | August 2004    |  |  | Cargo handling warehouse with offices                                |  | 1,200 sq. ft. warehouse and 570 sq. ft. of office space                                           
|                                                                                    
|ONTARIO INTL AIRPORT
    2161 East Avion
    Ontario, CA                            |  |          | Leased |        |  | $          | 287,000   |             |  |             | April 2007     |  |  | Landlord, service and refueling of commercial and private aircraft   |  | Offices and hangars on 14.4 acres                                                                 
|2161 East Avion
    Ontario, CA                                                      |  |          | Leased |        |  | $          | 11,020    |             |  |             | December 2005  |  |  | Aircraft parking                                                     |  | 24,000 sq. ft. of hangar space                                                                    
|2475 East Avion
    Ontario, CA                                                      |  |          | Leased |        |  | $          | 270,000   |             |  |             | October 2007   |  |  | Landlord, ramp, parking, office and hangar space                     |  | 48,700 sq. ft. of hangar, shop area and office space, site, ramp and parking on 3.75 acres.       
|                                                                                    
|BAKERSFIELD AIRPORT
    1550 Skyway Drive
    Bakersfield, CA                        |  |          | Leased |        |  | $          | 137,000   |             |  |             | May 2020       |  |  | Landlord, service and refueling of commercial and private aircraft   |  | Executive offices, terminal and hangars on 6.14 acres                                             
|1601 Skyway Drive
    Bakersfield, CA                                                |  |          | Leased |        |  | $          | 27,000    |             |  |             | February 2008  |  |  | Landlord, service and refueling of commercial and private aircraft   |  | 800 sq. ft. of office space and 2 acres of ramp                                                   
|                                                                                    
|BURBANK-GLENDALE-
    PASADENA AIRPORT, CA                                           |  |          | Leased |        |  | $          | 1,784,000 |             |  |             | April 2025     |  |  | Landlord, service and refueling of commercial and private aircraft   |  | Offices, hangars, and shop facilities on 27.65 acres                                              
|Sherman Way, Burbank, CA
    4561 Empire Ave.
    Burbank, CA                        |  |          | Leased |        |  | $          | 78,000    |             |  |             | December 2010  |  |  | Landlord, service and refueling of commercial and private aircraft   |  | 68,200 sq. ft. of ramp space                                                                      
|6920 Vineland Ave. No.
    Hollywood, CA                                             |  |          | Leased |        |  | $          | 98,000    |             |  |             | Month to month |  |  | Landlord, service and refueling of commercial and private aircraft   |  | 5,200 sq. ft. of offices, hangars and shop facilities                                             
|                                                                                    
|CHARLESTON INTERNATIONAL AIRPORT
    6060 S Aviation Wy.
    N. Charleston, SC       |  |          | Leased |        |  | $          | 196,000   |             |  |             | August 2007    |  |  | Terminal, office and hangars                                         |  | 103,000 sq. ft. of terminal, hangars and parking area                                             

12



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|                                                                         |  |                             |        |        |        |            |         |             |           |             |                |                                                                              |  |                                                                                  |        |                                                                 |  |                           |  | 
|------------------------------------------------------------------------ |  | --------------------------- | ------ | ------ | ------ | ---------- | ------- | ----------- | --------- | ----------- | -------------- | ---------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------- | ------ | --------------------------------------------------------------- |  | ------------------------- |  | 
|                                                                         |  | LEASED                      |        | ANNUAL |        | EXPIRATION |         | ACTIVITIES  |           | FACILITY   
|LOCATION                                                                 |  | OR OWNED                    |        | RENTAL |        | OF LEASE   |         | AT FACILITY |           | DESCRIPTION
|                                                                         |  |                             |        |        |        |            |         |             |           |            
|6070 Perimeter
    N. Charleston, SC                                     |  |                             | Leased |        |        | $          | 21,000  |             |           |             | Month-to-month |                                                                              |  | Building and hangar space                                                        |        | Hangars, ramp space and parking areas consisting of 12.7  acres
|                                                                        
|JOHNS ISLAND AIRPORT
    2700 Fort Trenholm
    Johns Island, SC         |  |                             | Leased |        |        | $          | 26,000  |             |           |             | May 2004       |                                                                              |  | Terminal, office and hangar space                                                |        | Terminal, hangar and parking consisting of 15.8 acres          
|                                                                        
|SANTA BARBARA MUNICIPAL AIRPORT
    404 Moffet Road
    Goleta, CA       |  |                             | Leased |        |        | $          | 9,000   |             |           |             | Month-to-month |                                                                              |  | Landlord, service, maintenance, and refueling of commercial and private aircraft |        | 8 T-Hangar space totaling 28,413 sq. ft.                       
|404 Moffet Road
    Goleta, CA
    (Building 124 & 126)                  |  |                             | Leased |        |        | $          | 58,000  |             |           |             | Month-to-month |                                                                              |  | Building space                                                                   |        | 9,360 sq. ft. of building space                                
|204 Moffet Place
    Goleta, CA                                          |  |                             | Leased |        |        | $          | 32,000  |             |           |             | Month-to-month |                                                                              |  | Building space and parking spaces                                                |        | 10,370 sq. ft. of office space and 10  parking spaces          
|Building 121
    302 Moffet Place
    Goleta,CA                          |  |                             | Leased |        |        | $          | 45,000  |             |           |             | Month-to-month |                                                                              |  | Building space                                                                   |        | 3,120 sq. ft. of office space                                  
|Building 122
    327 Firestone Rd.
    Goleta, CA                        |  |                             | Leased |        |        | $          | 32,000  |             |           |             | June 2032      |                                                                              |  | Fuel farm                                                                        |        |                                                                 |  |                          
|495 South Fairview Ave.
    Goleta, CA                                   |  |                             | Leased |        |        | $          | 398,000 |             |           |             | March 2010     |                                                                              |  |                                                                                  | Hangar |                                                                 |  | 39,010 sq. ft. of hangars
|                                                                        
|FRESNO YOSEMITE INTL AIRPORT
    5045 E. Anderson Avenue
    Fresno, CA |  |                             | Leased |        |        | $          | 82,000  |             |           |             | April 2020     |                                                                              |  | Landlord, service and refueling of commercial and private aircraft               |        | 8.47 acres                                                     
|5045 E. Anderson Avenue
    Fresno, CA                                   |  |                             | Leased |        |        | $          | 69,000  |             |           |             | August 2006    |                                                                              |  | Terminal, office and hangar facility                                             |        | Hangars and offices on 2.16 acres                              
|5045 E. Anderson Avenue
    Fresno, CA                                   |  |                             | Leased |        |        | $          | 127,000 |             |           |             | May 2005       |                                                                              |  | Hangar and commercial office space                                               |        | 22,000 sq. ft. of office space on 19.26  acres                 
|                                                                        
|WM. B. HARTSFIELD INTL AIRPORT
    1200 Toffie Terrace
    Atlanta, GA  |  |                             | Leased |        |        | $          | 107,000 |             |           |             | Month-to-month |                                                                              |  | Landlord, service and refueling of commercial and private aircraft               |        | 4,800 sq. ft. of offices and ramp area on 11.2 acres           
|                                                                        
|DEKALB-PEACHTREE AIRPORT
    1951 Airport Road
    Atlanta, GA           |  |                             | Leased |        |        | $          | 258,000 |             |           |             | November 2006  |                                                                              |  | Landlord, service and refueling of commercial and private aircraft               |        | 164,288 sq. ft. of offices, hangars and land of 24.89 acres    
|                                                                        
|RENO CANNON INTL AIRPORT
    655 So. Rock Blvd.
    Reno, NV            |  | Building owned, land leased |        | $      | 14,000 |            |         |             | June 2017 |             |                | Landlord, service and refueling of commercial, private and military aircraft |  | 33,000 sq. ft. of hangars and administrative building on 23.7  acres of land    
|357 S. Rock Blvd.
    Reno, NV                                           |  |                             | Leased |        |        | $          | 9,000   |             |           |             | June 2017      |                                                                              |  | Fuel farm                                                                        |        |                                                                 |  |                          
|1500 Terminal Way
    Reno, NV                                           |  |                             | Leased |        |        | $          | 45,000  |             |           |             | August 2007    |                                                                              |  | Ground support equipment service bay                                             |        | 1,247 sq. ft. of office space and 2,087 sq. ft. of warehouse   
|                                                                        
|ADDISON AIRPORT
    4400 Glenn Curtiss Dr.
    Dallas, TX                |  |                             | Leased |        |        | $          | 314,000 |             |           |             | September 2021 |                                                                              |  | Landlord, service and refueling of commercial and private aircraft               |        | 49,472 sq. ft. of offices and hangars on 2.80 acres            
|4400 Glenn Curtiss Dr.
    Dallas, TX                                    |  |                             | Leased |        |        | $          | 56,000  |             |           |             | June 2022      |                                                                              |  | Landlord, service and refueling of commercial and private aircraft               |        | 57,949 sq. ft. of offices and hangar space on 6.28 acres       
|4400 Glenn Curtiss Dr.
    Dallas, TX                                    |  |                             | Leased |        |        | $          | 9,000   |             |           |             | July 2021      |                                                                              |  | Landlord, service and refueling of commercial and private aircraft               |        | 12,600 sq. ft. of offices and hangar space                     
|4400 Glenn Curtiss Dr.
    Dallas, TX                                    |  |                             | Leased |        |        | $          | 31,000  |             |           |             | Month-to-month |                                                                              |  | Fuel farm                                                                        |        |                                                                 |  |                          
|                                                                        
|CORPUS CHRISTI
    355 Pinson Drive
    Corpus Christi, TX               |  |                             | Leased |        |        | $          | 19,000  |             |           |             | October 2009   |                                                                              |  | Landlord, service and refueling of commercial and private aircraft               |        | 66,096 sq. ft. of offices and hangars on 6.69 acres            

13



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##### Table of Contents



|                                                                       |  |          |        |        |  |            |         |             |  |             |                |  |  |                                                                    |      |                                                                  |  |  |  | 
|---------------------------------------------------------------------- |  | -------- | ------ | ------ |  | ---------- | ------- | ----------- |  | ----------- | -------------- |  |  | ------------------------------------------------------------------ | ---- | ---------------------------------------------------------------- |  |  |  | 
|                                                                       |  | LEASED   |        | ANNUAL |  | EXPIRATION |         | ACTIVITIES  |  | FACILITY   
|LOCATION                                                               |  | OR OWNED |        | RENTAL |  | OF LEASE   |         | AT FACILITY |  | DESCRIPTION
|                                                                       |  |          |        |        |  |            |         |             |  |            
|NASHVILLE INTL AIRPORT
    635 Hangar Lane
    Nashville, TN          |  |          | Leased |        |  | $          | 404,000 |             |  |             | June 2012      |  |  | Landlord, service and refueling of commercial and private aircraft |      | Office and hangars on 38.69 acres                               
|                                                                      
|JACKSON INTL AIRPORT
    110 S. Hangar Drive
    Jackson, MS          |  |          | Leased |        |  | $          | 121,000 |             |  |             | February 2006  |  |  | Landlord, service and refueling of commercial and private aircraft |      | Office and hangars on 7 acres                                   
|                                                                      
|TULSA INTL AIRPORT
    7500 E. Apache
    Hangar 1 & 2                |  |          | Leased |        |  | $          | 73,000  |             |  |             | April 2019     |  |  | Landlord, service and refueling of commercial and private aircraft |      | Office and hangars on 11.23 acres                               
|7500 E. Apache
    Hangar 22 & 26
    Tulsa, OK                        |  |          | Leased |        |  | $          | 23,000  |             |  |             | April 2019     |  |  | Landlord, service and refueling of commercial and private aircraft |      | Land consisting of 5.23 acres                                   
|7500 E. Apache
    Hangar 22 & 26                                      |  |          | Leased |        |  | $          | 36,000  |             |  |             | June 2011      |  |  | Landlord, service and refueling of commercial and private aircraft |      | Office and hangars on 5.23 acres                                
|7500 E. Apache
    Hangar 18                                           |  |          | Leased |        |  | $          | 12,000  |             |  |             | June 2016      |  |  | Landlord, service and refueling of commercial and private aircraft |      | Hangar space on 6.18  acres                                     
|                                                                      
|FORT WAYNE AIRPORT
    Fort Wayne-Allen County
    Airport Authority   |  |          | Leased |        |  | $          | 53,000  |             |  |             | December 2013  |  |  | Landlord, service and refueling of commercial and private aircraft |      | Office, hangars, and ramp space on 172,734  sq. ft. of land     
|Fort Wayne-Allen County
    Airport Authority                          |  |          | Leased |        |  | $          | 70,000  |             |  |             | December 2013  |  |  | Landlord, service and refueling of commercial and private aircraft |      | 234,451 sq. ft. of office, hangar, parking and ramp space       
|Fort Wayne-Allen County
    Airport Authority                          |  |          | Leased |        |  | $          | 61,000  |             |  |             | November 2004  |  |  | Landlord, service and refueling of commercial and private aircraft |      | 49,500 sq. ft. of hangar, ramp and parking space                
|Fort Wayne-Allen County
    Airport Authority                          |  |          | Leased |        |  | $          | 41,000  |             |  |             | October 2016   |  |  | Landlord, service and refueling of commercial and private aircraft |      | Aircraft hangar space consisting of 53,658  sq. ft.             
|Fort Wayne-Allen County
    Airport Authority                          |  |          | Leased |        |  | $          | 9,000   |             |  |             | August 2003    |  |  | Landlord, service and refueling of commercial and private aircraft |      | Aircraft hangar space consisting of 4,000  sq. ft.              
|Fort Wayne-Allen County
    Airport Authority                          |  |          | Leased |        |  | $          | 2,700   |             |  |             | Month-to-month |  |  | Landlord, service and refueling of commercial and private aircraft |      | 2,500 sq. ft. of aircraft hangar space                          
|Fort Wayne-Allen County
    Airport Authority
    Parcke Bi, 1, 2, & 3 |  |          | Leased |        |  | $          | 31,000  |             |  |             | November 2004  |  |  | Landlord, service and refueling of commercial and private aircraft |      | 115,128 sq. ft. of space used for parking, ramp and hangar space
|Fort Wayne-Allen County
    Airport Authority                          |  |          | Leased |        |  | $          | 22,000  |             |  |             | December 2003  |  |  |                                                                    | Ramp |                                                                  |  |  |  | 
|                                                                      
|BIRMINGHAM AIRPORT
    Birmingham Airport
    Parcel 1  6 & 9         |  |          | Leased |        |  | $          | 155,000 |             |  |             | August 2021    |  |  | Landlord, service and refueling of commercial and private aircraft |      | Office, hangar, storage and ramp space on 29.30 acres           
|                                                                      
|BIRMINGHAM AIRPORT
    Hangar 7A                                       |  |          | Leased |        |  | $          | 23,000  |             |  |             | December 2007  |  |  | Landlord service and refueling of commercial and private aircraft  |      | 8,500 sq. ft. of aircraft hangar space                          



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | This property was purchased in May 1995 for
    $515,000 and is subject to a first mortgage to U.S. Bank in the
    sum of $267,000 at June 30, 2003, repayable with interest
    at 9% in equal monthly installments of approximately $4,450, the
    last payment due May 2010.                                                                                                                                                                                                                 
|   
|(2) | This property was sold in January 2002 to CFK
    Realty Partners, LLC (CFK Realty), a related party
    of the Company; however, the related assets are still recorded
    on the Companys books since the transaction did not
    qualify for sale-leaseback accounting and the non-consolidation
    of CFK Realty as described in Item 1. Business under
    Restatement and Note 1 to the consolidated financial
    statements included elsewhere in this Annual Report on
    Form 10-K.

14



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##### Table of Contents



The following table summarizes Mercurys
existing fuel storage facilities:

|                              |  |                      |                              | 
|----------------------------- |  | -------------------- | ---------------------------- | 
|Location                      |  | Approximate Capacity
|                              |  |                     
|                              |  | (gallons)           
|Los Angeles, California       |  |                      | 310,000(UG)                  | 
|Bakersfield, California       |  |                      | 98,000(62,000 AG. 36,000 UG) | 
|Burbank, California           |  |                      | (1)                          | 
|Santa Barbara, California     |  |                      | 54,000                       | 
|Reno, Nevada                  |  |                      | 47,000(AG)                   | 
|Ontario, California           |  |                      | 88,000(UG)                   | 
|Dallas, Texas                 |  |                      | 57,000(UG)(2)                | 
|Corpus Christi, Texas         |  |                      | 25,000(AG)                   | 
|Atlanta, Georgia (Hartsfield) |  |                      | 49,000(AG)                   | 
|Atlanta, Georgia (Peachtree)  |  |                      | 47,000(AG)                   | 
|Fresno, California            |  |                      | 42,000(AG)                   | 
|Nashville, Tennessee          |  |                      | 37,000(AG)                   | 
|Charleston, South Carolina    |  |                      | 24,000(AG)                   | 
|Jackson, Mississippi          |  |                      | 42,000(AG)(3)                | 
|Tulsa, Oklahoma               |  |                      | 126,000(UG)                  | 
|Fort Wayne, Indiana           |  |                      | 170,000(AG)                  | 
|Johns Island, South Carolina |  |                      | 18,000(UG)                   | 
|Birmingham, Alabama           |  |                      | 195,500(AG)                  | 



---



|     |                                                                 
|---- | ----------------------------------------------------------------
|(AG) | = Above-ground fuel storage (UG) = Under-ground
    fuel storage



|    |                                                                                                  
|--- | -------------------------------------------------------------------------------------------------
|(1) | Consortium fuel farm                                                                             
|   
|(2) | Facility owned by a third-party.                                                                 
|   
|(3) | The Company presently uses a third party tank
    farm consortium for the balance of requirement.

Management believes that Mercurys property
and equipment are adequate for its present business needs.
Mercury fully utilizes the real properties it owns or leases for
its business. Mercurys operating profits are substantially
dependent on a number of its leased facilities which enjoy
strategic airport locations and could be adversely affected by a
failure to obtain alternative facilities or renew a lease at
expiration.






|        |                   
|------- | ------------------
|Item 3. | Legal Proceedings.

On May 1, 2002, Mercury received a Notice of
Violation (NOV) for its Fort Wayne, Indiana FBO
facility alleging that Mercurys Spill Prevention, Control
and Countermeasure Plan (the SPCC Plan) did not meet
certain federal regulatory guidelines. Specifically, the
Environmental Protection Agency (the EPA) alleged
that Mercurys SPCC Plan failed to provide for proper
parking, secondary containment, and proper drainage of its
refueler trucks. Mercury entered into discussions with the EPA
and responded to the NOV. On January 29, 2003, the Company
was notified by the EPA of some deficiencies in its latest SPCC
Plan and requested the Company to submit a written response to
its allegations within 30 days. On March 14, 2003, the
Company received a NOV from the United States Environmental
Protection Agency, Region 5 (the EPA
Region 5) alleging certain deficiencies in the SPCC
Plan for its Fort Wayne, Indiana FBO facility, submitted to the
EPA in November 2002. The Company believes that it has resolved
all deficiencies except for alleged deficiencies related to
secondary containment for its refueler trucks and for the
discrete fuel loading areas. Pursuant to an agreement detailed
in a letter submitted to the EPA Region 5 on April 16,
2003, Mercury has been permitted to suspend modifications to its
SPCC Plan regarding the installation of secondary containment
for its refueler trucks, pending resolution of federal
regulatory issues associated with secondary containment for such
trucks. The EPA has also extended national compliance with
regulations related to discrete loading areas until
August 17, 2004. In the opinion of management, the ultimate
resolution of this matter is not expected to have a material
effect on the Companys consolidated financial statements.

15



---



##### Table of Contents



On February 26, 2003, Robert Bosch filed an
action in the United States District Court, Eastern District of
New York against Excel Cargo, Inc. and others, seeking
$1.5 million in damages for damaged cargo. On June 4,
2003 Plaintiffs Counsel agreed to voluntary dismiss Excel
Cargo, Inc., without prejudice, from the lawsuit conditioned on
the production of information by Excel Cargo, Inc.

On April 16, 2003, the Plan Committee of
Shuttle America Corp. filed an Adversary Proceeding in the
United States Bankruptcy Court, District of Connecticut alleging
preferential transfers in the amount of $995,000. The parties
reached a settlement agreement, which provides that the Company
will pay Shuttle America $40,000. The settlement agreement is
subject to approval of the Bankruptcy Court.

In April 2000, Mercury filed a collection action
against AER Global Logistics (AER) in the state of
New York. AER filed a counterclaim for $5.0 million
alleging among other things, tortious interference with
contract. On June 9, 2003 Mercury Air Cargo, Inc. agreed to
pay AER the amount of $15,000 to settle the matter.

On July 9, 2003 Central Insurance Company,
LTD. filed an action in the United States District Court Central
District of California-Western Division, against Mercury Air
Cargo, Inc. for damages paid to their assured United
Microelectronics Corp in the amount of $335,337. In the opinion
of management, the ultimate resolution of this matter is not
expected to have a material effect on the Companys
consolidated financial statements.

In December 2001, a jury returned its verdict on
Michael Marignys (Plaintiff) cause of action
for retaliation in violation of California Fair Employment and
Housing Act in favor of the Defendant, the Company, but awarded
damages in the amount of $15,000 for Plaintiffs cause of
action for intentional of emotional distress. In February 2002,
Plaintiff filed a notice of appeal with the Second Appellate
Court (Court). The Court ruled on this appeal in
August of 2003 affirming in part and reversing in part the
judgment and the case was remanded for retrial. A new trial date
has not been set at this time.

On November 26, 2003, Signature Flight
Support Corporation filed a complaint against Air Centers and
Allied alleging: 1) breach of contract and tortuous
interference with contract against Allied; 2) interference
with prospective economic advantage against Allied; and
3) unfair business practices against Mercury and Allied.
The Company believes that the allegations are without merit and
is in the process of preparing a response. The Company has
agreed to indemnify Allied and its affiliates (including,
without limitation, Air Centers after the closing of the FBO
sale), directors, officers, agents, employees and controlling
persons from any liability, obligation, loss or expense to which
Allied may become subject as a result of the complaint. In the
opinion of management, the ultimate resolution of this complaint
will not have a material effect on the Companys
consolidated financial statements.

The Company is also a defendant in certain
litigation arising in the normal course of business. In the
opinion of management, the ultimate resolution of such
litigation will not have a material effect on the Companys
consolidated financial statements.






|        |                                                         
|------- | --------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders.

None.

16



---



##### Table of Contents






PART II






|        |                                                                           
|------- | --------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters.

Mercurys Common Stock is listed and traded
on the AMEX under the Symbol MAX. The table below
sets forth, for the quarterly periods indicated, the high and
low sales prices per share of Common Stock during each full
quarterly period as adjusted for the one-for-two reverse stock
split effective June 18, 2003.

|             |                                  |      |   |       |  |  |   |      | 
|------------ | -------------------------------- | ---- | - | ----- |  |  | - | ---- | 
|             |                                  | High |   | Low  
|             |                                  |      |   |      
|FISCAL 2004: |                                  |      |   |       |  |  |   |     
|             | Quarter ended September 30, 2003 |      | $ | 7.30  |  |  | $ | 6.20 | 
|FISCAL 2003: |                                  |      |   |       |  |  |   |     
|             | Quarter ended June 30, 2003      |      | $ | 8.18  |  |  | $ | 5.70 | 
|             | Quarter ended March 31, 2003     |      |   | 7.40  |  |  |   | 6.40 | 
|             | Quarter ended December 31, 2002  |      |   | 8.00  |  |  |   | 5.00 | 
|             | Quarter ended September 30, 2002 |      |   | 9.10  |  |  |   | 7.00 | 
|FISCAL 2002: |                                  |      |   |       |  |  |   |     
|             | Quarter ended June 30, 2002      |      | $ | 10.20 |  |  | $ | 8.50 | 
|             | Quarter ended March 31, 2002     |      |   | 12.00 |  |  |   | 8.60 | 
|             | Quarter ended December 31, 2001  |      |   | 11.60 |  |  |   | 8.70 | 
|             | Quarter ended September 30, 2001 |      |   | 13.96 |  |  |   | 6.20 | 

As of December 5, 2003, there were
approximately 303 holders of record.

Securities authorized for issuance under
Equity Compensation Plans

|                                                               |       |                            |         |                      |  |                                           |       |       |  |  |   |   | 
|-------------------------------------------------------------- | ----- | -------------------------- | ------- | -------------------- |  | ----------------------------------------- | ----- | ----- |  |  | - | - | 
|                                                               |       | Number of securities to be |         | Weighted-average     |  | Number of securities remaining           
|                                                               |       | issued upon exercise of    |         | exercise price of    |  | available for future issuance            
|                                                               |       | outstanding options,       |         | outstanding options, |  | under equity compensation plans          
|Plan Category                                                  |       | warrants and rights        |         | warrants and rights  |  | (excl. securities reflected in (a) or (b)
|                                                               |       |                            |         |                      |  |                                          
|Equity compensation plans approved by security
    holders     |       |                            | 502,658 |                      |  | $                                         | 11.07 |       |  |  | 0 |  
|Equity compensation plans not approved by
    security holders |       |                            | 3,438   |                      |  | $                                         | 14.36 |       |  |  | 0 |  
|                                                               |       |                            |         |                      |  |                                           |       |       |  |  |   |  
|                                                               | Total |                            |         | 506,106              |  |                                           | $     | 11.10 |  |  |   | 0 | 
|                                                               |       |                            |         |                      |  |                                           |       |       |  |  |   |  

The Company has not paid any cash dividends since
the fiscal year ended June 30, 1998 and does not intend to
pay any cash dividends on common shares in the foreseeable
future.



| |                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) Stock prices have been adjusted
    retroactively to reflect the effect of the one-for-two reverse
    stock split that was effective June 18, 2003.






|        |                         
|------- | ------------------------
|Item 6. | Selected Financial Data.

The following selected consolidated financial
data for each of the five years in the period ended
June 30, 2003 have been derived from the Companys
audited consolidated financial statements.

17



---



##### Table of Contents



The information set forth below should be read in
conjunction with the consolidated financial statements and notes
thereto and Managements Discussion and Analysis of
Financial Condition and Results of Operations included
elsewhere in this Annual Report Form 10-K. As described in
Item 1. Business under Restatement and Note 1 to
the consolidated financial statements included elsewhere in this
Annual Report on Form 10-K, the Company restated its fiscal
2002 and 2001 financial statements.

|                                             |                                            |                                               |         |            |   |      |         |         |   |      |         |       |   |   |         |       |   |   |         |       |  
|-------------------------------------------- | ------------------------------------------ | --------------------------------------------- | ------- | ---------- | - | ---- | ------- | ------- | - | ---- | ------- | ----- | - | - | ------- | ----- | - | - | ------- | ----- | -
|                                             |                                            |                                              
|                                             |                                            | Year Ended June 30,                          
|                                             |                                            |                                              
|                                             |                                            | 2003                                          |         | 2002       |   | 2001 |         | 2000(1) |   | 1999
|                                             |                                            |                                               |         |            |   |      |         |         |   |     
|                                             |                                            |                                               |         | (Restated) |   |      |         |         |   |     
|                                             |                                            |                                              
|                                             |                                            | (Dollars in thousands, except per share data)
|INCOME STATEMENT DATA                        |                                            |                                               |         |            |   |      |         |         |   |      |         |       |   |   |         |       |   |   |         |      
|Operating data                               |                                            |                                               |         |            |   |      |         |         |   |      |         |       |   |   |         |       |   |   |         |      
|Sales and revenues                           |                                            | $                                             | 429,015 |            |   | $    | 383,342 |         |   | $    | 478,446 |       |   | $ | 334,333 |       |   | $ | 218,272 |      
|Costs and expenses                           |                                            |                                               | 403,052 |            |   |      | 355,529 |         |   |      | 444,181 |       |   |   | 300,596 |       |   |   | 187,052 |      
|                                             |                                            |                                               |         |            |   |      |         |         |   |      |         |       |   |   |         |       |   |   |         |      
|Gross margin                                 |                                            |                                               | 25,963  |            |   |      | 27,813  |         |   |      | 34,265  |       |   |   | 33,737  |       |   |   | 31,220  |      
|Selling, general and administrative expenses |                                            |                                               | 10,818  |            |   |      | 11,771  |         |   |      | 7,929   |       |   |   | 7,223   |       |   |   | 7,118   |      
|Provision for bad debts                      |                                            |                                               | 1,648   |            |   |      | 1,358   |         |   |      | 3,725   |       |   |   | 5,408   |       |   |   | 1,721   |      
|Depreciation and amortization                |                                            |                                               | 7,963   |            |   |      | 9,258   |         |   |      | 9,331   |       |   |   | 8,485   |       |   |   | 8,297   |      
|Gain on sale of facilities and property      |                                            |                                               |         |            |   |      | (8,929  | )       |   |      |         |       |   |   |         |       |   |   |         |      
|Write-off of deferred financing costs        |                                            |                                               | 1,773   |            |   |      |         |         |   |      |         |       |   |   |         |       |   |   |         |      
|Interest expense                             |                                            |                                               | 7,956   |            |   |      | 5,830   |         |   |      | 7,184   |       |   |   | 6,293   |       |   |   | 4,379   |      
|Other (income) expense, net                  |                                            |                                               | 74      |            |   |      | 908     |         |   |      | (48     | )     |   |   | (133    | )     |   |   | (178    | )    
|                                             |                                            |                                               |         |            |   |      |         |         |   |      |         |       |   |   |         |       |   |   |         |      
|Income (loss) before income taxes            |                                            |                                               | (4,269  | )          |   |      | 7,617   |         |   |      | 6,144   |       |   |   | 6,461   |       |   |   | 9,883   |      
|Provision for (benefit from) income taxes    |                                            |                                               | (1,471  | )          |   |      | 2,930   |         |   |      | 2,397   |       |   |   | 2,883   |       |   |   | 3,854   |      
|                                             |                                            |                                               |         |            |   |      |         |         |   |      |         |       |   |   |         |       |   |   |         |      
|Income (loss) from continuing operations     |                                            |                                               | (2,798  | )          |   |      | 4,687   |         |   |      | 3,747   |       |   |   | 3,578   |       |   |   | 6,029   |      
|Income (loss) from discontinued operations   |                                            |                                               |         |            |   |      | (170    | )       |   |      | (858    | )     |   |   | (933    | )     |   |   | 393     |      
|Loss on sale of discontinued operations      |                                            |                                               |         |            |   |      |         |         |   |      | (477    | )     |   |   |         |       |   |   |         |      
|Extraordinary item                           |                                            |                                               |         |            |   |      |         |         |   |      |         |       |   |   | (979    | )     |   |   | (483    | )    
|                                             |                                            |                                               |         |            |   |      |         |         |   |      |         |       |   |   |         |       |   |   |         |      
|Net income (loss)                            |                                            | $                                             | (2,798  | )          |   | $    | 4,517   |         |   | $    | 2,412   |       |   | $ | 1,666   |       |   | $ | 5,939   |      
|                                             |                                            |                                               |         |            |   |      |         |         |   |      |         |       |   |   |         |       |   |   |         |      
|Net income (loss) per share:                 |                                            |                                               |         |            |   |      |         |         |   |      |         |       |   |   |         |       |   |   |         |      
|Basic:                                       |                                            |                                               |         |            |   |      |         |         |   |      |         |       |   |   |         |       |   |   |         |      
|                                             | From continuing operations                 |                                               | $       | (0.86      | ) |      | $       | 1.43    |   |      | $       | 1.15  |   |   | $       | 1.09  |   |   | $       | 1.80  |  
|                                             | Income (loss) from discontinued operations |                                               |         |            |   |      |         | (0.05   | ) |      |         | (0.26 | ) |   |         | (0.28 | ) |   |         | 0.12  |  
|                                             | Loss on sale of discontinued operations    |                                               |         |            |   |      |         |         |   |      |         | (0.15 | ) |   |         |       |   |   |         |       |  
|                                             | Extraordinary item                         |                                               |         |            |   |      |         |         |   |      |         |       |   |   |         | (0.30 | ) |   |         | (0.14 | )
|                                             |                                            |                                               |         |            |   |      |         |         |   |      |         |       |   |   |         |       |   |   |         |      
|                                             | Net income (loss)                          |                                               | $       | (0.86      | ) |      | $       | 1.38    |   |      | $       | 0.74  |   |   | $       | 0.51  |   |   | $       | 1.78  |  
|                                             |                                            |                                               |         |            |   |      |         |         |   |      |         |       |   |   |         |       |   |   |         |      
|Diluted:                                     |                                            |                                               |         |            |   |      |         |         |   |      |         |       |   |   |         |       |   |   |         |      
|                                             | From continuing operations                 |                                               | $       | (0.86      | ) |      | $       | 1.40    |   |      | $       | 1.12  |   |   | $       | 1.00  |   |   | $       | 1.38  |  
|                                             | Income (loss) from discontinued operations |                                               |         |            |   |      |         | (0.05   | ) |      |         | (0.26 | ) |   |         | (0.24 | ) |   |         | 0.08  |  
|                                             | Loss on sale of discontinued operations    |                                               |         |            |   |      |         |         |   |      |         | (0.14 | ) |   |         |       |   |   |         |       |  
|                                             | Extraordinary item                         |                                               |         |            |   |      |         |         |   |      |         |       |   |   |         | (0.26 | ) |   |         | (0.10 | )
|                                             |                                            |                                               |         |            |   |      |         |         |   |      |         |       |   |   |         |       |   |   |         |      
|                                             | Net income (loss)                          |                                               | $       | (0.86      | ) |      | $       | 1.35    |   |      | $       | 0.72  |   |   | $       | 0.50  |   |   | $       | 1.36  |  
|                                             |                                            |                                               |         |            |   |      |         |         |   |      |         |       |   |   |         |       |   |   |         |      

18



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##### Table of Contents



|                                                                  |  |             |         |            |  |      |         |         |  |      |         |  |  |   |         |  |  |   |         | 
|----------------------------------------------------------------- |  | ----------- | ------- | ---------- |  | ---- | ------- | ------- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                                                  |  |            
|                                                                  |  | At June 30,
|                                                                  |  |            
|                                                                  |  | 2003        |         | 2002       |  | 2001 |         | 2000(1) |  | 1999
|                                                                  |  |             |         |            |  |      |         |         |  |     
|                                                                  |  |             |         | (Restated) |  |      |         |         |  |     
|BALANCE SHEET DATA                                                |  |             |         |            |  |      |         |         |  |      |         |  |  |   |         |  |  |   |         | 
|Total assets                                                      |  | $           | 132,955 |            |  | $    | 136,214 |         |  | $    | 152,488 |  |  | $ | 134,768 |  |  | $ | 126,534 | 
|Short-term debt (including current portion of
    long-term debt) |  |             | 4,194   |            |  |      | 14,677  |         |  |      | 7,461   |  |  |   | 6,936   |  |  |   | 6,806   | 
|Long-term debt                                                    |  |             | 25,501  |            |  |      | 17,516  |         |  |      | 44,560  |  |  |   | 42,358  |  |  |   | 44,285  | 
|Subordinated debt  current                                       |  |             |         |            |  |      | 23,179  |         |  |      |         |  |  |   |         |  |  |   |         | 
|Subordinated debt  long-term                                     |  |             | 23,445  |            |  |      |         |         |  |      | 23,030  |  |  |   | 22,844  |  |  |   |         | 
|Convertible subordinated debentures                               |  |             |         |            |  |      |         |         |  |      |         |  |  |   |         |  |  |   | 19,852  | 



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As discussed in Item 1. Business under
    Restatement and Note 1 to the consolidated financial
    statements included elsewhere in this Annual Report on
    Form 10-K, the Company adjusted their June 30, 2000
    opening retained earnings by $363,000 to correct for income tax
    adjustments that should have been recorded in years prior to
    fiscal 2001. Although the Company has not been able to ascertain
    which prior years these income tax adjustments relate to, the
    fiscal 2000 financial statements above have been restated to
    record this $363,000 as additional income taxes.






|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations.

Results of Operations  Fiscal 2003,
2002 and 2001

The following tables set forth, for the periods
indicated, the revenue and gross margin for each of the
Companys four operating units included in continuing
operations, as well as selected other financial statement data.

|                             |                |                     |       |            |  |        |      |          |   |        |       |          |  |  |      |     |   |   |       |       |  |  |      |     |  
|---------------------------- | -------------- | ------------------- | ----- | ---------- |  | ------ | ---- | -------- | - | ------ | ----- | -------- |  |  | ---- | --- | - | - | ----- | ----- |  |  | ---- | --- | -
|                             |                |                    
|                             |                | Year Ended June 30,
|                             |                |                    
|                             |                |                     |       |            |  |       
|                             |                | 2003                |       | 2002       |  | 2001  
|                             |                |                     |       |            |  |       
|                             |                |                     |       |            |  |       
|                             |                |                     |       | (Restated) |  |       
|                             |                |                     |       | % of       |  |        |      | % of     |   |        |       | % of    
|                             |                |                     |       | Total      |  |        |      | Total    |   |        |       | Total   
|                             |                | Amount              |       | Revenues   |  | Amount |      | Revenues |   | Amount |       | Revenues
|                             |                |                     |       |            |  |        |      |          |   |        |       |         
|                             |                |                    
|                             |                | ($ in millions)    
|Revenues:                    |                |                     |       |            |  |        |      |          |   |        |       |          |  |  |      |     |   |   |       |       |  |  |      |    
|MercFuel                     |                | $                   | 280.1 |            |  |        | 65.3 | %        |   | $      | 232.6 |          |  |  | 60.7 | %   |   | $ | 318.8 |       |  |  | 66.6 | %  
|Air Centers                  |                |                     | 96.2  |            |  |        | 22.4 |          |   |        | 94.4  |          |  |  | 24.6 |     |   |   | 99.5  |       |  |  | 20.8 |    
|Air Cargo                    |                |                     | 32.7  |            |  |        | 7.6  |          |   |        | 28.1  |          |  |  | 7.3  |     |   |   | 31.3  |       |  |  | 6.6  |    
|Government Contract Services |                |                     | 24.4  |            |  |        | 5.7  |          |   |        | 28.2  |          |  |  | 7.4  |     |   |   | 28.8  |       |  |  | 6.0  |    
|Intercompany eliminations    |                |                     | (4.4  | )          |  |        | (1.0 | )        |   |        |       |          |  |  |      |     |   |   |       |       |  |  |      |    
|                             |                |                     |       |            |  |        |      |          |   |        |       |          |  |  |      |     |   |   |       |       |  |  |      |    
|                             | Total revenues |                     | $     | 429.0      |  |        |      | 100      | % |        | $     | 383.3    |  |  |      | 100 | % |   | $     | 478.4 |  |  |      | 100 | %
|                             |                |                     |       |            |  |        |      |          |   |        |       |          |  |  |      |     |   |   |       |       |  |  |      |    

|                             |                    |        |      |          |  |        |      |          |   |        |      |          |  |  |      |     |   |   |      |      |  |  |      |     |  
|---------------------------- | ------------------ | ------ | ---- | -------- |  | ------ | ---- | -------- | - | ------ | ---- | -------- |  |  | ---- | --- | - | - | ---- | ---- |  |  | ---- | --- | -
|                             |                    |        |      | % of     |  |        |      | % of     |   |        |      | % of    
|                             |                    |        |      | Unit     |  |        |      | Unit     |   |        |      | Unit    
|                             |                    | Amount |      | Revenues |  | Amount |      | Revenues |   | Amount |      | Revenues
|                             |                    |        |      |          |  |        |      |          |   |        |      |         
|Gross margin(1):             |                    |        |      |          |  |        |      |          |   |        |      |          |  |  |      |     |   |   |      |      |  |  |      |    
|MercFuel                     |                    | $      | 5.9  |          |  |        | 2.1  | %        |   | $      | 6.6  |          |  |  | 2.8  | %   |   | $ | 7.4  |      |  |  | 2.3  | %  
|Air Centers                  |                    |        | 12.9 |          |  |        | 13.4 |          |   |        | 13.5 |          |  |  | 14.3 |     |   |   | 15.0 |      |  |  | 15.1 |    
|Air Cargo                    |                    |        | 2.6  |          |  |        | 8.0  |          |   |        | 0.9  |          |  |  | 3.2  |     |   |   | 6.1  |      |  |  | 19.4 |    
|Government Contract Services |                    |        | 4.6  |          |  |        | 18.8 |          |   |        | 6.8  |          |  |  | 24.1 |     |   |   | 5.7  |      |  |  | 19.7 |    
|                             |                    |        |      |          |  |        |      |          |   |        |      |          |  |  |      |     |   |   |      |      |  |  |      |    
|                             | Total gross margin |        | $    | 26.0     |  |        |      | 6.1      | % |        | $    | 27.8     |  |  |      | 7.3 | % |   | $    | 34.2 |  |  |      | 7.2 | %
|                             |                    |        |      |          |  |        |      |          |   |        |      |          |  |  |      |     |   |   |      |      |  |  |      |    

19



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##### Table of Contents



|                                                                 |  |                     |      |            |  |        |      |          |  |        |      |          |  |  |      |   |  |   |      |   |  |  |      |  
|---------------------------------------------------------------- |  | ------------------- | ---- | ---------- |  | ------ | ---- | -------- |  | ------ | ---- | -------- |  |  | ---- | - |  | - | ---- | - |  |  | ---- | -
|                                                                 |  |                    
|                                                                 |  | Year Ended June 30,
|                                                                 |  |                    
|                                                                 |  |                     |      |            |  |       
|                                                                 |  | 2003                |      | 2002       |  | 2001  
|                                                                 |  |                     |      |            |  |       
|                                                                 |  |                     |      |            |  |       
|                                                                 |  |                     |      | (Restated) |  |       
|                                                                 |  |                     |      | % of       |  |        |      | % of     |  |        |      | % of    
|                                                                 |  |                     |      | Total      |  |        |      | Total    |  |        |      | Total   
|                                                                 |  | Amount              |      | Revenues   |  | Amount |      | Revenues |  | Amount |      | Revenues
|                                                                 |  |                     |      |            |  |        |      |          |  |        |      |         
|                                                                 |  |                    
|                                                                 |  | ($ in millions)    
|Selling, general and administrative expenses                     |  | $                   | 10.8 |            |  |        | 2.5  | %        |  | $      | 11.8 |          |  |  | 3.1  | % |  | $ | 7.9  |   |  |  | 1.7  | %
|Provision for bad debts                                          |  |                     | 1.6  |            |  |        | 0.4  |          |  |        | 1.4  |          |  |  | 0.4  |   |  |   | 3.4  |   |  |  | 0.7  |  
|Depreciation and amortization                                    |  |                     | 8.0  |            |  |        | 1.9  |          |  |        | 9.3  |          |  |  | 2.4  |   |  |   | 9.3  |   |  |  | 1.9  |  
|Interest expense and other                                       |  |                     | 8.1  |            |  |        | 1.9  |          |  |        | 6.7  |          |  |  | 1.7  |   |  |   | 7.5  |   |  |  | 1.6  |  
|Write off of deferred financing costs                            |  |                     | 1.8  |            |  |        | 0.4  |          |  |        |      |          |  |  |      |   |  |   |      |   |  |  |      |  
|Gain on sale of facilities and property                          |  |                     |      |            |  |        |      |          |  |        | (8.9 | )        |  |  | (2.3 | ) |  |   |      |   |  |  |      |  
|                                                                 |  |                     |      |            |  |        |      |          |  |        |      |          |  |  |      |   |  |   |      |   |  |  |      |  
|Income (loss) from continuing operations
    before income taxes |  |                     | (4.3 | )          |  |        | (1.0 | )        |  |        | 7.6  |          |  |  | 2.0  |   |  |   | 6.1  |   |  |  | 1.3  |  
|Provision for (benefit from) income taxes                        |  |                     | (1.5 | )          |  |        | (0.3 | )        |  |        | 2.9  |          |  |  | 0.8  |   |  |   | 2.4  |   |  |  | 0.5  |  
|                                                                 |  |                     |      |            |  |        |      |          |  |        |      |          |  |  |      |   |  |   |      |   |  |  |      |  
|Income (loss) from continuing operations                         |  |                     | (2.8 | )          |  |        | (0.7 | )        |  |        | 4.7  |          |  |  | 1.2  |   |  |   | 3.7  |   |  |  | 0.8  |  
|Income (loss) from discontinued operations                       |  |                     |     |            |  |        |     |          |  |        | (0.2 | )        |  |  | (0.0 | ) |  |   | (0.8 | ) |  |  | (0.2 | )
|Loss on sale of discontinued operations                          |  |                     |     |            |  |        |     |          |  |        |     |          |  |  |     |   |  |   | (0.5 | ) |  |  | (0.1 | )
|                                                                 |  |                     |      |            |  |        |      |          |  |        |      |          |  |  |      |   |  |   |      |   |  |  |      |  
|Net income (loss)                                                |  | $                   | (2.8 | )          |  |        | (0.7 | )%       |  | $      | 4.5  |          |  |  | 1.2  | % |  | $ | 2.4  |   |  |  | 0.5  | %
|                                                                 |  |                     |      |            |  |        |      |          |  |        |      |          |  |  |      |   |  |   |      |   |  |  |      |  



---



|    |                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Gross Margin as used here and throughout
    Managements Discussion and Analysis includes certain
    selling, general and administrative costs which are charged
    directly to the operating units, but excludes depreciation and
    amortization expenses and selling, general and administrative
    expenses.



| |                                                                                
| | -------------------------------------------------------------------------------
| | Fiscal Year ended June 30, 2003
    compared to Fiscal Year ended June 30, 2002

Revenue for the Company was $429.0 million
in fiscal year 2003, representing an increase of
$45.7 million or 11.9% from fiscal year 2002 revenue of
$383.3 million. The increase in revenue was primarily
attributable to higher MercFuel revenue due to higher fuel oil
commodity prices, resulting in an increase in revenue of
$47.6 million from the prior year. In addition, Air Cargo
had increased revenues of $4.6 million. These gains were
offset by reduced revenue of $3.8 million for Maytag. Air
Centers revenue increased $1.8 million despite the
sale of the Bedford FBO at the end of the prior fiscal year.
Gross margin in fiscal year 2003 was $26.0 million,
representing a decline of $1.8 million, or 6.7% from the
gross margin realized in fiscal year 2002 of $27.8 million.
The lower gross margin is primarily due to lower government
contract business activity during the current year resulting in
reduced gross margin of $2.2 million.

Air Centers had revenue of $96.2 million in
fiscal year 2003, an increase of $1.8 million or 1.9% from
the fiscal year 2002 revenue level of $94.4 million. The
Air Centers aviation fuel sales volume was
33.8 million gallons compared to 36.0 million gallons
in fiscal year 2002. The average realized sales price in fiscal
year 2003 was $1.82 per gallon resulting in average sales margin
of $0.805 per gallon. This compares to the average realized
sales price in fiscal year 2002 of $1.68 per gallon and an
average sales margin of $0.799 per gallon. Excluding the
contribution of the Bedford FBO from last years results,
which had revenue of $7.5 million on sales of
2.9 million gallons, fiscal year 2003 revenue increased
$9.3 million or 10.7% with a 2.2% increase in sales volume.
The revenue increase can be attributed to the higher sales price
of petroleum products.

Air Centers gross margin in fiscal year
2003 was $12.9 million, a decrease of $0.6 million or
5.1% from the gross margin of $13.5 million generated in
fiscal year 2002. Excluding the $1.8 million margin
contribution of the Bedford FBO in the prior year, the Air
Centers gross margin increased $1.1 million or 9.4%
from the prior year, which is attributed to the higher sales
volume in the current year.

Revenue from Maytag, the Companys
government contract services business segment, was
$24.4 million in fiscal year 2003, a decrease of
$3.8 million or 13.5% from the fiscal year 2002 revenue
level of $28.2 million.

20



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##### Table of Contents



The decrease in Maytags revenue was due to
the loss of revenue of $1.4 million from the Yokota, Japan
contract, which expired in December 2001 at which time Maytag
was not awarded the contract renewal as a result of a
competitive bid process. In addition, Maytag lost refueling
contracts in the prior year which provided $1.9 million in
revenue for fiscal year 2002. In addition, revenue from Weather
Data Services contracts decreased during the current year by
$0.8 million. Air terminal contract revenue of
$8.2 million or 34% of fiscal 2003 revenues, increased
slightly from $8.1 million or 29% from Maytags fiscal
2002 revenues.


Maytag had gross margin of $4.6 million in
fiscal year 2003, a decrease of $2.1 million or 32.3% from
the gross margin of $6.8 million realized in fiscal year
2002. The decrease in gross margin is primarily attributed to
the loss of the Yokota, Japan contract, lower margin on the
Kuwait Air Terminal contract and a reserve for a legal
settlement of $0.3 million in fiscal year 2003.

MercFuel, the Companys fuel sales business,
generated revenue in fiscal year 2003 of $280.1 million, an
increase of $47.6 million or 20.5% from fiscal year 2002
revenue of $232.6 million. The increase in revenue was due
to higher average sales prices offset by a slightly reduced
sales volume. The average sales price in fiscal year 2003 was
$0.977 per gallon, an increase of 20.8% from the fiscal year
2002 average sales price of $0.809 per gallon, equating to
higher revenue of $48.3 million. Fuel sales volume in
fiscal year 2003 was 286.9 million gallons, a decrease of
0.8 million gallons from fiscal year 2002 resulting in
lower revenue of $0.8 million. The higher average sales
price is due to higher average worldwide petroleum product
prices.

National, a customer of MercFuel, ceased
operations on November 6, 2002. The Company had been
providing fuel to National since May 1999. In December 2000,
National filed for Chapter 11 bankruptcy protection and the
Company continued to sell fuel to National on a secured basis
under the auspices of the bankruptcy court. Sales to National
for fiscal year 2003 through November 5, 2002 were
$24.7 million on a volume of 29.0 million gallons, as
compared to $49.1 million on a volume of 68.7 million
gallons for the full twelve months of fiscal year 2002. As a
result of the secured nature of the transactions, the amount of
loss on the cessation of business was negligible. Excluding the
sales volume to National for both periods, MercFuels sales
volume was 257.9 million gallons for fiscal year 2003 as
compared to 219.0 million gallons for fiscal year 2002.

MercFuels gross margin in fiscal year 2003
was $5.9 million representing a decline of
$0.7 million or 10% from fiscal year 2002. The average
gross margin per gallon sold in fiscal year 2003 was
3.8 cents per gallon, essentially unchanged from fiscal
year 2002. The decline in gross margin was primarily due to the
lower sales volume.

The Companys Air Cargo operations had
revenue of $32.7 million in fiscal year 2003, an increase
of $4.5 million or 16.2% from the fiscal year 2002 revenue
of $28.1 million. The increase in revenue is attributed to
higher revenue in the cargo handling operations, which had
increased handling volume due to the west coast
dockworkers strike and due to improved import/export
activity.

The Air Cargo segment generated gross margin of
$2.6 million in fiscal year 2003, an increase of
$1.7 million or 188.9% from last years gross margin
of $0.9 million, primarily due to the subleasing of the Air
Cargos Atlanta warehouse facility to Lufthansa Handling
starting in March 2002 which improved margins by
$1.2 million, higher margin of $0.4 million in Cargo
Space Logistics and higher margins at its Los Angeles warehouse
operations of $0.4 million partially offset by higher
start-up expenses for the Mercury World Cargo operations and
lower margins in the Cargo Management operations of
$0.2 million.

Bad debt expense in 2003 totaled
$1.6 million or 0.4% of total revenue. This represents a
$0.2 million increase from fiscal year 2002 bad debt
expense of $1.4 million which also represented 0.4% of
fiscal year 2002 revenue. The Company experienced no significant
individual write-offs during the current fiscal year.

Selling, general and administrative
(G&A) expenses decreased in fiscal year 2003 to
$10.8 million, a decrease of $1.0 million or 8.1% from
the fiscal year 2002 expense of $11.8 million.

Depreciation and amortization expense was
$8.0 million in the current period as compared to
$9.3 million last year. The reduction is due to the sale of
the Bedford FBO in June 2002.

21



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##### Table of Contents



The current period also reflects the cessation of
the amortization of goodwill due to the adoption of Statement of
Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets effective as of
July 1, 2002 which resulted in a decrease in annual
amortization expense of $0.4 million from the prior year.

Interest expense in the current period was
$8.0 million, an increase of $2.1 million from last
years interest expense of $5.8 million. The increase
is due primarily to a $1.7 million accrual of a premium
relating to the Companys $24 million Senior
Subordinated 12% Note, for which the Company would be
obligated to pay in the event the note is not prepaid prior to
December 31, 2003. As of the effective date of the amended
$24 million Senior Subordinated 12% Note, the Company
estimated that the Note would be outstanding for the full term
of the Note and, therefore, accrued the premium associated with
the issuance of the additional consideration over the remaining
term of the Note, which was 36 months. On October 28, 2003,
the Company announced that Allied had acquired the
Companys $24.0 million Senior Subordinated 12% Note
due December 31, 2005 from J. H. Whitney Co.
Mezzanine Fund (the Whitney Note). The Whitney Note
contained provisions whereby if any amount of the Whitney Note
is outstanding on December 31, 2003, J. H. Whitney Company
Mezzanine Fund (J. H. Whitney) would be
entitled to stock warrants equivalent to 5% of the then
outstanding shares of the Companys common stock for a
nominal amount and if there is $12.0 million or more of the
principle of the Whitney Note outstanding on December 31,
2003, J. H. Whitney would be entitled to a second set
stock warrants equivalent to 5% of the then outstanding shares
of the Companys common stock and an additional note with a
principal amount of $5 million. Upon Allieds
acquisition of the Whitney Note, Allied waived these provisions.

As a result of the restructuring of the
Companys long term debt in the current period, the Company
incurred debt extinguishment costs of $1,773,000. This is
comprised of the unamortized portion of the deferred debt
issuance costs associated with the previous senior
collateralized credit facility and the subordinated note at the
time of early extinguishment of this debt, and note amendment
and expenses incurred associated with other refinancing options
that were not completed.

In fiscal year 2002, the Company wrote-off the
deferred stock offering costs of $1.0 million associated
with the planned public and private offering of MercFuel common
stock. The Company decided not to undertake the offering due to
market uncertainties and general economic conditions at the time.

In fiscal year 2002, the Company incurred
$0.2 million in expenses net of tax relating to final
payroll costs for RPA, a discontinued segment sold on
July 3, 2001. No additional costs relating to this segment
were incurred in fiscal year 2003.

The effective income tax benefit on the loss from
continuing operation for fiscal year 2003 was 34.5% resulting in
an income tax benefit on the loss from continuing operations of
$1.5 million. This compares to an effective income tax rate
on the income from continuing operations for fiscal year 2002 of
38.5% resulting in an income tax expense on income from
continuing operations of $2.9 million. The reduction in the
effective income tax rate in fiscal 2003, resulting in a lower
income tax benefit, is due to non-deductible expenses and a
lower effective state income tax rate.



| |                                                                                
| | -------------------------------------------------------------------------------
| | Fiscal Year ended June 30, 2002
    compared to Fiscal Year ended June 30, 2001

Revenue for the Company was $383.3 million
in fiscal year 2002, representing a decline of
$95.1 million or 19.9% from fiscal year 2001 revenue of
$478.4 million. The revenue decline was primarily
attributable to lower revenue in both the MercFuel and FBO
businesses due to lower fuel oil commodity prices equating to
$68.9 million and to the reduced business levels attributed
to the aftermath of the tragic events of September 11,
2001. Gross margin in fiscal year 2002 was $27.8 million,
representing a decline of $6.4 million, or 18.8% from the
gross margin realized in fiscal year 2001 of $34.2 million.
The lower gross margin is primarily due to lower general
business activity resulting from September 11, 2001 and
lower realized margins and general business activity in Air
Cargos operations.

Air Centers had revenue of $94.4 million in
fiscal year 2002, a decrease of $5.1 million or 5.1% from
the fiscal year 2001 revenue level of $99.5 million. Air
Centers sales volume of aviation fuel was 36.0 million

22



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##### Table of Contents



gallons in fiscal year 2002 compared to
36.4 million gallons in fiscal year 2001. The average
realized sales price in fiscal year 2002 was $1.679 per gallon
resulting in average sales margin of $0.799 per gallon. This
compares to the average realized sales price in fiscal year 2001
of $1.819 per gallon and an average sales margin of $0.717 per
gallon. The sales volume decline in fiscal year 2002 as compared
to fiscal year 2001 of 378,000 gallons, or 1.0%, was primarily
due to airport closures following September 11, 2001. It is
estimated that Air Centers sales volume declined
approximately 400,000 gallons during the general aviation
shutdown.


Air Centers gross margin was
$13.5 million in fiscal year 2002, a decrease of
$1.5 million or 9.8% from the gross margin of
$15.0 million generated in fiscal year 2001. The lower
gross margin is primarily attributed to higher operating
expenses. Despite the lower sales volumes the average sales
margin increased $0.082 per gallon resulting in an increase of
$3.0 million in gross margin. In addition, into-plane
revenue and hangar rental and tie-down services resulted in an
additional $1.6 million in gross margin during fiscal year
2002. These increases were offset by increased operating costs
of approximately $6.0 million in fiscal year 2002.

In June 2002, the Company sold its FBO operation
at Bedford, Massachusetts to Signature Flight Support Corp.
resulting in a pre-tax gain of $8.9 million. Prior to the
sale, the Bedford FBO had revenue of $7.5 million in fiscal
year 2002 and $7.3 million in fiscal year 2001 resulting in
gross margin of $1.8 million and $1.4 million,
respectively.

Revenue from Maytag was $28.2 million in
fiscal year 2002, a decrease of $0.6 million or 1.9% from
the fiscal year 2001 revenue level of $28.8 million. The
major decrease in Maytags revenue was the loss of revenue
from the Yokota, Japan contract which expired in December 2001
and Maytag was not awarded the contact renewal as a result of a
competitive bid process at the conclusion of the contract term.
This contract represented 17% of Maytags revenues during
fiscal year 2001. In addition, revenue from Weather Data
Services contracts decreased during fiscal year 2002. These
losses were mitigated in part by additional revenues from
refueling, base operating system contracts, and air terminal
contracts of $7.4 million or 26.4% of government contract
services revenues in fiscal year 2002.

Maytags gross margin was $6.8 million
in fiscal year 2002, an increase of $1.1 million or 19.7%
from the gross margin of $5.7 million realized in fiscal
year 2001. Despite the loss of $1.3 million in gross margin
from the Yokota contract, margins on other air terminal
contracts increased $1.5 million from the prior year,
primarily due to the Kuwait contract. In addition, base
operating support contract gross margin increased
$1.0 million from fiscal year 2001.

MercFuel, the Companys fuel sales business,
generated revenue in fiscal year 2002 of $232.6 million, a
decrease of $86.2 million or 27.1% from fiscal year 2001
revenue of $318.8 million. The decline in revenue was due
to lower average sales prices and lower sales volume. The
average sales price in fiscal year 2002 was $0.809 per gallon, a
decrease of 21.5% from the fiscal year 2001 average sales price
of $1.031 per gallon, equating to lower revenue of
$63.9 million. Fuel sales volume for fiscal year 2002 was
287.7 million gallons, a decrease of 21.7 million
gallons from fiscal year 2001 equating to lower revenue of
$22.3 million. The lower fuel sales volume is attributed to
the effects of September 11, 2001 on the airline industry
and the general decline in general aviation in the United States
and abroad. The lower average sales price is due to lower
average worldwide petroleum product prices.

Despite the 27.1% decline in revenue,
MercFuels gross margin in fiscal year 2002 of
$6.6 million represented a decline of only
$0.8 million or 12.2% from fiscal year 2001. The average
gross margin per gallon sold in fiscal year 2002 was 3.8 cents
per gallon, essentially unchanged from fiscal year 2001, as
MercFuel was able to maintain its average profit margin despite
the decline in sales prices. The decline in gross margin was
primarily due to the lower sales volume.

Air Cargos revenue was $28.1 million
in fiscal year 2002, a decrease of $3.2 million or 10.3%
from the fiscal year 2001 revenue of $31.3 million. Air
Cargo experienced revenue declines in all of its areas of
operations in fiscal year 2002 as compared to fiscal year 2001
as air cargo traffic declined as a result of the worldwide
economic slowdown and the aftermath of September 11, 2001.
The decline in air cargo business activity resulted in pricing
competition among cargo handlers, a surplus of cargo storage
capacity in the marketplace, and a reduction in the number of
air freighter flights.

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Air Cargos gross margin was
$0.9 million in fiscal year 2002, a decrease of
$5.2 million or 85.3% from fiscal year 2001s gross
margin of $6.1 million. Air Cargos handling
businesss gross margin decreased to $1.3 million in
fiscal year 2002 from $4.4 million in fiscal year 2001 due
to the lower revenue and other factors described above in
addition to the fixed warehouse facility costs including
warehouse lease expense. In the fourth quarter of fiscal 2002,
the Company recorded $459,000 of additional rent expense, net of
recoverable sublease income, representing the retroactive
portion of the proposed rent increase at one of the
Companys warehouse facilities located at LAX. The proposed
rental increase will be effective retroactive to June 18,
2001. The space brokerage business realized gross margin of
$1.4 million, a decline of $1.0 million or 41.6% from
the gross margin of $2.4 million in fiscal year 2001. The
Company also incurred start-up expenses of $0.4 million
associated with its Mercury World Cargo business in fiscal year
2002 in addition to administrative expenses for cargo operations
of $1.6 million.

Bad debt expense in fiscal year 2002 totaled
$1.4 million or 0.3% of total revenue. This represents a
reduction of $2.1 million of expense from fiscal year 2001
bad debt expense of $3.4 million which included
$1.6 million associated with a legal settlement with
Western Pacific Airlines Inc. (WPAIC) and
$1.0 million associated with Tower Aviation, both related
to alleged preferential treatment claims.

Selling, general and administrative
(G&A) expenses increased in fiscal year 2002 to
$11.8 million, an increase of $3.8 million or 48.5%
from fiscal year 2001 G&A expenses of $7.9 million. The
increase in G&A expenses was primarily associated with
higher professional services associated with public relations,
legal advisory and accounting services and with executive
severance costs.

The Company incurred a one-time expense in fiscal
year 2002 of $1.0 million associated with the initiation
and subsequent cancellation of the initial public offering of
MercFuel, Inc. The costs incurred in establishing MercFuel as a
stand-alone entity and in preparing the initial public offering
were expensed when the decision to abort the spin-off was made
after the September 11, 2001 incident.

Depreciation and amortization expense in fiscal
year 2002 was $9.3 million, essentially unchanged from
fiscal year 2001.

Interest expense for fiscal year 2002 was
$5.8 million, a decrease of $1.4 million or 18.8% from
the interest expense incurred in fiscal year 2001. The lower
interest expense can be attributed to both lower effective rates
of interest and lower average debt outstanding as the Company
focused on the repayment of debt to reduce its debt service
level.

Liquidity and Capital Resources

The Company has historically financed its
operations primarily through operating cash flow, bank debt and
various public and private placements of bonds and subordinated
debt. The Companys cash balance as of June 30, 2003
was $2.8 million, a decrease of $2.8 million from
June 30, 2002.

Net cash provided from operating activities in
fiscal year 2003 was $4.8 million, a decrease of
$9.1 million from fiscal year 2002. Contributing to the
lower net cash provided from operating activities in fiscal year
2003 was a net usage of cash for operating assets and
liabilities of $3.8 million whereas the net cash provided
from operating activities in fiscal year 2002 benefited from net
cash generated from operating assets and liabilities of
$7.4 million. Contributing to the net usage of cash in
fiscal year 2003 was an increase in inventory of
$1.4 million and increase in prepaid expenses and other
current assets of $2.2 million.

Net cash used in investing activities in fiscal
year 2003 was $0.9 million as compared to cash provided by
investing activities in fiscal year 2002 of $8.3 million.
In fiscal year 2003, the Company invested $1 million in the
acquisition of Canyon Fuels business, an aviation fuel
resale business and $4.1 million for general maintenance
capital. The net cash generated in fiscal year 2002 was
primarily the result of the sale of the Companys FBO in
Bedford, Massachusetts providing cash flow of $15.5 million
partially offset by $4.5 million of general maintenance
capital. The increase in restricted cash in fiscal year 2002
represents a set aside for federal and state income taxes in
conjunction with the gain resulting from the sale of the Bedford
FBO. These funds were utilized in the first quarter of fiscal
year 2003.

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In fiscal year 2003, the Company used
$6.8 million of cash related to financing activities to
reduce and refinance long-term debt. The Company realized
$16.9 million in proceeds from the refinancing of its
senior debt. The proceeds were utilized with $13.3 million
used to retire the previous debt facility and $3.5 million
incurred in financing costs. The Company also acquired
50,850 shares of its common stock in a stock repurchase
during the first quarter of the fiscal year.

The Company also provided funds to certain key
executives in fiscal 2002 in the amount of $3.9 million
that was used by the executives to acquire the Companys
common stock from CFK Partners LLC, a partnership consisting of
Messrs. Czyzyk, Fagan and Kopko, as described in Note 11 to
the Companys consolidated financial statements included in
this Annual Report on Form 10-K. These acquisitions were
made by the key executives under employment agreements and
contain provisions for the loans to be forgiven over either an
eight-year or ten-year periods, under certain conditions.

Separate and apart from the transaction noted
above, the Company also acquired 59,200 shares of its
common stock in a stock purchase in the open market during the
first quarter of fiscal year 2002.

On December 30, 2002, the Company entered
into a loan and security agreement with Foothill Capital
Corporation (Foothill), now known as Wells Fargo
Foothill, a division of Wells Fargo Bank (the
Facility), refinancing its senior collateralized
credit facilities for a five-year term, as agent for the lenders
party thereto. In addition, the Company and J.H. Whitney
Co. Mezzanine Fund entered into agreements amending the terms of
the subordinated note (the Whitney Note), which will
mature on December 31, 2005. The initial funding from the
facility and the amendments to the subordinated note were
completed on December 31, 2002.

The Facility provides a total of up to
$42.5 million in revolving and term loans. The term loan is
for an amount equal to $12.5 million, while the revolving
loan is for an amount not to exceed 85% of Eligible Accounts
Receivable (as defined in the loan agreement), subject to
certain limitations. The term loan is payable in
$1.0 million installments each April 1 and
October 1, beginning April 1, 2003, and in
$0.5 million installments each July 1 and
December 31, until paid in full. Amounts repaid under the
term loan increase the maximum availability under the revolving
loan. The Facility also provides for the issuance of certain
letters of credit. The terms of the Facility require that the
Company maintain a minimum availability on the revolving line of
credit of $2.5 million. As of June 30, 2003, the
Company had $4.4 million of availability on the revolving
line of credit. The amount available under the revolving credit
line fluctuates on a daily basis dependent upon the amount of
Eligible Receivables, the amount of letters of credit
outstanding and the amount of outstanding cash borrowings
against the revolving credit facility.

The Facility may be terminated on
December 23, 2005, if the Whitney Note is not paid in full
or refinanced, on terms acceptable to Foothill, prior to
October 31, 2005. The Facility is collateralized by
substantially all of the assets of the Company and its
subsidiaries. The Facility contains provisions that require the
maintenance of certain financial ratios including minimum EBITDA
levels, minimum fixed charge coverage ratios, and maximum annual
capital expenditure levels. In addition, under the Facility, the
Company is prohibited from paying non-intercompany cash
dividends.

The amended Whitney Note is in the form of a
$24.0 million Senior Subordinated 12% Note (the
Note) with detachable warrants to purchase
251,563 shares of the Companys common stock
exercisable through September 9, 2006 at $6.10 per share as
adjusted for the one-for-two stock split in July 2003. The
warrant exercise price was reduced from $11.0 per share. The
Note is collateralized by the Companys assets, subordinate
to Foothills interest. Warrants to purchase an additional
5% of the Companys common stock, exercisable for nominal
consideration, will be issuable if the principal amount of the
Note is not prepaid by December 31, 2003. Warrants to
purchase a second 5% of the Companys common stock,
exercisable for nominal consideration, along with an additional
note in the original principal amount of $5 million must
also be issued if the outstanding principal amount of the Note
is greater than $12 million after December 31, 2003.
However, on October 28, 2003 the Company announced that
Allied had acquired the Note from Whitney and waived the
provisions for the additional warrants equivalent to 10% of the
Companys outstanding common stock and the additional
$5 million note. Beginning January 2004 and continuing
through June 2004, the interest rate will increase by 1% per
annum each month up to a maximum rate of 18%. The amended note

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contains similar covenants as the original Note,
including covenants that, among other matters, limit senior
indebtedness, the payment of dividends, and the disposition of
assets. The revised covenants also include minimum EBITDA
requirements and capital expenditure limitations.


On October 28, 2003, the Company also
announced the FBO Sale, for which closing is, among other
things, contingent on: 1) stockholder approval; 2) the
completion of due diligence; and 3) regulatory
agencies approvals and consents. The proceeds from the FBO
Sale are subject to the establishment of an escrow account in
the amount of $8.3 million to be distributed at the earlier
of the award of a long term lease to Allied for the FBO at the
Hartsfield Airport or in five equal annual installment payments
starting at the first anniversary date of the close of the FBO
Sale if the Air Centers lease for the Hartsfield FBO is
not terminated earlier, reimbursement for certain FBO capital
expenditures made by the Company, minimum working capital
amounts at closing and other customary terms and conditions. The
Company has received consent for the FBO Sale from its Senior
Lenders. In accordance with the terms of the definitive
agreement, as amended, the FBO Sale is to close on
January 16, 2004 but the closing date can be extended, at
Allieds discretion, to April 16, 2004. The Company
expects the FBO Sale to close in the Companys third
quarter of fiscal 2004.

On December 12, 2003, the Company entered
into a settlement agreement (the Hambro Settlement)
relating to litigation with J O Hambro Capital
Management and certain of its affiliates and private clients
(J O Hambro) whereby the Company issued
three promissory notes for an aggregate principle amount of
$3,586,000 (the Hambro Notes) in exchange for the
following, among other things: 1) the repurchase of
343,600 shares of the Companys common stock owned by
J O Hambro; 2) reimbursement of certain costs
associated with the mutual release of claims; and 3) a
standstill agreement associated with the pending lawsuits and
anticipated proxy solicitations. The Hambro Notes: 1) are
subordinated to the Senior Secured Credit Facility and to the
Senior Subordinated Note; 2) are due on the earlier of
(a) March 31, 2006, provided that if the Senior
Secured Credit Facility Matures on December 31, 2007 then
such date shall be March 31, 2008 and (b) the
ninetieth day following payment in full of the Senior Secured
Credit Facility and the termination of commitments for the
Senior Secured Lender to provide financing under the Senior
Secured Credit Facility; and 3) bear and accrue interest at
the rate of 12% per annum commencing on December 31, 2003
but will increase to 16% per annum for any amount of unpaid
principal after June 30, 2004. During the second quarter of
fiscal 2004, the Company will recognize as expense
$1.8 million, which represents the consideration paid to
J.O. Hambro in excess of the market value of such shares at
that time.

At the close of the FBO Sale, the Company
estimates gross sales proceeds of $73.1 million. The
Company intends to use these proceeds to: 1) prepay the
outstanding principal amount on the Senior Secured Term Loan of
$10 million; 2) repay all outstanding cash advances on
the Revolving Line of Credit; 3) pay all accrued interest,
fees and expenses associated with the Senior Secured Credit
Facility; 4) provide cash collateral for the outstanding
Letters of Credit of approximately $16.0 million;
5) prepay the outstanding principal amount on the Allied
Note; 6) pay all accrued interest, fees and expenses
associated with the Allied Note; 7) establish an escrow
account for the FBO at the Hartsfield Airport in the amount of
$8.3 million; 8) repay the outstanding principal
amount due on the J. O. Hambro Note of
$3.6 million; 9) repay all accrued interest on the
Hambro Notes; and 10) pay all commissions, fees and
expenses associated with the sale transaction. After settlement
of the all of the obligations noted above, the Company estimates
that the transaction will result in surplus cash proceeds of
approximately $4.0 million, of which an estimated
$1.5 million will be required to settle the Companys
current income tax obligation associated with the FBO Sale
although the exact amount of the surplus cash proceeds will be
dependent upon many factors including, but not limited to, the
date of closing.

The Company is currently evaluating new credit
facilities to support the Companys expansion of its
remaining three business lines and to support the Companys
Letters of Credit requirements thereby releasing the cash
collateral of approximately $16 million to be used for
working capital requirements and general corporate purposes.

The Company has historically competed in a niche
market where it generally purchases fuel from major oil
companies and refiners using credit terms which on average are
shorter than the credit terms the Company

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offers its fuel customers. Because of its bulk
buying and credit worthiness the Company is able to purchase
fuel at a lower price than its customers. Typically, the Company
buys on terms that range from 3 days to 15 days and
sells on terms ranging up to 30 days. As a result, the
Company requires access to sufficient credit facilities which
may need to increase in the future as the Company expands its
business. The amount of working capital consumed by the Company
has depended and is expected to depend primarily on the quantity
and the price of fuel bought and sold, the Companys
extension of credit to its customers, customers compliance
with the Companys credit terms and the credit terms
extended to the Company by its suppliers. Any increase in the
quantity and/or price of fuel sold or in credit terms extended
to its customers and/or any reduction in credit terms extended
to the Company by its suppliers and/or any substantial customer
noncompliance with the Companys credit terms can result in
a corresponding increase in the Companys working capital
requirements. Under these circumstances, the Companys
liquidity could be adversely affected unless the Company is able
to increase vendor credit or increase lending limits under the
Companys Revolving Credit facility. The Company believes,
however, that its current financing arrangements and vendor
credit terms should provide the Company with sufficient
liquidity in the event of a temporary surge in fuel oil prices.
However, to the extent that the Revolving Credit facility or any
other credit facility is used to fund increased working capital
requirements, the Company will incur additional debt service
costs


The Companys accounts receivable balance as
of June 30, 2003 was $46.7 million. The Companys
accounts receivable are primarily comprised of customer trade
receivables net of an allowance for doubtful accounts of
$2.0 million. The Companys credit risk is based in
part on the following factors: 1) a substantial portion of
the customer trade receivables are related to a single industry
(aviation) and 2) at any given point in time, one or
several customers may owe a significant balance to the Company.
At June 30, 2003, MercFuels accounts receivable
comprised 58% of the Companys total receivable. Of
MercFuels receivables, approximately 9.8% of the customers
comprised 65.6% of the total receivables with an average balance
of $1.0 million for these customers.

The Companys MercFuel operations accounted
for approximately 65.3% of the Companys total revenue in
fiscal year 2003. As of June 30, 2003, MercFuel customers
comprise approximately 58% of the Companys total accounts
receivable due from what the Company defines as smaller and
generally less well-established or well-capitalized airlines,
including certain foreign, regional, commuter and start-up
airlines. These customers are affected by fluctuations in the
economy in general and in the aviation industry specifically.
For example, a material rise in the price of aviation fuel tends
to adversely impact these types of customers. To the extent that
MercFuels airline customers are not able to immediately
adjust their business operations to reflect increased operating
costs, they could take relatively longer to pay the
Companys accounts receivable. Such payment delays would
further increase the Companys working capital demands. In
some cases, the impact of such economic fluctuations could
materially impair the financial stability of an airline customer
such that it would be unable to pay amounts owed to the Company
and could result in such airline customer filing for bankruptcy
protection. In that event, Mercury could incur significant
losses related to the uncollectability of the receivables. The
Company has incurred in the past and is likely to continue to
incur losses as the result of the business failure of a
customer. The Company assesses its credit portfolio on an
ongoing basis and establishes allowances which the Company
believes are adequate to absorb potential credit problems that
can be reasonably anticipated. This assessment includes an
analysis of past due accounts as well as a review of accounts
with significant balances. Allowances are established for all or
some portion of past due balances based upon various factors,
including the extent of delinquency, financial conditions of
delinquent customers and amounts of insurance and collateral, if
any.

Accounts receivable sales days outstanding were
40 days and 43 days as of June 30, 2003 and 2002,
respectively. Accounts receivable days sales outstanding have
historically been impacted by a high volume of fuel sales to
customers with extended payment terms. However, during fiscal
year 2001, the Company added a large customer, AirTran Airways,
whose terms are prepaid. The terms of the prepayment provide for
weekly payments equal to the following weeks estimated
sales. This prepaid customer accounted for approximately 19% and
15% of the Companys consolidated revenue for the fiscal
years ended June 30, 2003 and 2002, respectively.

In April 2002, the Company received a notice from
LAWA of a proposed rent increase for the Avion Warehouse
retroactive to June 18, 2001. In response to this notice,
the Company submitted protests to the

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LAWA Staff and Board of Commissioners regarding
the proposed increase on the basis that: 1) the Company had
made a substantial investment in the warehouse facility and the
proposed rental increase would greatly reduce the Companys
ability to achieve an acceptable rate of return on the
Companys investment to date; 2) if any increase is to
be made, it should be determined based on the Company being the
developer of the facility and not strictly a tenant; and
3) that the amount of the proposed increase is not
justified given the general business environment of the air
cargo handling operations. In response to the Companys
protests to the proposed increase, in September 2002 the Company
received a revised notice from LAWA of a reduced proposal for a
rental increase for the Avion Warehouse. The LAWA Staff intend
to present their recommended rental increase to the LAWA Board
of Commissioners for approval in late January 2004. From
June 18, 2001 through June 30, 2003, the accumulated
amount of the retroactive rent increase is $1,579,000, which
will be partially offset by recoverable retroactive sublease
rental income of $661,000. The LAWA Staff has indicated that the
retroactive portion of the rent increase would be payable by the
Company in equal monthly installments over the remaining term of
the lease agreement, which is scheduled to expire in June 2006.
The proposed monthly rent, on a go-forward basis, would increase
by $64,600, or 35%, from the existing monthly rent. The Company
has accrued $459,000 for the retroactive rent adjustment, which
is net of the increased recoverable retroactive sublease rental
income, as of June 30, 2002, and has accrued an additional
$114,750 on a quarterly basis in fiscal 2003, resulting in a
total accrual of $918,000 as of June 30, 2003. As discussed
in Item 1. Business under Restatement and Note 1 to
the consolidated financial statements, the fiscal 2002 financial
statements and each of the first three quarters of fiscal 2003
were restated related to this retroactive rent increase.


The Companys most recent recurring capital
expenditure requirements have been related to the maintenance
and expansion of the Companys Air Center facilities.
During fiscal year 2002, the Company completed the construction
of a hangar at the Bedford FBO at a cost of approximately
$5.1 million, incurred primarily during fiscal years 2000
and 2001. This hangar was sold in conjunction with the sale of
the Bedford facility at the end of fiscal year 2002. The Company
spent approximately $1.8 million for the construction of a
new hangar at the Jackson Air Center during fiscal year 2002.

Absent a major prolonged surge in oil prices or a
capital intensive acquisition, the Company believes its
operating cash flow, senior credit facility, vendor credit and
cash balance will provide it with sufficient liquidity during
the next twelve months. In the event that fuel prices increase
significantly for an extended period of time, the Companys
liquidity could be adversely affected unless the Company is able
to increase vendor credit or increase lending limits under its
revolving credit facility. The Company believes, however, its
revolving credit and vendor credit should provide it with
sufficient liquidity in the event of a major temporary surge in
oil prices.



| |                                                                                       
| | --------------------------------------------------------------------------------------
| | Contractual Obligations, Commercial
    Commitments and Off-Balance Sheet Arrangements

The Companys significant contractual
obligations and financial commitments are summarized below.
Additional information regarding the Companys financial
commitments can be found in Notes 8, 9 and 14 to the
Consolidated Financial Statements included in Item 15 of
this Annual Report on Form 10-K.



| |                  
| | -----------------
| | Letters of Credit

As of June 30, 2003, the Company had
outstanding letters of credit in the amount of
$15.5 million. These letters of credit are included as part
of the Companys revolving credit and reduce the amount of
cash availability under the revolving credit facility. A letter
of credit in support of the tax exempt bonds issued by the
California Economic Development Financing Authority
(CEDFA) comprised $14.2 million of the
outstanding letters of credit as of June 30, 2003.

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| |                  
| | -----------------
| | Lease Commitments

As of June 30, 2003, the Companys
future minimum lease payments under non-cancelable operating
leases for rental properties with terms in excess of one year
were as follows:

|                                    |  |            |        | 
|----------------------------------- |  | ---------- | ------ | 
|                                    |  | Thousands 
|For the Fiscal year Ending June 30, |  | of dollars
|                                    |  |           
|2004                                |  | $          | 12,821 | 
|2005                                |  |            | 11,937 | 
|2006                                |  |            | 11,078 | 
|2007                                |  |            | 6,993  | 
|2008                                |  |            | 5,930  | 
|Thereafter                          |  |            | 50,051 | 
|                                    |  |            |        | 
|Total minimum payments              |  | $          | 98,810 | 
|                                    |  |            |        | 

As part of the Companys normal business
practices, the Company enters into site leases with the
respective airport agencies for its Air Centers and Air Cargo
Operations. In addition, the Company enters into leases for
fueling equipment used in its Air Centers and MercFuel
businesses.



| |               
| | --------------
| | Long Term Debt

As of June 30, 2003, the Company had long
term debt and notes payable, including the current portion of
principal due, in the amount of $53.7 million. Please refer
to Notes 8 and 9 of the Companys Consolidated Financial
Statements for a description of the type of long term debt and
notes payable outstanding. The principal payment schedule
associated with these obligations is as follows:

|                                    |  |            |        | 
|----------------------------------- |  | ---------- | ------ | 
|                                    |  | Thousands 
|For the Fiscal year Ending June 30, |  | of dollars
|                                    |  |           
|2004                                |  | $          | 4,194  | 
|2005                                |  |            | 4,145  | 
|2006                                |  |            | 28,154 | 
|2007                                |  |            | 3,664  | 
|2008                                |  |            | 1,174  | 
|Thereafter                          |  |            | 12,364 | 
|                                    |  |            |        | 
|Total minimum payments              |  | $          | 53,695 | 
|                                    |  |            |        | 



| |                     
| | --------------------
| | Employment Contracts

The Company has a consulting agreement with its
Chairman of the Board (the Chairman), and employment
agreements with its: 1) President and Chief Executive
Officer (CEO); 2) Executive Vice President,
General Counsel and Secretary (General Counsel); and
3) Vice President of Finance, Treasurer and Chief Financial
Officer (CFO), and other business unit officers.
Following is a brief description of the terms and conditions of
the key employment contracts.

The consulting agreement with the Chairman dated
as of August 22, 2000 is for a three-year period with
automatic one-year extensions at the anniversary dates, starting
August 22, 2003, until either party terminates the
agreement in writing prior to such renewal. Under this
agreement, the Chairmans annual consulting fee is $350,000
per year.

The amended and restated employment agreement
with the CEO dated as of May 22, 2002 is for a term ending
on November 15, 2004, subject to automatic one-year
extensions starting on November 15, 2004 and on each
successive anniversary date unless either party gives
30 days notice of non-renewal. The annual salary under this
agreement is $520,000. The CEO is also eligible for an annual
bonus equal to: (i) 25% of the CEOs base compensation
subject to the Companys consolidated operating income
before sales and general and

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administrative expenses and depreciation
(Adjusted EBIT) for the most recent completed fiscal
year exceeding the average of the Adjusted EBIT for the
immediately prior three fiscal years; and (ii) 4.166% of
the amount by which the Adjusted EBIT for the most recently
completed fiscal year exceeds the average Adjusted EBIT for the
immediately prior three fiscal years. The CEO was eligible to
participate in the 2002 Management Stock Purchase Plan (the
2002 Plan), wherein the CEO was eligible to purchase
up to 193,825 shares of the Companys common stock, as
adjusted for the reverse stock split, from CFK Partners at a
price of $15.00 per share, as adjusted for the one-for-two
reverse stock split effective June 18, 2003, such purchase
being funded by a loan from the Company. The CEO elected to
participate in the 2002 Plan and purchased 193,825 shares of the
Companys common stock, as adjusted for the stock split.
The CEOs obligation to repay the Company is forgiven
ratably over a ten-year period provided the CEO remains employed
by the Company during such period.


In the event the CEOs employment with the
Company is terminated for cause, the CEO will not be entitled to
receive or be paid a bonus for the year in which employment
terminated. In the event the CEOs employment with the
Company is terminated without cause, the Company will be
obligated to pay the CEO the lesser of three years base
compensation or the base compensation that would have been paid
to him over the remaining term of the CEOs employment
agreement, and a bonus for the fiscal year of employment
termination in an amount which would otherwise be paid to the
CEO prorated over the days the CEO was gainfully employed by the
Company during the fiscal year in which the employment
termination occurred.

The employment agreements for the General Counsel
and the CFO dated as of May 22, 2002 are each for a period
ending on May 22, 2005 subject to automatic one-year
extensions starting on May 22, 2005 and each subsequent
anniversary date, unless either party gives a minimum
30 days notice of non-renewal. Under the employment
agreements the annual base salary for the General Counsel and
the CFO is $179,000 and $170,000, respectively. Both the General
Counsel and the CFO were eligible to participate in the 2002
Plan, wherein the General Counsel was eligible to purchase up to
15,948 shares and the CFO was eligible to purchase up to 12,500
shares of the Companys common stock from CFK Partners for
a price of $15.00 per share, all amounts as adjusted for the
reverse stock split, with such purchases being funded through a
loan from the Company. Both the General Counsel and the CFO
elected to participate in the 2002 Plan and purchased the
maximum number of shares allotted. The obligations to repay the
Company are forgiven over a ten-year period, provided they each
remained employed by the Company during such period.

In the event that either the General
Counsels or the CFOs employment with the Company is
terminated for cause, or in the event of their death or
disability, all rights under the respective employment
agreements will cease. In the event that either the General
Counsels or the CFOs employment with the Company is
terminated without cause, the Company will be obligated to pay
the respective individual the lesser of one-years base
compensation or the base compensation that would otherwise be
paid to them over the remaining term of the employment
agreement, not to be less than the equivalent of six months base
compensation.

As of June 30, 2003, the Companys
future minimum payments for these and other executive employment
contracts, excluding discretionary and performance based
bonuses, are as follows:

|                                    |  |            |       | 
|----------------------------------- |  | ---------- | ----- | 
|                                    |  | Thousands 
|For the Fiscal year Ending June 30, |  | of dollars
|                                    |  |           
|2004                                |  | $          | 1,388 | 
|2005                                |  |            | 927   | 
|                                    |  |            |       | 
|Total minimum payments              |  | $          | 2,315 | 
|                                    |  |            |       | 



| |                     
| | --------------------
| | Purchase Commitments

Effective April 1, 2003, the Companys
Air Cargo operations entered into a one-year renewal of its
contract to purchase all of South African Airlines cargo
capacity on its passenger flights from the United States and
Canada to South Africa. The commitment for this one-year
contract is approximately $4.6 million, which is
essentially unchanged from the previous year.

30



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##### Table of Contents



The Company currently has no fixed volume or
fixed price purchase commitments, although the Company may, from
time-to-time, commit to such arrangements.

Critical Accounting Policies and
Estimates

The preparation of the consolidated financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect amounts reported
therein, including the financial information reported in
Managements Discussion and Analysis of Financial Condition
and Results of Operations. Estimates are based 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 form other
sources. Actual results reported in future periods may be based
upon amounts which differ from those estimates. The following
represent what the Company believes are the critical accounting
policies most affected by significant management estimates and
judgments:



| |                                    
| | -----------------------------------
| | Allowance for Doubtful
    Accounts

The Company continuously monitors collections and
payments from its customers and maintains a provision for
estimated credit losses based upon its historical experience and
any specific customer collection issues that have been
identified. Accounts receivable are reported net of the
allowance for amounts that may become uncollectible in the
future. Such allowances can be either specific to a particular
customer or general to all customers. The Company believes the
level of the allowance for bad debts is reasonable based on past
experience and an analysis of the net realizable value of the
Companys trade receivables at June 30, 2003. However,
the credit loss rate can be impacted by adverse changes in the
aviation industry, or changes in the liquidity or financial
position of its customers which would affect the collectability
of its accounts receivable and its future operating results. If
credit losses exceed established allowances, our results of
operations and financial condition may be adversely affected.



| |              
| | -------------
| | Contingencies

The Company accounts for contingencies in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 5, Accounting for
Contingencies. SFAS No. 5 requires that the Company
record an estimated loss from a loss contingency when
information available prior to issuance of the Companys
financial statements indicates that it is probable that an asset
has been impaired or a liability has been incurred at the date
of the financial statements and the amount of the loss can be
reasonably estimated. Accounting for contingencies such as legal
matters requires significant judgment. Many of these legal
matters can take years to resolve. Generally, as the time period
increases over which the uncertainties are resolved, the
likelihood of changes to the estimate of the ultimate outcome
increases. Management believes that the accruals for loss
contingencies are adequate.



| |                    
| | -------------------
| | Revenue Recognition

Revenues are recognized upon delivery of product
or the completion of service. For fuel delivered on an
into-plane basis, revenue is recognized on the date the fuel is
delivered into the aircraft. Aircraft maintenance contracts are
recognized as the labor and maintenance is completed. Cargo
handling revenue is recognized in the period the cargo is
shipped out of the Companys cargo warehouses. Space
logistics and general cargo sales agent services are recognized
as revenue in the period that the related flights occur or the
commissions are earned. Revenue associated with fixed rate fees
of long-term service contracts is recognized on a straight-line
basis over the term of the contract. Revenue associated with the
variable rate fees of long-term contracts is recognized in the
period in which services are performed and completed. The
Companys contracts with the United States Government are
subject to profit renegotiation. To date, the Company has not
been required to adjust profits arising from United States
government contracts.

31



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##### Table of Contents





| |             
| | ------------
| | Income Taxes

Deferred income taxes are determined using the
liability method. A deferred tax asset or liability is
determined based on the difference between the financial
statement and tax basis of assets and liabilities as measured by
the enacted tax rates that will be in effect when these
differences reverse. Deferred tax expense is the result of
changes in the deferred tax asset or liability. If necessary,
valuation allowances are established to reduce deferred tax
assets to their expected realizable values.



| |                                                 
| | ------------------------------------------------
| | Impairment of Long-Lived Assets and
    Goodwill

Long-lived assets and goodwill are reviewed for
impairment, based on undiscounted cash flows, whenever events or
changes in circumstances indicate that the carrying amount of
such assets may not be recoverable but in any event, no less
than once per year. If this review indicates that the carrying
amount is not recoverable, the Company will recognize an
impairment loss, measured by the future discounted cash flow
method. In July 2001, the Financial Accounting Standards Board
issued SFAS No. 142, Goodwill and Other Intangible
Assets. This statement was adopted by the Company on
July 1, 2002. SFAS No. 142 requires that goodwill not
be amortized, but be tested for impairment annually. In
accordance with this Statement, the Company completed the
transitional goodwill impairment test in November 2002. As a
result of the impairment test and the assessment of current
financial projections, no adjustments to goodwill were deemed
necessary as of June 30, 2003. The Company ceased
$0.4 million in annual amortization of goodwill effective
July 1, 2002.

New Accounting Pronouncements

On April 30, 2003, the Financial Accounting
Standards Board (FASB) issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. Such standard amends and clarifies the
accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The
provisions of this statement are generally effective for
contracts entered into or modified after June 30, 2003. The
Company does not expect that the adoption of this standard will
have a material impact on its consolidated financial statements.

In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). This
interpretation elaborates on disclosures to be made by a
guarantor in its interim and annual financial statements with
regard to its obligations under certain guarantees that it has
issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the
guarantee. The disclosure requirements of FIN 45 are
effective for interim and annual periods ending after
December 15, 2002, and the Company has adopted those
requirements beginning in the second quarter of fiscal year
2003. The initial recognition and initial measurement
requirements of FIN 45 are effective prospectively for
guarantees issued or modified after December 31, 2002. The
adoption of the recognition and initial measurement requirements
of FIN 45 did not have a material impact on the Companys
consolidated financial statements.

In January 2003, the FASB issued Interpretation
Number 46, Consolidation of Variable Interest
Entities (FIN 46). This interpretation of
Accounting Research Bulletin No. 51, Consolidated
Financial Statements, addresses consolidation by business
enterprises of variable interest entities. Under current
practice, two enterprises generally have been included in
consolidated financial statements because one enterprise
controls the other through voting interests. FIN 46 defines the
concept of variable interests and requires existing
unconsolidated variable interest entities to be consolidated by
their primary beneficiaries if the entities do not effectively
disperse risks among the parties involved. This interpretation
applies immediately to variable interest entities created after
January 31, 2003. It applies in the first fiscal year or
interim period ending after December 15, 2003, to variable
interest entities considered to be a special purpose entity
(SPE) in which an enterprise holds a variable
interest that it acquired before February 1, 2003. For
non-SPE variable purpose entities acquired before
February 1, 2003, the interpretation must be adopted no
later

32



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##### Table of Contents



than the first interim or annual reporting period
ending after March 15, 2004. The interpretation may be
applied prospectively with a cumulative-effect adjustment as of
the date on which it is first applied or by restating previously
issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first
year restated. The Company is currently evaluating the potential
impact of the adoption of FIN 46.


In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, which
establishes standards for the classification and measurement of
certain financial instruments with characteristics of both
liabilities and equity. SFAS 150 requires classification of
financial instruments within its scope as a liability, including
financial instruments issued in the form of shares that are
mandatorily redeemable, because those financial instruments are
deemed to be, in essence, obligations of the issuer. The Company
does not expect that the adoption of this standard will have a
material impact on its consolidated financial statements.



| |          
| | ---------
| | Inflation

The Company believes that inflation has not had a
significant effect on its results of operations during the past
three fiscal years.



| |                           
| | --------------------------
| | Forward-Looking Statements

Statements contained in this Annual Report on
Form 10-K which are not historical facts are
forward-looking statements. In addition, the Company, from
time-to-time, makes forward-looking statements concerning its
expected future operations and performance and other
developments. Such forward-looking statements are necessarily
estimates reflecting the Companys best judgment based upon
current information and involve a number of risks and
uncertainties, and there can be no assurance that other factors
will not affect the accuracy of such forward-looking statements.
While it is impossible to identify all such factors, factors
which could cause actual results to differ materially from those
estimated by the Company include, but are not limited to, risks
associated with acquisitions, the financial condition of
customers, non-renewal of contracts, government regulation, as
well as operating risks, general conditions in the economy and
capital markets, and other factors which may be identified from
time-to-time in the Companys Securities and Exchange
Commission filings and other public announcements.






|         |                                                                
|-------- | ---------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk.

The Company does not currently utilize material
derivative financial instruments which expose the Company to
significant market risk. However, the Companys cash flow,
earnings, and the fair value of its debt, may be adversely
effected due to changes in interest rates with respect to its
long-term debt. The table below presents principal cash flows
and related weighted average interest rates of the
Companys long-term debt at June 30, 2003 by expected
maturity dates. Weighted average variable rates are based on
rates in effect at June 30, 2003. These rates should not be
considered a predictor of actual future interest rates.

|                                   |  |                        |           |         |  |         |           |         |  |         |            |            |  |       |           |            |  |   |           |   |  |   |           |   |  |   |            |   |  |   |            | 
|---------------------------------- |  | ---------------------- | --------- | ------- |  | ------- | --------- | ------- |  | ------- | ---------- | ---------- |  | ----- | --------- | ---------- |  | - | --------- | - |  | - | --------- | - |  | - | ---------- | - |  | - | ---------- | 
|                                   |  |                       
|                                   |  | Expected Maturity Date
|                                   |  |                       
|                                   |  | June-04                |           | June-05 |  | June-06 |           | June-07 |  | June-08 |            | Thereafter |  | Total |           | Fair Value
|                                   |  |                        |           |         |  |         |           |         |  |         |            |            |  |       |           |           
|Fixed Rate Subordinated Note       |  |                        | 0         |         |  |         | 0         |         |  | $       | 24,000,000 |            |  |       | 0         |            |  |   | 0         |   |  |   | 0         |   |  | $ | 24,000,000 |   |  | $ | 24,000,000 | 
|Average Interest Rate              |  |                        | 29.3      | %       |  |         | 29.3      | %       |  |         | 29.3       | %          |  |       | 0         |            |  |   | 0         |   |  |   | 0         |   |  |   | 29.3       | % |  |   |            | 
|Fixed Rate Other Debt              |  | $                      | 194,000   |         |  | $       | 146,000   |         |  | $       | 154,000    |            |  | $     | 163,000   |            |  | $ | 173,000   |   |  | $ | 3,276,000 |   |  | $ | 4,106,000  |   |  | $ | 4,106,000  | 
|Average Interest Rate              |  |                        | 7.71      | %       |  |         | 7.36      | %       |  |         | 7.34       | %          |  |       | 7.33      | %          |  |   | 7.32      | % |  |   | 7.26      | % |  |   | 7.30       | % |  |   |            | 
|Variable Rate Tax Exempt Bonds (1) |  | $                      | 1,000,000 |         |  | $       | 1,000,000 |         |  | $       | 1,000,000  |            |  | $     | 1,000,000 |            |  | $ | 1,000,000 |   |  | $ | 9,000,000 |   |  | $ | 14,000,000 |   |  | $ | 14,000,000 | 
|Average Interest Rate              |  |                        | 1.24      | %       |  |         | 1.24      | %       |  |         | 1.24       | %          |  |       | 1.24      | %          |  |   | 1.24      | % |  |   | 1.24      | % |  |   | 1.24       | % |  |   |            | 
|Variable Rate Other Debt (2)       |  | $                      | 3,000,000 |         |  | $       | 3,000,000 |         |  | $       | 3,000,000  |            |  | $     | 2,500,000 |            |  | $ | 88,000    |   |  |   | 0         |   |  | $ | 11,588,000 |   |  | $ | 11,588,000 | 
|Average Interest Rate              |  |                        | 5.00      | %       |  |         | 5.00      | %       |  |         | 5.00       | %          |  |       | 5.00      | %          |  |   | 5.00      | % |  |   | 0         |   |  |   | 5.00       | % |  |   |            | 



---



|    |                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------
|(1) | The interest rate is based upon a weekly
    remarketing of the bonds.                                       
|   
|(2) | Consists of debt under which interest rates will
    fluctuate based upon changes in the prime rate or LIBOR.

33



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##### Table of Contents



In making its determination as to the balance of
fixed and variable rate debt, the Company considers the interest
rate environment (including interest rate trends), borrowing
alternatives and relative pricing. The Company periodically
monitors the balance of fixed and variable rate debt, and can
make appropriate corrections either pursuant to the terms of
debt agreements or through the use of swaps and other financial
instruments.






|        |                                                 
|------- | ------------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data.

See Part IV, Item 15, pages F1 through
F35 immediately following.






|        |                                                                                              
|------- | ---------------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial
    Disclosure.

Deloitte & Touche LLP
(D&T) was previously the principal accountant
for the Company. On June 16, 2003, the Companys Audit
Committee of the Board of Directors (the Audit
Committee) recommended to the Companys Board of
Directors to terminate D&Ts appointment as principal
accountant and for PricewaterhouseCoopers LLP to be engaged as
principal accountant. The Audit Committees recommendation
to change accountants was approved by the Companys Board
of Directors on that date.

In connection with the audits of the two fiscal
years ended June 30, 2002, and during the subsequent
interim period through June 16, 2003, there were no
disagreements with D&T on any matter of accounting
principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreements, if not
resolved to their satisfaction, would have caused D&T to
make reference thereto in their report on the financial
statements for such years.

The audit reports of D&T on the consolidated
financial statements of the Company as of and for the fiscal
years ended June 30, 2002 and 2001, did not contain any
adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or
accounting principles.

The Company requested D&T to furnish the
Company with a letter addressed to the Securities and Exchange
Commission (SEC) stating whether or not it agreed
with the above statements. A copy of such letter, dated
June 23, 2003, was filed as Exhibit 16.1 to
Form 8-K, which was filed with the SEC on June 16,
2003.

During the two fiscal years ended June 30,
2002 and subsequent interim period through June 16, 2003,
the Company did not consult with PricewaterhouseCoopers LLP
regarding the application of accounting principles generally
accepted in the United States of America to a specific
transaction, either proposed or completed, or the type of audit
opinion that might be rendered on the Companys
consolidated financial statements.

In November 2003, the Companys management
recommended to the Audit Committee for the Audit Committee to
engage PricewaterhouseCoopers LLP to conduct a re-audit of the
Companys financial statements for fiscal years 2002 and
2001 (which, as discussed in Note 1 of the Notes to
Consolidated Financial Statements, have been restated), in
addition to their engagement to audit the Companys
financial statements for fiscal year 2003. The Audit Committee
approved the engagement of PricewaterhouseCoopers LLP to
re-audit the Companys financial statements for fiscal 2002
and 2001.






|         |                        
|-------- | -----------------------
|Item 9A. | Control and Procedures.

Evaluation of disclosure controls and
procedures.Based on the evaluation of
our disclosure controls and procedures (as defined in the
Securities Exchange Act of 1934 Rules 13a-15 (e) and
15d-15 (3) required by Securities Exchange Act
Rules 13a-15 (b) or 15-d-15 (b), the Companys
Chief Executive Officer and Chief Financial Officer have
concluded that as of the end of the period covered by this
report the Companys disclosure controls and procedures
were effective.

Changes in internal controls.There were no changes in the
Companys internal controls over financial reporting that
occurred during our most recent fiscal quarter that have
materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial
reporting.

34



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##### Table of Contents






PART III






|         |                                                        
|-------- | -------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant.

Reference is made to the information set forth
under the caption Election of Directors and
Executive Officers, Compensation and Other
Information of the Companys Proxy Statement for the
Annual Meeting of Stockholders scheduled to be held in February
2004 (the 2003 Proxy Statement) for a description of
the directors and executive officers of the Company, which
information is incorporated herein by reference.






|         |                        
|-------- | -----------------------
|Item 11. | Executive Compensation.

Reference is made to the information set forth
under the caption Executive Compensation of the 2003
Proxy Statement, which information is incorporated herein by
reference.






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management.

Reference is made to the table, including the
footnotes thereto, set forth under the caption Election of
Directors of the 2003 Proxy Statement, for certain
information respecting ownership of stock of the Company by
management and certain shareholders, which table and footnotes
are incorporated herein by reference.






|         |                                                    
|-------- | ---------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions.

Reference is made to the information set forth
under the caption Certain Transactions of the 2003
Proxy Statement for certain information with respect to
relationships and related transactions, which information is
incorporated herein by reference.






|         |                                            
|-------- | -------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services.

Reference is made to the information set forth
under the caption Information Relating to the
Companys Independent Public Accountants of the 2003
Proxy Statement for certain information with respect to
principal accountant fees and services which information is
incorporated herein by reference.




PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K.

(a)(1) Financial Statements

|                                                                                                                      |  |  |     | 
|--------------------------------------------------------------------------------------------------------------------- |  |  | --- | 
|Report of Independent Auditors                                                                                        |  |  | F-1 | 
|Consolidated Balance Sheets as of June 30,
    2003 and 2002                                                          |  |  | F-2 | 
|Consolidated Statements of Operations for each of
    the three years in the period ended June 30, 2003               |  |  | F-3 | 
|Consolidated Statements of Cash Flows for each of
    the three years in the period ended June 30, 2003               |  |  | F-4 | 
|Consolidated Statements of Stockholders
    Equity for each of the three years in the period ended
    June 30, 2003 |  |  | F-6 | 
|Notes to Consolidated Financial Statements                                                                            |  |  | F-7 | 

(a)(2) Supplemental Schedule for each of
the three years in the period ended June 30, 2003:

|                                                    |  |  |      | 
|--------------------------------------------------- |  |  | ---- | 
|Schedule II  Valuation and
    Qualifying Accounts |  |  | F-35 | 

All other items are not included in this Annual
Report on Form 10-K either because they are not applicable
or are included in the information as set forth in the
Consolidated Financial Statements or in the Notes to
Consolidated Financial Statements.

35



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##### Table of Contents



(a)(3) Exhibits and Exhibit List:

|        |   |             |  |                                                                                                                                                                                                                                                                                                                                          
|------- | - | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |   |            
|No.     |   | Description
|        |   |            
|        | 2 | .1          |  | Agreement and Plan of Merger adopted
    January 9, 2001.(17)                                                                                                                                                                                                                                                                            
|        | 2 | .2          |  | Certificate of Merger.(17)                                                                                                                                                                                                                                                                                                               
|        | 2 | .3          |  | Stock Purchase Agreement Dated as of
    October 28, 2003. By and Among Allied Capital Corporation,
    Mercury Air Centers, Inc. and Mercury Air Group, Inc.(28)                                                                                                                                                                        
|        | 3 | .1          |  | Certificate of Incorporation.(17)                                                                                                                                                                                                                                                                                                        
|        | 3 | .2          |  | Amended and Restated Bylaws of Mercury Air Group,
    Inc. adopted December 7, 2002.(25)                                                                                                                                                                                                                                                 
|        | 3 | .3          |  | Certificate of Designations of Series A 8%
    Cumulative Convertible Preferred Stock.(27)                                                                                                                                                                                                                                               
|        | 4 | .1          |  | Loan Agreement between California Economic
    Development Financing Authority and Mercury Air Group, Inc.
    relating to $19,000,000 California Economic Development
    Financing Authority Variable Rate Demand Airport Facilities
    Revenue Bonds, Series 1998 (Mercury Air Group, Inc.
    Project) dated as of April 1, 1998.(2)
|        | 4 | .2          |  | Securities Purchase Agreement dated
    September 10, 1999 by and among Mercury Air Group, Inc. and
    J.H. Whitney Mezzanine Fund, L.P.(12)                                                                                                                                                                                            
|        | 4 | .3          |  | Amendment No. 1 dated as of
    September 30, 2000 by and between J.H. Whitney
    Mezzanine, L.P. and Mercury Air Group, Inc. to the Securities
    Agreement.(16)                                                                                                                                                                      
|        | 4 | .4          |  | Waiver and Consent Agreement dated as of
    December 29, 2000 among Mercury Air Group, Inc. and
    J.H. Whitney Mezzanine Fund, L.P.(17)                                                                                                                                                                                               
|        | 4 | .5          |  | Waiver and Consent Agreement dated as of
    July 2, 2001 among Mercury Air Group, Inc. and
    J.H. Whitney Mezzanine Fund, L.P.(18)                                                                                                                                                                                                    
|        | 4 | .6          |  | Waiver Agreement dated as of September 25,
    2001 among Mercury Air Group, Inc. and J.H. Whitney
    Mezzanine Fund, L.P.(18)                                                                                                                                                                                                          
|        | 4 | .7          |  | Amendment No. 2 dated as of
    September 30, 2001 by and between J.H. Whitney
    Mezzanine Fund, L.P. and Mercury Air Group, Inc. to the
    Securities Purchase Agreement.(19)                                                                                                                                                        
|        | 4 | .8          |  | Waiver Agreement dated as of November 26,
    2001 among Mercury Air Group, Inc. and J.H. Whitney
    Mezzanine, L.P.(21)                                                                                                                                                                                                                
|        | 4 | .9          |  | Waiver Agreement dated as of December 21,
    2001 among Mercury Air Group, Inc. and J.H. Whitney
    Mezzanine, L.P.(21)                                                                                                                                                                                                                
|        | 4 | .10         |  | Waiver Agreement dated as of June 26, 2002
    among Mercury Air Group, Inc. and J.H. Whitney Mezzanine,
    L.P.(24)                                                                                                                                                                                                                    
|        | 4 | .11         |  | Amendment No. 3 to Securities Purchase
    Agreement by and between Mercury Air Group, Inc. and
    J.H. Whitney Mezzanine Fund, L.P. dated as of
    December 30, 2002.(26)                                                                                                                                                             
|        | 4 | .12         |  | Amended and Restated J.H. Whitney Mezzanine
    Fund, L.P. Warrant dated September 10, 1999.(26)                                                                                                                                                                                                                                         
|        | 4 | .13         |  | Amended and Restated J.H. Whitney Mezzanine
    Fund, L.P. Senior Subordinated Promissory Note dated
    September 10, 1999.(26)                                                                                                                                                                                                         
|        | 4 | .14         |  | Security Agreement by and between Mercury Air
    Group, Inc. and each of its subsidiaries hereto as Obligors and
    J.H. Whitney Mezzanine Fund, L.P. as the Lenders, dated as
    of December 30, 2002.(26)                                                                                                                           
|        | 4 | .15         |  | Subordination Agreement among J.H. Whitney
    Mezzanine Fund, L.P. Foothill Capital Corporation, as Agent and
    Mercury Air Group, Inc. and certain of its subsidiaries
    signatory thereto, dated as of December 30, 2002.(26)                                                                                                     
|        | 4 | .16         |  | Loan and Security Agreement by and among Foothill
    Capital Corporation and Mercury Air Group, Inc. and certain
    subsidiaries signatory thereto, dated as of December 30,
    2002.(26)                                                                                                                                             
|        | 4 | .17         |  | First Amendment to Loan and Security Agreement by
    and among Foothill Capital Corporation and Mercury Air Group,
    Inc. and certain of its subsidiaries, dated March 12, 2003.                                                                                                                                                      
|        | 4 | .18         |  | Second Amendment to Loan and Security Agreement
    by and among Foothill Capital Corporation and Mercury Air Group,
    Inc. and certain of its subsidiaries, dated March 31, 2003.                                                                                                                                                     

36



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                               
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 4  | .19         |  | Third Amendment to Loan and Security Agreement by
    and among Foothill Capital Corporation and Mercury Air Group,
    Inc. and certain of its subsidiaries, dated July 16, 2003.                                            
|        | 4  | .20         |  | Fourth Amendment to Loan and Security Agreement
    by and among Foothill Capital Corporation and Mercury Air Group,
    Inc. and certain of its subsidiaries, dated August 1, 2003.                                          
|        | 4  | .21         |  | Amendment No. 4 to Securities Purchase
    Agreement by and between Mercury Air Group, Inc. and Allied
    Capital Corporation, as Assignee of J.H. Whitney Mezzanine
    Fund, L.P. dated as of October 28, 2003(28)         
|        | 4  | .22         |  | Assignment of Note dated as of October 28,
    2003 between Allied Capital Corporation and J.H. Whitney
    Mezzanine Fund, L.P.(28)                                                                                          
|        | 4  | .23         |  | Second Amended and Restated Allied Capital
    Corporation 12% Senior Subordinated Promissory Note dated
    September 10, 1999(28)                                                                                           
|        | 4  | .24         |  | Second Amended and Restated Allied Capital
    Corporation Warrant dated October 28, 2003(28)                                                                                                                                 
|        | 4  | .25         |  | Securities Purchase Agreement dated as of
    October 28, 2003 by and among J.H. Whitney Mezzanine
    Fund, L.P. and J.H. Whitney Mezzanine Debt Fund, L.P.,
    Allied Capital Corporation and Mercury Air Group, Inc.(28)  
|        | 4  | .26         |  | Second Amended and Restated J.H. Whitney
    Mezzanine Fund, L.P. Warrant dated October 28, 2003(28)                                                                                                                          
|        | 10 | .1          |  | Mercury Air Group, Inc.s 1990 Long-Term
    Incentive Plan.(4)*                                                                                                                                                              
|        | 10 | .2          |  | Mercury Air Group, Inc.s 1990 Directors
    Stock Option Plan.(1)*                                                                                                                                                           
|        | 10 | .3          |  | Memorandum Dated September 15, 1997
    regarding Summary of Officer Life Insurance Policies with
    Benefits Payable to Officers or Their Designated
    Beneficiaries.(8)*                                                 
|        | 10 | .4          |  | Non-Qualified Stock Option Agreement dated
    March 21, 1996, by and between Frederick H. Kopko and
    Mercury Air Group, Inc.(6)*                                                                                          
|        | 10 | .5          |  | Mercury Air Group, Inc.s 1998 Long-Term
    Incentive Plan.(10)*                                                                                                                                                             
|        | 10 | .6          |  | Mercury Air Group, Inc.s 1998 Directors
    Stock Option Plan.(10)*                                                                                                                                                          
|        | 10 | .7          |  | Revolving Credit and Term Loan Agreement dated as
    of March 2, 1999 by and among Mercury Air Group, Inc., The
    Banks listed on Schedule 1 thereto, and The Fleet National
    Bank f/k/a BankBoston, N.A., as Agent.(11)
|        | 10 | .8          |  | First Amendment to Revolving Credit and Term Loan
    Agreement dated as of September 10, 1999.(14)                                                                                                                           
|        | 10 | .9          |  | Second Amendment to Revolving Credit and Term
    Loan Agreement dated as of March 31, 2000.(14)                                                                                                                              
|        | 10 | .10         |  | Third Amendment, Waiver and Consent to Revolving
    Credit and Term Loan Agreement dated as of August 11,
    2000.(14)                                                                                                      
|        | 10 | .11         |  | The Companys 401(k) Plan consisting of CNA
    Trust Corporation. Regional Prototype Defined Contribution Plan
    and Trust and Adoption Agreement.(14)*                                                                    
|        | 10 | .12         |  | Employment Agreement dated July 31, 2000
    between the Company and Dr. Philip J. Fagan.(15)*                                                                                                                                
|        | 10 | .13         |  | Fourth Amendment to Revolving Credit and Term
    Loan Agreement dated as of November 14, 2000.(16)                                                                                                                           
|        | 10 | .14         |  | Amendment No. 1 to Mercury Air Group, Inc.
    1998 Long-Term Incentive Option Plan as of August 22,
    2000.(16)*                                                                                                           
|        | 10 | .15         |  | Amendment No. 1 to Mercury Air Group, Inc.
    1998 Directors Stock Option Plan as of August 22, 2000.(16)*                                                                                                                   
|        | 10 | .16         |  | Limited Waiver letter Agreement to Revolving
    Credit and Term Loan Agreement dated as of September 21,
    2001.(18)                                                                                                       
|        | 10 | .17         |  | Fifth Amendment to Revolving Credit and Term loan
    Agreement dated as of September 21, 2001.(18)                                                                                                                           
|        | 10 | .18         |  | Limited Consent letter Agreement to Revolving
    Credit and Term Loan Agreement dated as of September 30,
    2001.(19)                                                                                                      
|        | 10 | .20         |  | Limited waiver and Consent to Revolving Credit
    and Term Loan Agreement dated as of December 31, 2001.(21)                                                                                                                 

37



---



##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                           
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 10 | .21         |  | 2002 Management Stock Purchase Plan.(22)                                                                                                                                                                                                                                                  
|        | 10 | .22         |  | Amended and Restated Employment Agreement dated
    May 22, 2002 between Mercury Air Group, Inc. and
    Joseph A, Czyzyk.(22)*                                                                                                                                                           
|        | 10 | .23         |  | Employment Agreement dated May 22, 2002
    between Mercury Air Group, Inc. and Wayne J. Lovett(22)*                                                                                                                                                                                      
|        | 10 | .24         |  | Employment Agreement dated May 22, 2002
    between Mercury Air Group, Inc. and John Enticknap(22)*                                                                                                                                                                                       
|        | 10 | .25         |  | Employment Agreement dated May 22, 2002
    between Mercury Air Group, Inc. and Mark Coleman(22)*                                                                                                                                                                                         
|        | 10 | .26         |  | Employment Agreement dated May 22, 2002
    between Mercury Air Group, Inc. and Steven S. Antonoff(22)*                                                                                                                                                                                   
|        | 10 | .27         |  | Employment Agreement dated May 22, 2002
    between Mercury Air Group, Inc. and Robert Schlax(22)*                                                                                                                                                                                        
|        | 10 | .28         |  | Limited waiver and Consent to Revolving Credit
    and Term Loan Agreement dated as of June 27, 2002.(24)                                                                                                                                                                                 
|        | 10 | .29         |  | Sale-Leaseback agreement made by and between CFK
    Realty Partners, LLC and Mercury Air Group, Inc. dated
    December 15, 2001.(24)                                                                                                                                                    
|        | 10 | .30         |  | Amendment to Sale-Leaseback agreement made by and
    between CFK Realty Partners, LLC and Mercury Air Group, Inc.(24)                                                                                                                                                                    
|        | 10 | .31         |  | Promissory Note by CFK Partners, LLC in favor of
    Mercury Air Group, Inc.(24)                                                                                                                                                                                                          
|        | 10 | .32         |  | Limited Waiver and Consent to Revolving Credit
    and Term Loan Agreement dated as June 27, 2002.(24)                                                                                                                                                                                    
|        | 10 | .33         |  | Amendment No. 1 to Amended and Restated
    Employment Agreement dated May 22, 2002 between Mercury Air
    Group, Inc. and Joseph A. Czyzyk.*(24)                                                                                                                                        
|        | 10 | .34         |  | Lease dated December 31, 2001 by and between
    CFK Realty Partners, LLC. and Mercury Air Group, Inc.                                                                                                                                                                                    
|        | 10 | .35         |  | Settlement Agreement dated December 12, 2003
    by and among (i) J O Hambro Capital Management
    Group Limited, (ii) J O Hambro Capital Management
    Limited, (iii) American Opportunity Trust PLC,
    (iv) The Trident North Atlantic Fund, and (v) Mercury
    Air Group, Inc.(29)
|        | 21 | .1          |  | Subsidiaries of Registrant.                                                                                                                                                                                                                                                               
|        | 23 | .1          |  | Consent of PricewaterhouseCoopers LLP with
    respect to incorporation of their report on the audited
    financial statements contained in this Annual Report on
    Form 10-K in the Companys Registration Statement on
    Form S-8 (Registration Statement No. 33-69414)            
|        | 31 | .1          |  | Section 302 Certification of Chief Executive
    Officer.                                                                                                                                                                                                                                 
|        | 31 | .2          |  | Section 302 Certification of Chief Financial
    Officer.                                                                                                                                                                                                                                 
|        | 32 | .1          |  | Section 906 Certification of Chief Executive
    Officer.                                                                                                                                                                                                                                 
|        | 32 | .2          |  | Section 906 Certification of Chief Financial
    Officer.                                                                                                                                                                                                                                 
|        | 99 | .1          |  | Partnership Agreement dated as of July 27,
    2000 of CFK Partners by and among Philip J.
    Fagan, M.D., Frederick H. Kopko, Jr. and
    Joseph A. Czyzyk.(13)                                                                                                                         



---



|  |                                                                       
|- | ----------------------------------------------------------------------
|* | Denotes managements contract or
    compensation plan or arrangement.



|    |                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Such document was previously filed as
    Appendix A to the Companys Proxy Statement for the
    December 10, 1993 Annual Meeting of Stockholders and is
    incorporated herein by reference.
|   
|(2) | All such documents were previously filed as
    Exhibits to the Companys Quarterly Report on
    Form 10-Q for the quarter ended March 31, 1998 and are
    incorporated herein by reference. 
|   
|(3) | All such documents were previously filed as
    Exhibits to the Companys Registration Statement
    No. 33-39044 on Form S-2 and are incorporated herein
    by reference.                    
|   
|(4) | Such document was previously filed as
    Appendix A to the Companys Proxy Statement for the
    December 2, 1992 Annual Meeting of Stockholders.                                             

38



---



##### Table of Contents





|    |                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | All such documents were previously filed as
    Exhibits to the Companys Registration Statement
    No. 33-65085 on Form S-1 and are incorporated herein
    by reference.                   
|   
|(6) | All such documents were previously filed as
    Exhibits to the Companys Quarterly Report on
    Form 10-Q for the quarter ended March 31, 1996 and are
    incorporated herein by reference.
|   
|(7) | All such documents were previously filed as
    Exhibits to the Companys Report on Form 8-K filed
    September 13, 1996 and are incorporated herein by reference.                           
|   
|(8) | Such document was previously filed as an Exhibit
    to the Companys Annual Report on Form 10-K for the
    year ended June 30, 1997 and is incorporated herein by
    reference.            
|   
|(9) | All such documents were previously filed as an
    Exhibit to the Companys Annual Report on Form 10-K
    for the year ended June 30, 1998 and are incorporated
    herein by reference.     



|     |                                                                                                                                                                                                     
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Such document was previously filed as
    Appendix A to the Companys Proxy Statement for the
    December 3, 1998 Annual Meeting of Stockholders and is
    incorporated herein by reference.      
|    
|(11) | All such documents were previously filed as an
    Exhibit to the Companys Quarterly Report on Form 10-Q
    for the quarter ended March 31, 1999 and are incorporated
    herein by reference.    
|    
|(12) | All such documents were previously filed as an
    Exhibit to the Companys Annual Report on Form 10-K
    for the year ended June 30, 1999 and are incorporated
    herein by reference.           
|    
|(13) | Such document was previously filed as an Exhibit
    to the Companys current Report on Form 8-K on
    August 11, 2000 and is incorporated herein by reference.                                    
|    
|(14) | All such documents were previously filed as an
    Exhibit to the Companys Annual Report on Form 10-K
    for the year ended June 30, 2000 and is incorporated herein
    by reference.            
|    
|(15) | All such documents were previously filed as an
    Exhibit to the Companys Quarterly Report on Form 10-Q
    for the quarter ended September 30, 2000 and are
    incorporated herein by reference.
|    
|(16) | All such documents were previously filed as an
    Exhibit to the Companys Quarterly Report on Form 10-Q
    for the quarter ended December 31, 2000 and are
    incorporated herein by reference. 
|    
|(17) | All such documents were previously filed as an
    Exhibit to the Companys Quarterly Report on Form 10-Q
    for the quarter ended March 31, 2001 and are incorporated
    herein by reference.    
|    
|(18) | All such documents were previously filed as an
    Exhibit to the Companys Annual Report on Form 10-K
    for the year ended June 30, 2001 and are incorporated
    herein by reference.           
|    
|(19) | All such documents were previously filed as an
    Exhibit to the Companys Quarterly Report on Form 10-Q
    for the quarter ended September 30, 2001 and are
    incorporated herein by reference.
|    
|(20) | Such document was previously filed as
    Appendix A to the Companys Proxy Statement for the
    November 7, 2001 Annual Meeting of Stockholders and is
    incorporated herein by reference.      
|    
|(21) | All such documents were previously filed as an
    Exhibit to the Companys Quarterly Report on Form 10-Q
    for the quarter ended December 31, 2001 and are
    incorporated herein by reference. 
|    
|(22) | Such document was previously filed as an Exhibit
    to the Companys Current Report on Form 8-K on
    June 5, 2002 and is incorporated herein by reference.                                       
|    
|(23) | Such document was previously filed as an Exhibit
    to the Companys Current Report on Form 8-K on
    July 11, 2002 and is incorporated herein by reference.                                      
|    
|(24) | All such documents were previously filed as an
    Exhibit to the Companys Annual Report on Form 10-K
    for the year ended June 30, 2002 and are incorporated
    herein by reference.           
|    
|(25) | Such document was previously filed as an Exhibit
    to the Companys Current Report on Form 8-K on
    December 7, 2002 and is incorporated herein by reference.                                   
|    
|(26) | Such document was previously filed as an Exhibit
    to the Companys Current Report on Form 8-K on
    December 30, 2002 and is incorporated herein by reference.                                  
|    
|(27) | All such documents were previously filed as an
    Exhibit to the Companys Quarterly Report on Form 10-Q
    for the quarter ended March 31, 2003 and are incorporated
    herein by reference.    
|    
|(28) | Such document was previously filed as an Exhibit
    to the Companys Current Report on Form 8-K on
    October 28, 2003 and is incorporated herein by reference.                                   

39



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##### Table of Contents





|     |                                                                                                                                                                   
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(29) | Such document was previously filed as an Exhibit
    to the Companys Current Report on Form 8-K on
    December 12, 2003 and is incorporated herein by reference.

(b) Reports on Form 8-K:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A Form 8-K was filed on May 15, 2003
    reporting on Item 5. Other Events and Item 7.
    Financial Statements and Exhibits, as to the operating results
    of the Company for the three and nine month periods ended
    March 31, 2003.                                                                                                                                                                                                          
|
| | A Form 8-K was filed on June 23, 2003
    reporting on Item 4. Changes in Registrants Certifying
    Accountant and Item 7. Financial Statement and Exhibits, as
    to the dismissal of Deloitte & Touche, LLP as the
    Companys independent audit firm. No financial statements
    were filed with this report.                                                                                                                                
|
| | A Form 8-K was filed on June 30, 2003
    reporting on Item 5. Other Events and Regulation FD
    Disclosure and Item 7. Financial Statements and Exhibits,
    as to the lawsuit filed by the Company against Acquisitor
    Holdings, LLC, JO Hambro Capital Management Ltd.,
    JO Hambro Capital Management Group, Ltd., American
    Opportunity Trust PLC, Trident North Atlantic Fund, Executive
    Air Support, Inc. and Christopher Mills.

40



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Company has
duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized in the City of Los
Angeles, State of California, on December 30, 2003.



| |                        
| | -----------------------
| | MERCURY AIR GROUP, INC.



| |     |                               
| | --- | ------------------------------
| | By: | /s/ PHILIP J. FAGAN, JR., M.D.

| |                           
| | --------------------------
| |                           
| | Philip J. Fagan, Jr., M.D.
| | Chairman of the Board     

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Report has been signed by the
following persons in the capacities and on the dates indicated:

Signers:

|                                                                                 |  |  |  |                          |  | 
|-------------------------------------------------------------------------------- |  |  |  | ------------------------ |  | 
|                                                                                
|Chairman of the Board                                                            |  |  |  |                         
|                                                                                
|/s/ PHILIP J. FAGAN, JR. M.D.Philip J. Fagan, Jr. M.D.
    Chairman of the Board |  |  |  | Dated: December 30, 2003
|                                                                                
|Principal Executive Officer and Director:                                        |  |  |  |                         
|                                                                                
|/s/ JOSEPH CZYZYKJoseph Czyzyk
    Chief Executive Officer and Director          |  |  |  | Dated: December 30, 2003
|                                                                                
|/s/ ROBERT SCHLAXRobert Schlax
    Chief Financial Officer                       |  |  |  | Dated: December 30, 2003
|                                                                                
|Additional Directors:                                                            |  | 
|                                                                                
|/s/ FREDERICK H. KOPKO, JR.Frederick H. Kopko, Jr.
    Director                  |  |  |  | Dated: December 30, 2003
|                                                                                
|/s/ GARY J. FERACOTAGary J. Feracota
    Director                                |  |  |  | Dated: December 30, 2003
|                                                                                
|/s/ SERGEI KOUZMINESergei Kouzmine
    Director                                  |  |  |  | Dated: December 30, 2003
|                                                                                
|/s/ MICHAEL J. JANOWIAKMichael J. Janowiak
    Director                          |  |  |  | Dated: December 30, 2003
|                                                                                
|/s/ ANGELO PUSATERIAngelo Pusateri
    Director                                  |  |  |  | Dated: December 30, 2003

41



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##### Table of Contents



Exhibit 31.1

MERCURY AIR GROUP, INC

CERTIFICATIONS PURSUANT TO

SECTION 302 OF


THE SARBANES-OXLEY ACT OF 2002


CERTIFICATION

I, Joseph Czyzyk, certify that:



| |                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. I have reviewed this annual report on SEC
    Form 10-K of Mercury Air Group, Inc.;                                                                                                                                                                                                                                           
|
| | 2. Based on my knowledge, this report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, nor misleading with respect to the period covered by this
    report;
|
| | 3. Based on my knowledge, the financial
    statements, and other financial information included in this
    report, fairly present in all material respects the financial
    condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this report;                       
|
| | 4. The registrants other certifying
    officer and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-15(e) and 15d-15(e)) for the registrant and have;                                                                                       



| |                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. designed such disclosure controls and
    procedures, or caused such disclosure controls and procedures to
    be designed under our supervision, to ensure that material
    information relating to the registrant including its
    consolidated subsidiaries, is made known to us by others within
    those entities, particularly during the period in which this
    report is being prepared;
|
| | b. evaluated the effectiveness of the
    registrants disclosure controls and procedures and
    presented in this report our conclusions about the effectiveness
    of the disclosure controls and procedures as of the end of the
    period covered by this report based on such evaluation; and                                                                                                   
|
| | c. disclosed in this report any changes in
    the registrants internal control over financial reporting
    that occurred during the registrants fourth fiscal quarter
    that has materially affected the registrants internal
    controls over financial reporting; and                                                                                                                         



| |                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. The registrants other certifying
    officer and I have disclosed, based on our most recent
    evaluation of internal controls over financial reporting, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing
    similar functions);



| |                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. all significant deficiencies and material
    weaknesses in the design or operation of internal controls over
    financial reporting which are reasonably likely to adversely
    affect the registrants ability to record, process,
    summarize and report financial data; and
|
| | b. any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls over financial
    reporting.                                                                                            

| |  |                                                                                                                                  
| |  | ---------------------------------------------------------------------------------------------------------------------------------
| |  | /s/ JOSEPH CZYZYK
    ------------------------------------------------
    Joseph Czyzyk
    Chief Executive Officer and Director

December 30, 2003

42



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##### Table of Contents



Exhibit 31.2

MERCURY AIR GROUP, INC

CERTIFICATIONS PURSUANT TO

SECTION 302 OF


THE SARBANES-OXLEY ACT OF 2002


CERTIFICATION

I, Robert Schlax, certify that:



| |                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. I have reviewed this annual report on SEC
    Form 10-K of Mercury Air Group, Inc.;                                                                                                                                                                                                                                           
|
| | 2. Based on my knowledge, this report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, nor misleading with respect to the period covered by this
    report;
|
| | 3. Based on my knowledge, the financial
    statements, and other financial information included in this
    report, fairly present in all material respects the financial
    condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this report;                       
|
| | 4. The registrants other certifying
    officer and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-15(e) and 15d-15(e)) for the registrant and have;                                                                                       



| |                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. designed such disclosure controls and
    procedures, or caused such disclosure controls and procedures to
    be designed under our supervision, to ensure that material
    information relating to the registrant including its
    consolidated subsidiaries, is made known to us by others within
    those entities, particularly during the period in which this
    report is being prepared;
|
| | b. evaluated the effectiveness of the
    registrants disclosure controls and procedures and
    presented in this report our conclusions about the effectiveness
    of the disclosure controls and procedures as of the end of the
    period covered by this report based on such evaluation; and                                                                                                   
|
| | c. disclosed in this report any changes in
    the registrants internal control over financial reporting
    that occurred during the registrants fourth fiscal quarter
    that has materially affected the registrants internal
    controls over financial reporting; and                                                                                                                         



| |                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. The registrants other certifying
    officer and I have disclosed, based on our most recent
    evaluation of internal controls over financial reporting, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing
    similar functions);



| |                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. all significant deficiencies and material
    weaknesses in the design or operation of internal controls over
    financial reporting which are reasonably likely to adversely
    affect the registrants ability to record, process,
    summarize and report financial data; and
|
| | b. any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls over financial
    reporting.                                                                                            

| |  |                                                                                                                     
| |  | --------------------------------------------------------------------------------------------------------------------
| |  | /s/ ROBERT SCHLAX
    ------------------------------------------------
    Robert Schlax
    Chief Financial Officer

December 30, 2003

43



---



##### Table of Contents



Exhibit 32.1

STATEMENT

Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350, the
undersigned officer of Mercury Air Group, Inc. (the
Company) hereby certifies that to the knowledge of
the undersigned:



| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) The Companys Annual Report on
    Form 10-K for the fiscal year ended June 30, 2003
    fully complies with the requirements of sections 13(a) or
    15(d), as applicable, of the Securities Exchange Act of 1934, and
|
| | (2) The information contained in the report
    fairly presents, in all material respects, the financial
    condition and results of operations of the Company.                                                            



| |                                     
| | ------------------------------------
| | /s/ Joseph Czyzyk                   
| |                                     
| | Joseph Czyzyk                       
| | Chief Executive Officer and Director

December 30, 2003

44



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##### Table of Contents



Exhibit 32.2

STATEMENT

Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350, the
undersigned officer of Mercury Air Group, Inc. (the
Company) hereby certifies that to the knowledge of
the undersigned:



| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (3) The Companys Annual Report on
    Form 10-K for the fiscal year ended June 30, 2003
    fully complies with the requirements of sections 13(a) or
    15(d), as applicable, of the Securities Exchange Act of 1934, and
|
| | (4) The information contained in the report
    fairly presents, in all material respects, the financial
    condition and results of operations of the Company.                                                            



| |                        
| | -----------------------
| | /s/ Robert Schlax      
| |                        
| | Robert Schlax          
| | Chief Financial Officer

December 30, 2003

45



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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders of
Mercury Air Group, Inc.

In our opinion, the consolidated financial
statements listed in the index appearing under
Item 15(a)(1) present fairly, in all material respects, the
financial position of Mercury Air Group, Inc. and its
subsidiaries (the Company) at June 30, 2003 and
2002, and the results of their operations and their cash flows
for each of the three years in the period ended June 30,
2003 in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the index appearing
under Item 15(a)(2)present fairly, in all material
respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are
the responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America, which require that we plan and perform the audits to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit 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.

As discussed in Note 1 to the consolidated
financial statements, the 2002 and 2001 financial statements,
previously audited by other independent auditors, have been
restated.

As discussed in Note 4 to the consolidated
financial statements, effective July 1, 2002, the Company
adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets.
Accordingly, the Company ceased amortizing goodwill as of
July 1, 2002.

PRICEWATERHOUSECOOPERS LLP

Los Angeles, California

December 29, 2003


F-1



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##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                    |                                                                                                                                                |                                                                                         |            |                        |             |  |            |            |             | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ---------- | ---------------------- | ----------- |  | ---------- | ---------- | ----------- | 
|                                                                                                                                                                    |                                                                                                                                                | June 30,                                                                                |            | June 30,              
|                                                                                                                                                                    |                                                                                                                                                | 2003                                                                                    |            | 2002                  
|                                                                                                                                                                    |                                                                                                                                                |                                                                                         |            |                       
|                                                                                                                                                                    |                                                                                                                                                |                                                                                         |            | (Restated, see Note 1)
|ASSETS                                                                                                                                                             
|CURRENT ASSETS:                                                                                                                                                     |                                                                                                                                                |                                                                                         |            |                        |             |  |            |           
|                                                                                                                                                                    | Cash and cash equivalents                                                                                                                      |                                                                                         | $          | 2,802,000              |             |  | $          | 5,565,000  |            
|                                                                                                                                                                    | Restricted cash                                                                                                                                |                                                                                         |            |                        |             |  |            | 3,780,000  |            
|                                                                                                                                                                    | Trade accounts receivable, net of allowance for
    doubtful accounts of $2,006,000 and $1,583,000 at June 30,
    2003 and 2002, respectively |                                                                                         |            | 46,753,000             |             |  |            | 47,570,000 |            
|                                                                                                                                                                    | Inventories, principally aviation fuel                                                                                                         |                                                                                         |            | 4,422,000              |             |  |            | 2,985,000  |            
|                                                                                                                                                                    | Prepaid expenses and other current assets                                                                                                      |                                                                                         |            | 5,241,000              |             |  |            | 3,042,000  |            
|                                                                                                                                                                    | Deferred income taxes                                                                                                                          |                                                                                         |            | 901,000                |             |  |            |            |            
|                                                                                                                                                                    |                                                                                                                                                |                                                                                         |            |                        |             |  |            |           
|                                                                                                                                                                    |                                                                                                                                                | TOTAL CURRENT ASSETS                                                                    |            |                        | 60,119,000  |  |            |            | 62,942,000  | 
|PROPERTY, EQUIPMENT AND LEASEHOLDS, net of
    accumulated depreciation and amortization of $61,061,000 and
    $54,383,000 at June 30, 2003 and 2002, respectively |                                                                                                                                                |                                                                                         | 58,844,000 |                        |             |  | 61,094,000 |           
|NOTES RECEIVABLE, net of allowance for doubtful
    accounts of $509,000 at June 30, 2003.                                                                          |                                                                                                                                                |                                                                                         | 1,815,000  |                        |             |  | 2,158,000  |           
|DEFERRED INCOME TAXES                                                                                                                                               |                                                                                                                                                |                                                                                         | 2,284,000  |                        |             |  | 1,302,000  |           
|GOODWILL                                                                                                                                                            |                                                                                                                                                |                                                                                         | 4,389,000  |                        |             |  | 4,389,000  |           
|OTHER INTANGIBLE ASSETS, NET                                                                                                                                        |                                                                                                                                                |                                                                                         | 1,033,000  |                        |             |  | 233,000    |           
|OTHER ASSETS, NET                                                                                                                                                   |                                                                                                                                                |                                                                                         | 4,471,000  |                        |             |  | 4,096,000  |           
|                                                                                                                                                                    |                                                                                                                                                |                                                                                         |            |                        |             |  |            |           
|                                                                                                                                                                    |                                                                                                                                                | TOTAL ASSETS                                                                            |            | $                      | 132,955,000 |  |            | $          | 136,214,000 | 
|                                                                                                                                                                    |                                                                                                                                                |                                                                                         |            |                        |             |  |            |           
|LIABILITIES, MANDATORILY REDEEMABLE
    PREFERRED
    STOCK AND STOCKHOLDERS EQUITY                                                                               
|CURRENT LIABILITIES:                                                                                                                                                |                                                                                                                                                |                                                                                         |            |                        |             |  |            |           
|                                                                                                                                                                    | Accounts payable                                                                                                                               |                                                                                         | $          | 34,677,000             |             |  | $          | 35,449,000 |            
|                                                                                                                                                                    | Accrued expenses and other current liabilities                                                                                                 |                                                                                         |            | 10,162,000             |             |  |            | 8,861,000  |            
|                                                                                                                                                                    | Current portion of long-term debt                                                                                                              |                                                                                         |            | 4,194,000              |             |  |            | 14,677,000 |            
|                                                                                                                                                                    | Current portion of Senior Subordinated Notes                                                                                                   |                                                                                         |            |                        |             |  |            | 23,179,000 |            
|                                                                                                                                                                    |                                                                                                                                                |                                                                                         |            |                        |             |  |            |           
|                                                                                                                                                                    |                                                                                                                                                | TOTAL CURRENT LIABILITIES                                                               |            |                        | 49,033,000  |  |            |            | 82,166,000  | 
|LONG-TERM DEBT                                                                                                                                                      |                                                                                                                                                |                                                                                         | 25,501,000 |                        |             |  | 17,516,000 |           
|SENIOR SUBORDINATED NOTES                                                                                                                                           |                                                                                                                                                |                                                                                         | 23,445,000 |                        |             |  |            |           
|DEFERRED INCOME TAXES                                                                                                                                               |                                                                                                                                                |                                                                                         |            |                        |             |  | 169,000    |           
|DEFERRED RENT                                                                                                                                                       |                                                                                                                                                |                                                                                         | 1,885,000  |                        |             |  | 1,943,000  |           
|MINORITY INTEREST                                                                                                                                                   |                                                                                                                                                |                                                                                         | 180,000    |                        |             |  |            |           
|                                                                                                                                                                    |                                                                                                                                                |                                                                                         |            |                        |             |  |            |           
|                                                                                                                                                                    |                                                                                                                                                | TOTAL LIABILITIES                                                                       |            |                        | 100,044,000 |  |            |            | 101,794,000 | 
|                                                                                                                                                                    |                                                                                                                                                |                                                                                         |            |                        |             |  |            |           
|COMMITMENTS AND CONTINGENCIES (NOTE 14)                                                                                                                             |                                                                                                                                                |                                                                                         |            |                        |             |  |            |           
|                                                                                                                                                                   
|MANDATORILY REDEEMABLE PREFERRED STOCK,
    Series A  $0.01 par value; 1,000,000 shares
    authorized; 462,627 shares outstanding at June 30, 2003                |                                                                                                                                                |                                                                                         | 481,000    |                        |             |  |            |           
|STOCKHOLDERS EQUITY:                                                                                                                                               |                                                                                                                                                |                                                                                         |            |                        |             |  |            |           
|                                                                                                                                                                    | Preferred Stock  $.01 par value;
    2,000,000 shares authorized; no shares outstanding                                                       |                                                                                         |            |                        |             |  |            |            |            
|                                                                                                                                                                    | Common Stock  $.01 par value;
    18,000,000 shares authorized;                                                                               |                                                                                         |            |                        |             |  |            |            |            
|                                                                                                                                                                    |                                                                                                                                                | 3,293,568 shares outstanding at
    June 30, 2003;                                      |            |                        |             |  |            |            |             | 
|                                                                                                                                                                    |                                                                                                                                                | 3,270,850 shares outstanding at
    June 30, 2002                                       |            |                        | 33,000      |  |            |            | 33,000      | 
|                                                                                                                                                                    | Additional paid-in capital                                                                                                                     |                                                                                         |            | 22,496,000             |             |  |            | 22,266,000 |            
|                                                                                                                                                                    | Retained earnings                                                                                                                              |                                                                                         |            | 14,018,000             |             |  |            | 16,872,000 |            
|                                                                                                                                                                    | Accumulated other comprehensive loss                                                                                                           |                                                                                         |            | (86,000                | )           |  |            | (316,000   | )          
|                                                                                                                                                                    | Notes receivable from officers                                                                                                                 |                                                                                         |            | (4,031,000             | )           |  |            | (4,435,000 | )          
|                                                                                                                                                                    |                                                                                                                                                |                                                                                         |            |                        |             |  |            |           
|                                                                                                                                                                    |                                                                                                                                                | TOTAL STOCKHOLDERS EQUITY                                                              |            |                        | 32,430,000  |  |            |            | 34,420,000  | 
|                                                                                                                                                                    |                                                                                                                                                |                                                                                         |            |                        |             |  |            |           
|                                                                                                                                                                    |                                                                                                                                                | TOTAL LIABILITIES, MANDATORILY REDEEMABLE
    PREFERRED STOCK, AND STOCKHOLDERS EQUITY |            | $                      | 132,955,000 |  |            | $          | 136,214,000 | 
|                                                                                                                                                                    |                                                                                                                                                |                                                                                         |            |                        |             |  |            |           

See accompanying notes to consolidated financial
statements.

F-2



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##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                   |                                                                                                                              |                                                            |            |                        |             |      |           |             |             |   |           |             |             |  
|---------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ---------- | ---------------------- | ----------- | ---- | --------- | ----------- | ----------- | - | --------- | ----------- | ----------- | -
|                                                                                   |                                                                                                                              |                                                           
|                                                                                   |                                                                                                                              | Year Ended June 30,                                       
|                                                                                   |                                                                                                                              |                                                           
|                                                                                   |                                                                                                                              | 2003                                                       |            | 2002                   |             | 2001
|                                                                                   |                                                                                                                              |                                                            |            |                        |             |     
|                                                                                   |                                                                                                                              |                                                            |            | (Restated, see Note 1) |             |     
|Sales and revenues:                                                                |                                                                                                                              |                                                            |            |                        |             |      |           |             |             |   |           |            
|                                                                                   | Sales                                                                                                                        |                                                            | $          | 337,217,000            |             |      | $         | 293,731,000 |             |   | $         | 385,868,000 |            
|                                                                                   | Service revenues                                                                                                             |                                                            |            | 91,798,000             |             |      |           | 89,611,000  |             |   |           | 92,578,000  |            
|                                                                                   |                                                                                                                              |                                                            |            |                        |             |      |           |             |             |   |           |            
|                                                                                   |                                                                                                                              | Total sales and revenues                                   |            |                        | 429,015,000 |      |           |             | 383,342,000 |   |           |             | 478,446,000 |  
|                                                                                   |                                                                                                                              |                                                            |            |                        |             |      |           |             |             |   |           |            
|Costs and Expenses:                                                                |                                                                                                                              |                                                            |            |                        |             |      |           |             |             |   |           |            
|                                                                                   | Costs of sales                                                                                                               |                                                            |            | 298,686,000            |             |      |           | 253,264,000 |             |   |           | 347,456,000 |            
|                                                                                   | Operating expenses                                                                                                           |                                                            |            | 104,366,000            |             |      |           | 102,265,000 |             |   |           | 96,725,000  |            
|                                                                                   |                                                                                                                              |                                                            |            |                        |             |      |           |             |             |   |           |            
|                                                                                   |                                                                                                                              | Total costs and expenses                                   |            |                        | 403,052,000 |      |           |             | 355,529,000 |   |           |             | 444,181,000 |  
|                                                                                   |                                                                                                                              |                                                            |            |                        |             |      |           |             |             |   |           |            
|                                                                                   |                                                                                                                              | Gross margin (excluding depreciation and
    amortization) |            |                        | 25,963,000  |      |           |             | 27,813,000  |   |           |             | 34,265,000  |  
|                                                                                   |                                                                                                                              |                                                            |            |                        |             |      |           |             |             |   |           |            
|Expenses (Income):                                                                 |                                                                                                                              |                                                            |            |                        |             |      |           |             |             |   |           |            
|                                                                                   | Selling, general and administrative                                                                                          |                                                            |            | 10,818,000             |             |      |           | 11,771,000  |             |   |           | 7,929,000   |            
|                                                                                   | Provision for bad debts                                                                                                      |                                                            |            | 1,648,000              |             |      |           | 1,358,000   |             |   |           | 3,425,000   |            
|                                                                                   | Depreciation and amortization                                                                                                |                                                            |            | 7,963,000              |             |      |           | 9,258,000   |             |   |           | 9,331,000   |            
|                                                                                   | Interest expense                                                                                                             |                                                            |            | 7,956,000              |             |      |           | 5,830,000   |             |   |           | 7,184,000   |            
|                                                                                   | Gain on sale of facilities and property                                                                                      |                                                            |            |                        |             |      |           | (8,929,000  | )           |   |           |             |            
|                                                                                   | Expenses of discontinued stock offering                                                                                      |                                                            |            |                        |             |      |           | 985,000     |             |   |           |             |            
|                                                                                   | Write-off of deferred financing costs                                                                                        |                                                            |            | 1,773,000              |             |      |           |             |             |   |           |             |            
|                                                                                   | Write-down of investments                                                                                                    |                                                            |            | 196,000                |             |      |           |             |             |   |           | 300,000     |            
|                                                                                   | Interest income                                                                                                              |                                                            |            | (122,000               | )           |      |           | (77,000     | )           |   |           | (48,000     | )          
|                                                                                   |                                                                                                                              |                                                            |            |                        |             |      |           |             |             |   |           |            
|                                                                                   |                                                                                                                              | Total expenses (income)                                    |            |                        | 30,232,000  |      |           |             | 20,196,000  |   |           |             | 28,121,000  |  
|                                                                                   |                                                                                                                              |                                                            |            |                        |             |      |           |             |             |   |           |            
|Income (loss) from continuing operations before
    income tax provision (benefit) |                                                                                                                              |                                                            | (4,269,000 | )                      |             |      | 7,617,000 |             |             |   | 6,144,000 |            
|Income tax provision (benefit)                                                     |                                                                                                                              |                                                            | (1,471,000 | )                      |             |      | 2,930,000 |             |             |   | 2,397,000 |            
|                                                                                   |                                                                                                                              |                                                            |            |                        |             |      |           |             |             |   |           |            
|Net income (loss) from continuing operations                                       |                                                                                                                              |                                                            | (2,798,000 | )                      |             |      | 4,687,000 |             |             |   | 3,747,000 |            
|Discontinued Operations:                                                           |                                                                                                                              |                                                            |            |                        |             |      |           |             |             |   |           |            
|                                                                                   | Loss from discontinued operations, net of income
    tax benefit of $109,000 and $548,000 in 2002 and 2001,
    respectively |                                                            |            |                        |             |      |           | (170,000    | )           |   |           | (858,000    | )          
|                                                                                   | Loss on sale of discontinued operations, net of
    income tax benefit of $305,000                                           |                                                            |            |                        |             |      |           |             |             |   |           | (477,000    | )          
|                                                                                   |                                                                                                                              |                                                            |            |                        |             |      |           |             |             |   |           |            
|Net income (loss)                                                                  |                                                                                                                              | $                                                          | (2,798,000 | )                      |             | $    | 4,517,000 |             |             | $ | 2,412,000 |            
|Accrued preferred stock dividends                                                  |                                                                                                                              |                                                            | (19,000    | )                      |             |      |           |             |             |   |           |            
|                                                                                   |                                                                                                                              |                                                            |            |                        |             |      |           |             |             |   |           |            
|Net income (loss) applicable to common
    stockholders                            |                                                                                                                              | $                                                          | (2,817,000 | )                      |             | $    | 4,517,000 |             |             | $ | 2,412,000 |            
|                                                                                   |                                                                                                                              |                                                            |            |                        |             |      |           |             |             |   |           |            
|Net income (loss) per common share:                                                |                                                                                                                              |                                                            |            |                        |             |      |           |             |             |   |           |            
|                                                                                   | Basic:                                                                                                                       |                                                            |            |                        |             |      |           |             |             |   |           |             |            
|                                                                                   |                                                                                                                              | From continuing operations                                 |            | $                      | (0.86       | )    |           | $           | 1.43        |   |           | $           | 1.15        |  
|                                                                                   |                                                                                                                              | Loss from discontinued operations                          |            |                        |             |      |           |             | (0.05       | ) |           |             | (0.26       | )
|                                                                                   |                                                                                                                              | Loss on sale of discontinued operations                    |            |                        |             |      |           |             |             |   |           |             | (0.15       | )
|                                                                                   |                                                                                                                              |                                                            |            |                        |             |      |           |             |             |   |           |            
|                                                                                   |                                                                                                                              | Net income (loss)                                          |            | $                      | (0.86       | )    |           | $           | 1.38        |   |           | $           | 0.74        |  
|                                                                                   |                                                                                                                              |                                                            |            |                        |             |      |           |             |             |   |           |            
|                                                                                   | Diluted:                                                                                                                     |                                                            |            |                        |             |      |           |             |             |   |           |             |            
|                                                                                   |                                                                                                                              | From continuing operations                                 |            | $                      | (0.86       | )    |           | $           | 1.40        |   |           | $           | 1.12        |  
|                                                                                   |                                                                                                                              | Loss from discontinued operations                          |            |                        |             |      |           |             | (0.05       | ) |           |             | (0.26       | )
|                                                                                   |                                                                                                                              | Loss on sale of discontinued operations                    |            |                        |             |      |           |             |             |   |           |             | (0.14       | )
|                                                                                   |                                                                                                                              |                                                            |            |                        |             |      |           |             |             |   |           |            
|                                                                                   |                                                                                                                              | Net income (loss)                                          |            | $                      | (0.86       | )    |           | $           | 1.35        |   |           | $           | 0.72        |  
|                                                                                   |                                                                                                                              |                                                            |            |                        |             |      |           |             |             |   |           |            

See accompanying notes to consolidated financial
statements.

F-3



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##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                      |                                                                |                                                                    |                                           |                        |            |           |   |            |            |            |   |             |             |            | 
|------------------------------------- | -------------------------------------------------------------- | ------------------------------------------------------------------ | ----------------------------------------- | ---------------------- | ---------- | --------- | - | ---------- | ---------- | ---------- | - | ----------- | ----------- | ---------- | 
|                                      |                                                                |                                                                   
|                                      |                                                                | Year Ended June 30,                                               
|                                      |                                                                |                                                                   
|                                      |                                                                | 2003                                                               |                                           | 2002                   |            | 2001     
|                                      |                                                                |                                                                    |                                           |                        |            |          
|                                      |                                                                |                                                                    |                                           | (Restated, see Note 1) |            |          
|CASH FLOWS FROM OPERATING ACTIVITIES: |                                                                |                                                                    |                                           |                        |            |           |   |            |            |            |   |            
|                                      | Net income (loss)                                              |                                                                    | $                                         | (2,798,000             | )          |           | $ | 4,517,000  |            |            | $ | 2,412,000   |            
|                                      | Add: Loss from discontinued operations                         |                                                                    |                                           |                        |            |           |   | 170,000    |            |            |   | 1,335,000   |            
|                                      |                                                                |                                                                    |                                           |                        |            |           |   |            |            |            |   |            
|                                      | Income (loss) from continuing operations                       |                                                                    |                                           | (2,798,000             | )          |           |   | 4,687,000  |            |            |   | 3,747,000   |            
|                                      | Adjustments to derive cash flow from operating
    activities: |                                                                    |                                           |                        |            |           |   |            |            |            |   |             |            
|                                      |                                                                | Gain of sale of facilities and properties                          |                                           |                        |            |           |   |            | (8,929,000 | )          |   |             |             |           
|                                      |                                                                | Bad debt expense                                                   |                                           |                        | 1,648,000  |           |   |            | 1,358,000  |            |   |             | 3,425,000   |           
|                                      |                                                                | Depreciation and amortization                                      |                                           |                        | 7,963,000  |           |   |            | 9,258,000  |            |   |             | 9,331,000   |           
|                                      |                                                                | Deferred income taxes                                              |                                           |                        | (2,052,000 | )         |   |            | (1,757,000 | )          |   |             | 270,000     |           
|                                      |                                                                | Deferred rent                                                      |                                           |                        | (58,000    | )         |   |            | 589,000    |            |   |             | 677,000     |           
|                                      |                                                                | Compensation expense related to remeasurement of
    stock options |                                           |                        | 318,000    |           |   |            | 87,000     |            |   |             |             |           
|                                      |                                                                | Expense related to discount of executive stock
    purchase        |                                           |                        |            |           |   |            | 792,000    |            |   |             |             |           
|                                      |                                                                | Executive loan amortization                                        |                                           |                        | 404,000    |           |   |            | 34,000     |            |   |             |             |           
|                                      |                                                                | Amortization of senior subordinated note discount                  |                                           |                        | 266,000    |           |   |            | 192,000    |            |   |             | 186,000     |           
|                                      |                                                                | Loss on retirement/sale of assets                                  |                                           |                        | 24,000     |           |   |            |            |            |   |             |             |           
|                                      |                                                                | Write off of deferred financing costs                              |                                           |                        | 1,773,000  |           |   |            |            |            |   |             |             |           
|                                      |                                                                | Write down of investments                                          |                                           |                        | 196,000    |           |   |            |            |            |   |             |             |           
|                                      |                                                                | Amortization of deferred financing costs                           |                                           |                        | 558,000    |           |   |            |            |            |   |             |             |           
|                                      |                                                                | Executive compensation used to purchase preferred
    stock        |                                           |                        | 204,000    |           |   |            |            |            |   |             |             |           
|                                      |                                                                | Executive compensation used to exercise stock
    options          |                                           |                        | 174,000    |           |   |            |            |            |   |             |             |           
|                                      | Changes in operating assets and liabilities:                   |                                                                    |                                           |                        |            |           |   |            |            |            |   |             |            
|                                      |                                                                | Trade accounts receivable                                          |                                           |                        | (831,000   | )         |   |            | 4,602,000  |            |   |             | (14,050,000 | )         
|                                      |                                                                | Inventories                                                        |                                           |                        | (1,437,000 | )         |   |            | 1,084,000  |            |   |             | (641,000    | )         
|                                      |                                                                | Prepaid expenses and other current assets                          |                                           |                        | (2,198,000 | )         |   |            | (160,000   | )          |   |             | 22,000      |           
|                                      |                                                                | Accounts payable                                                   |                                           |                        | (773,000   | )         |   |            | 3,685,000  |            |   |             | 5,924,000   |           
|                                      |                                                                | Accrued expenses and other current liabilities                     |                                           |                        | 1,426,000  |           |   |            | (1,593,000 | )          |   |             | 4,656,000   |           
|                                      |                                                                |                                                                    |                                           |                        |            |           |   |            |            |            |   |            
|                                      |                                                                |                                                                    | Net cash provided by operating activities |                        |            | 4,807,000 |   |            |            | 13,929,000 |   |             |             | 13,547,000 | 
|                                      |                                                                |                                                                    |                                           |                        |            |           |   |            |            |            |   |            
|CASH FLOWS FROM INVESTING ACTIVITIES: |                                                                |                                                                    |                                           |                        |            |           |   |            |            |            |   |            
|                                      | Restricted cash                                                |                                                                    |                                           | 3,780,000              |            |           |   | (3,780,000 | )          |            |   |             |            
|                                      | Decrease (increase) in other assets                            |                                                                    |                                           | (1,080,000             | )          |           |   | (437,000   | )          |            |   | 1,499,000   |            
|                                      | Decrease (increase) in notes receivable                        |                                                                    |                                           | 343,000                |            |           |   | (78,000    | )          |            |   |             |            
|                                      | Acquisition of businesses                                      |                                                                    |                                           |                        |            |           |   |            |            |            |   | (10,400,000 | )          
|                                      | Proceeds from sale of facilities and property                  |                                                                    |                                           | 82,000                 |            |           |   | 17,068,000 |            |            |   |             |            
|                                      | Additions to property, equipment and leaseholds                |                                                                    |                                           | (4,065,000             | )          |           |   | (4,500,000 | )          |            |   | (6,471,000  | )          
|                                      |                                                                |                                                                    |                                           |                        |            |           |   |            |            |            |   |            
|                                      | Net cash provided by (used in) investing
    activities        |                                                                    |                                           | (940,000               | )          |           |   | 8,273,000  |            |            |   | (15,372,000 | )          
|                                      |                                                                |                                                                    |                                           |                        |            |           |   |            |            |            |   |            

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##### Table of Contents



|                                                                                    |                                                        |                                             |                                                         |                        |   |            |            |             |         |             |           |           |  |           | 
|----------------------------------------------------------------------------------- | ------------------------------------------------------ | ------------------------------------------- | ------------------------------------------------------- | ---------------------- | - | ---------- | ---------- | ----------- | ------- | ----------- | --------- | --------- |  | --------- | 
|                                                                                    |                                                        |                                            
|                                                                                    |                                                        | Year Ended June 30,                        
|                                                                                    |                                                        |                                            
|                                                                                    |                                                        | 2003                                        |                                                         | 2002                   |   | 2001      
|                                                                                    |                                                        |                                             |                                                         |                        |   |           
|                                                                                    |                                                        |                                             |                                                         | (Restated, see Note 1) |   |           
|CASH FLOWS FROM FINANCING ACTIVITIES:                                               |                                                        |                                             |                                                         |                        |   |            |            |             |         |             |           |          
|                                                                                    | Net (reduction of) additions to debt instruments       |                                             |                                                         | (6,833,000             | ) |            |            | (19,828,000 | )       |             |           | 2,727,000 | 
|                                                                                    | Early retirement of debt                               |                                             |                                                         | (13,285,000            | ) |            |            |             |         |             |           |           | 
|                                                                                    | Proceeds from refinancing                              |                                             |                                                         | 16,923,000             |   |            |            |             |         |             |           |           | 
|                                                                                    | Payments received from notes
    receivable  officers |                                             |                                                         |                        |   |            |            |             |         |             |           | 75,000    | 
|                                                                                    | Repurchase of stock for executive plan                 |                                             |                                                         |                        |   |            |            | (3,934,000  | )       |             |           |           | 
|                                                                                    | Increase in deferred financing costs                   |                                             |                                                         | (3,550,000             | ) |            |            |             |         |             |           |           | 
|                                                                                    | Repurchase of common stock                             |                                             |                                                         | (370,000               | ) |            |            | (311,000    | )       |             |           |           | 
|                                                                                    | Proceeds from issuance of preferred stock              |                                             |                                                         | 259,000                |   |            |            |             |         |             |           |           | 
|                                                                                    | Proceeds from exercise of stock options                |                                             |                                                         | 72,000                 |   |            |            |             |         |             |           |           | 
|                                                                                    | Proceeds from issuance of common stock                 |                                             |                                                         |                        |   |            |            | 40,000      |         |             |           | 430,000   | 
|                                                                                    |                                                        |                                             |                                                         |                        |   |            |            |             |         |             |           |          
|                                                                                    |                                                        |                                             | Net cash provided by (used in) financing
    activities |                        |   | (6,784,000 | )          |             |         | (24,033,000 | )         |           |  | 3,232,000 | 
|                                                                                    |                                                        |                                             |                                                         |                        |   |            |            |             |         |             |           |          
|Effect of exchange rate changes on cash                                             |                                                        |                                             | 154,000                                                 |                        |   |            | (88,000    | )           |         |             |           |          
|                                                                                    |                                                        |                                             |                                                         |                        |   |            |            |             |         |             |           |          
|NET INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS FROM CONTINUING OPERATIONS |                                                        |                                             | (2,763,000                                              | )                      |   |            | (1,919,000 | )           |         |             | 1,407,000 |          
|                                                                                    | Net cash provided by discontinued operations           |                                             |                                                         |                        |   |            |            | 3,598,000   |         |             |           | 398,000   | 
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                        |                                                        |                                             | 5,565,000                                               |                        |   |            | 3,886,000  |             |         |             | 2,081,000 |          
|                                                                                    |                                                        |                                             |                                                         |                        |   |            |            |             |         |             |           |          
|CASH AND CASH EQUIVALENTS,
    END OF YEAR                                          |                                                        | $                                           | 2,802,000                                               |                        |   | $          | 5,565,000  |             |         | $           | 3,886,000 |          
|                                                                                    |                                                        |                                             |                                                         |                        |   |            |            |             |         |             |           |          
|CASH PAID DURING THE YEAR FOR:                                                      |                                                        |                                             |                                                         |                        |   |            |            |             |         |             |           |          
|                                                                                    | Interest                                               |                                             | $                                                       | 5,383,000              |   |            | $          | 5,786,000   |         |             | $         | 7,306,000 | 
|                                                                                    | Income taxes                                           |                                             | $                                                       | 5,176,000              |   |            | $          | 470,000     |         |             | $         | 3,000     | 
|SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
    FINANCING ACTIVITIES:           |                                                        |                                             |                                                         |                        |   |            |            |             |         |             |           |          
|                                                                                    |                                                        | Adjustment of warrants on subordinated note |                                                         |                        |   |            |            | $           | 43,000  |             |           |           |  |          
|                                                                                    |                                                        | Note receivable due to sale of property     |                                                         |                        |   |            |            | $           | 570,000 |             |           |           |  |          

See accompanying notes to consolidated financial
statements.

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##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                                               |                      |              |           |        |  |                 |        |          |  |               |            |               |  |       |            |   |  |   |            |   |  |   |          |   |  |   |            |            |  
|------------------------------------------------------------------------------ | -------------------- | ------------ | --------- | ------ |  | --------------- | ------ | -------- |  | ------------- | ---------- | ------------- |  | ----- | ---------- | - |  | - | ---------- | - |  | - | -------- | - |  | - | ---------- | ---------- | -
|                                                                               |                      |              |           |        |  |                 |        |          |  |               |            |              
|                                                                               |                      | Common Stock |           |        |  |                 |        |          |  | Accumulated   |            |              
|                                                                               |                      |              |           |        |  |                 |        | Notes    |  | Other         |            |              
|                                                                               |                      | Number of    |           |        |  | Additional      |        | Retained |  | Receivable    |            | Comprehensive |  |      
|                                                                               |                      | Shares       |           | Amount |  | Paid-in Capital |        | Earnings |  | From Officers |            | (Loss)        |  | Total
|                                                                               |                      |              |           |        |  |                 |        |          |  |               |            |               |  |      
|Balances, June 30, 2000
    (Restated, see Note 1)                             |                      |              | 3,236,477 |        |  | $               | 32,000 |          |  | $             | 21,046,000 |               |  | $     | 10,060,000 |   |  | $ | (608,000   | ) |  | $ | (228,000 | ) |  | $ | 30,302,000 |           
|Net income                                                                     |                      |              |           |        |  |                 |        |          |  |               |            |               |  |       | 2,412,000  |   |  |   |            |   |  |   |          |   |  |   | 2,412,000  |           
|Common stock issued on exercise of options                                     |                      |              | 51,863    |        |  |                 | 1,000  |          |  |               | 429,000    |               |  |       |            |   |  |   |            |   |  |   |          |   |  |   | 430,000    |           
|Reduction of note receivable from sale of stock                                |                      |              |           |        |  |                 |        |          |  |               |            |               |  |       |            |   |  |   | 75,000     |   |  |   |          |   |  |   | 75,000     |           
|                                                                               |                      |              |           |        |  |                 |        |          |  |               |            |               |  |       |            |   |  |   |            |   |  |   |          |   |  |   |            |           
|Balances, June 30, 2001                                                        |                      |              | 3,288,340 |        |  |                 | 33,000 |          |  |               | 21,475,000 |               |  |       | 12,472,000 |   |  |   | (533,000   | ) |  |   | (228,000 | ) |  |   | 33,219,000 |           
|Comprehensive income (loss):                                                   |                      |              |           |        |  |                 |        |          |  |               |            |               |  |       |            |   |  |   |            |   |  |   |          |   |  |   |            |           
|Net income (Restated, see Note 1)                                              |                      |              |           |        |  |                 |        |          |  |               |            |               |  |       | 4,517,000  |   |  |   |            |   |  |   |          |   |  |   | 4,517,000  |           
|Foreign currency translation adjustment                                        |                      |              |           |        |  |                 |        |          |  |               |            |               |  |       |            |   |  |   |            |   |  |   | (88,000  | ) |  |   | (88,000    | )         
|                                                                               |                      |              |           |        |  |                 |        |          |  |               |            |               |  |       |            |   |  |   |            |   |  |   |          |   |  |   |            |           
|                                                                               | Comprehensive income |              |           |        |  |                 |        |          |  |               |            |               |  |       |            |   |  |   |            |   |  |   |          |   |  |   |            | 4,429,000  |  
|                                                                               |                      |              |           |        |  |                 |        |          |  |               |            |               |  |       |            |   |  |   |            |   |  |   |          |   |  |   |            |           
|Common stock issued on exercise of options                                     |                      |              | 12,110    |        |  |                 |        |          |  |               | 40,000     |               |  |       |            |   |  |   |            |   |  |   |          |   |  |   | 40,000     |           
|Note receivable from sale of stock                                             |                      |              |           |        |  |                 |        |          |  |               |            |               |  |       |            |   |  |   | (3,934,000 | ) |  |   |          |   |  |   | (3,934,000 | )         
|Value of remeasured stock options                                              |                      |              |           |        |  |                 |        |          |  |               | 110,000    |               |  |       |            |   |  |   |            |   |  |   |          |   |  |   | 110,000    |           
|Repurchase of common stock                                                     |                      |              | (29,600   | )      |  |                 |        |          |  |               | (194,000   | )             |  |       | (117,000   | ) |  |   |            |   |  |   |          |   |  |   | (311,000   | )         
|Executive compensation related to 2002 Management
    Stock Purchase Plan      |                      |              |           |        |  |                 |        |          |  |               | 792,000    |               |  |       |            |   |  |   |            |   |  |   |          |   |  |   | 792,000    |           
|Amortization of note from executive stock plan                                 |                      |              |           |        |  |                 |        |          |  |               |            |               |  |       |            |   |  |   | 32,000     |   |  |   |          |   |  |   | 32,000     |           
|Revaluation of warrants issued in connection with
    Senior Subordinated Note |                      |              |           |        |  |                 |        |          |  |               | 43,000     |               |  |       |            |   |  |   |            |   |  |   |          |   |  |   | 43,000     |           
|                                                                               |                      |              |           |        |  |                 |        |          |  |               |            |               |  |       |            |   |  |   |            |   |  |   |          |   |  |   |            |           
|Balances, June 30, 2002 (Restated, see
    Note 1)                             |                      |              | 3,270,850 |        |  |                 | 33,000 |          |  |               | 22,266,000 |               |  |       | 16,872,000 |   |  |   | (4,435,000 | ) |  |   | (316,000 | ) |  |   | 34,420,000 |           
|Comprehensive income (loss):                                                   |                      |              |           |        |  |                 |        |          |  |               |            |               |  |       |            |   |  |   |            |   |  |   |          |   |  |   |            |           
|Net loss                                                                       |                      |              |           |        |  |                 |        |          |  |               |            |               |  |       | (2,798,000 | ) |  |   |            |   |  |   |          |   |  |   | (2,798,000 | )         
|Foreign currency translation adjustment                                        |                      |              |           |        |  |                 |        |          |  |               |            |               |  |       |            |   |  |   |            |   |  |   | 230,000  |   |  |   | 230,000    |           
|                                                                               |                      |              |           |        |  |                 |        |          |  |               |            |               |  |       |            |   |  |   |            |   |  |   |          |   |  |   |            |           
|                                                                               | Comprehensive loss   |              |           |        |  |                 |        |          |  |               |            |               |  |       |            |   |  |   |            |   |  |   |          |   |  |   |            | (2,568,000 | )
|                                                                               |                      |              |           |        |  |                 |        |          |  |               |            |               |  |       |            |   |  |   |            |   |  |   |          |   |  |   |            |           
|Common stock issued on exercise of options                                     |                      |              | 73,568    |        |  |                 | 1,000  |          |  |               | 245,000    |               |  |       |            |   |  |   |            |   |  |   |          |   |  |   | 246,000    |           
|Remeasurement of stock options                                                 |                      |              |           |        |  |                 |        |          |  |               | 318,000    |               |  |       |            |   |  |   |            |   |  |   |          |   |  |   | 318,000    |           
|Amortization of note from executive stock plan                                 |                      |              |           |        |  |                 |        |          |  |               |            |               |  |       |            |   |  |   | 404,000    |   |  |   |          |   |  |   | 404,000    |           
|Repurchase of common stock                                                     |                      |              | (50,850   | )      |  |                 | (1,000 | )        |  |               | (333,000   | )             |  |       | (37,000    | ) |  |   |            |   |  |   |          |   |  |   | (371,000   | )         
|Accrual of preferred stock dividends                                           |                      |              |           |        |  |                 |        |          |  |               |            |               |  |       | (19,000    | ) |  |   |            |   |  |   |          |   |  |   | (19,000    | )         
|                                                                               |                      |              |           |        |  |                 |        |          |  |               |            |               |  |       |            |   |  |   |            |   |  |   |          |   |  |   |            |           
|Balances, June 30, 2003                                                        |                      |              | 3,293,568 |        |  | $               | 33,000 |          |  | $             | 22,496,000 |               |  | $     | 14,018,000 |   |  | $ | (4,031,000 | ) |  | $ | (86,000  | ) |  | $ | 32,430,000 |           
|                                                                               |                      |              |           |        |  |                 |        |          |  |               |            |               |  |       |            |   |  |   |            |   |  |   |          |   |  |   |            |           

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##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note 1  Summary of Significant
Accounting Policies and Restatement:



| |         
| | --------
| | Business

Mercury Air Group, Inc. (the
Company), a Delaware Corporation, was organized in
1956 and provides a broad range of services to the aviation
industry through four principal operating units: Mercury Air
Centers, Inc. (Air Centers), Mercury Air Cargo, Inc.
(Air Cargo), MercFuel, Inc. (MercFuel),
and Maytag Aircraft Corporation (Maytag or
Government Contract Services), a provider of
government contract services. The Air Centers operations consist
of aviation fuel sales, aircraft refueling operations
(into-plane), aircraft ground support services,
aircraft hangar services, aircraft parking (aircraft
tie-down services) and aircraft maintenance at certain Air
Center locations, known as Fixed Based Operations
(FBOs), for commercial, private, general
aviation and military aircraft (collectively FBO
services). Air Cargos operations consist of cargo
handling, cargo space logistics, and general cargo sales agent
services. MercFuels operations consist of the sale and
delivery of fuel, primarily aviation fuel, to domestic and
international commercial airlines, corporate aviation and air
freight airlines. Maytags government contract services
consist of the following services primarily for agencies of the
United States Government: aircraft refueling and fuel storage
operations, base operations support (BOS) services,
air terminal and ground handling services and weather
observation and forecasting services.

On October 28, 2003, the Company announced
that it had entered into a definitive agreement, subject to the
Companys stockholders approval, completion of due
diligence, and regulatory agencies approvals and consents,
to sell 100% of the outstanding common stock of Air Centers to
Allied Capital Corporation (Allied) for
$70 million, subject to adjustments, with closing of the
transaction expected to occur between December 31, 2003 and
March 31, 2004. As of the date of this report, the
completion of the sale transaction is still pending. For more
information on this pending transaction, refer to Note
19  Subsequent Events.



| |            
| | -----------
| | Restatement

The fiscal 2002 and 2001 financial statements and
each of the first three quarters of fiscal 2003 have been
restated related to the following items: (1) To record as
of June 30, 2002 an accrual of $459,000 (representing
increased rent expense of $789,000 net of retroactive
recoverable sublease rental income of $330,000) for a rent
increase related to one of Air Cargos warehouse facilities
at Los Angeles International Airport which is retroactive to
June 18, 2001. The Company had previously recognized no
accrual for this retroactive rent increase in its fiscal 2002
financial statements, as the Company was disputing the amount of
the increase; however, the Company subsequently determined that
it had received information regarding the proposed rent increase
prior to the issuance of its fiscal 2002 financial statements
which provided substantial evidence that an obligation existed
at the balance sheet date and that the amount of the liability
could be reasonably estimated; (2) To record additional
compensation expense of $430,000 during the fourth quarter of
fiscal 2002 in connection with the 2002 Management Stock
Purchase Plan, pursuant to which the Company had loaned certain
officers in May 2002 a total of $3.9 million to purchase
shares of the Companys stock from CFK Partners (which is
owned by three of the Companys directors) at $15.00 per
share as adjusted for the one-for-two reverse stock split
effective June 18, 2003. The trading price of the shares at
this time was $9.80 per share. A full recourse loan was made to
the Companys Chief Executive Officer in the amount of
$2.9 million, and non-recourse loans totaling
$1 million were made to the other executives (Other
Executives). The Company originally recorded a
compensation charge of $356,000 in connection with this
transaction to write down the non-recourse loans based on the
difference between the purchase price paid by the Other
Executives for the shares and the market value of such shares at
that time. The Company has determined that it was proper to
record the compensation expense of $356,000 to reflect the
benefit received by CFK Partners for the purchase price paid by
the Other executives in excess of the market value of such
shares at that time; however, the non-recourse loans should not
have been written-down, but rather additional paid-in capital
should have been credited for $356,000. In addition, the Company
determined that it should have recorded additional

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##### Table of Contents



compensation expense of $436,000 related to the
recourse loan and the shares purchased by the CEO to also
reflect the benefit received by CFK Partners related to the
purchase price paid by the CEO for his shares in excess of the
market value of such shares at that time. The benefit attributed
to the CEOs interest in CFK Partners has been deducted in
determining the compensation expense related to these loans.
Accordingly, the fiscal 2002 financial statements have been
restated to record in the fourth quarter of fiscal 2002 the
reversal of the write-down of the non-recourse loans and a
credit to additional paid-in capital for $356,000, and to record
additional compensation expense of $436,000. The non-recourse
loans are being accounted for as a variable stock plan pursuant
to Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and the
recourse loan is being accounted for as a fixed stock plan;
(3) To reverse the sale-leaseback accounting associated
with the sale of a building housing the Companys corporate
headquarters and accounting for this transaction as a financing
effective January 2002. The Company sold the corporate
headquarters to CFK Realty Partners, LLC (CFK
Realty), a wholly owned subsidiary of CFK Partners, and
concurrently entered into a ten-year lease of the property.
However, the Company has determined that CFK Realty was not
sufficiently capitalized to permit sale-leaseback accounting and
the non-consolidation of CFK Realty. Accordingly, the fiscal
2002 financial statements have been restated to fully
consolidate CFK Realty effective in the third quarter of fiscal
2002, resulting in land and building totaling $1.8 million,
net of accumulated depreciation, being reinstated on the books
of the Company, recording of debt related to a loan of
$3.2 million incurred by CFK Realty to finance the
acquisition, reversal of a deferred gain of $2.1 million
recorded by the Company at the time of the transaction, and the
reversal of rent expense and recording of depreciation resulting
in additional pre-tax expense of $23,000 for the third and
fourth quarters of fiscal 2002 combined; and (4) to adjust
opening retained earnings by $363,000 to correct for income tax
adjustments that should have been recorded in years prior to
fiscal 2001.


The fiscal 2002 restatement resulted in a
reduction in previously recorded net income of $516,000. The
restatement for fiscal 2002 reduced previously reported basic
and diluted net income per share by $0.15 and $0.16,
respectively. The Companys fiscal 2002 and 2001 financial
statements, previously audited by other independent auditors,
were re-audited by PricewaterhouseCoopers LLP.

F-8



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##### Table of Contents



The following statements present the impact of
the restatement on balances as reported, and as restated, at
June 30, 2002 and for the year then ended:

CONSOLIDATED BALANCE SHEETS

|                                        |                                                                       |                                            |            |             |             |  |            |            |             | 
|--------------------------------------- | --------------------------------------------------------------------- | ------------------------------------------ | ---------- | ----------- | ----------- |  | ---------- | ---------- | ----------- | 
|                                        |                                                                       |                                           
|                                        |                                                                       | June 30, 2002                             
|                                        |                                                                       |                                           
|                                        |                                                                       | As Reported                                |            | As Restated
|                                        |                                                                       |                                            |            |            
|ASSETS                                 
|CURRENT ASSETS:                         |                                                                       |                                            |            |             |             |  |            |           
|                                        | Cash and cash equivalents                                             |                                            | $          | 5,554,000   |             |  | $          | 5,565,000  |            
|                                        | Restricted cash                                                       |                                            |            | 3,780,000   |             |  |            | 3,780,000  |            
|                                        | Trade accounts receivable, net of allowance for
    doubtful accounts |                                            |            | 46,958,000  |             |  |            | 47,570,000 |            
|                                        | Inventories, principally aviation fuel                                |                                            |            | 2,985,000   |             |  |            | 2,985,000  |            
|                                        | Prepaid expenses and other current assets                             |                                            |            | 3,077,000   |             |  |            | 3,042,000  |            
|                                        | Note receivable from affiliate                                        |                                            |            | 1,400,000   |             |  |            |            |            
|                                        |                                                                       |                                            |            |             |             |  |            |           
|                                        |                                                                       | TOTAL CURRENT ASSETS                       |            |             | 63,754,000  |  |            |            | 62,942,000  | 
|PROPERTY, EQUIPMENT AND LEASEHOLDS, net |                                                                       |                                            | 59,286,000 |             |             |  | 61,094,000 |           
|NOTES RECEIVABLE                        |                                                                       |                                            | 2,158,000  |             |             |  | 2,158,000  |           
|DEFERRED INCOME TAXES                   |                                                                       |                                            | 770,000    |             |             |  | 1,302,000  |           
|GOODWILL                                |                                                                       |                                            | 4,389,000  |             |             |  | 4,389,000  |           
|OTHER INTANGIBLE ASSETS, NET            |                                                                       |                                            | 233,000    |             |             |  | 233,000    |           
|OTHER ASSETS, NET                       |                                                                       |                                            | 4,096,000  |             |             |  | 4,096,000  |           
|                                        |                                                                       |                                            |            |             |             |  |            |           
|                                        |                                                                       | TOTAL ASSETS                               |            | $           | 134,686,000 |  |            | $          | 136,214,000 | 
|                                        |                                                                       |                                            |            |             |             |  |            |           
|LIABILITIES AND STOCKHOLDERS EQUITY   
|CURRENT LIABILITIES:                    |                                                                       |                                            |            |             |             |  |            |           
|                                        | Accounts payable                                                      |                                            | $          | 35,085,000  |             |  | $          | 35,449,000 |            
|                                        | Accrued expenses and other current liabilities                        |                                            |            | 8,459,000   |             |  |            | 8,861,000  |            
|                                        | Current portion of long-term debt                                     |                                            |            | 14,677,000  |             |  |            | 14,677,000 |            
|                                        | Current portion of Senior Subordinated Notes                          |                                            |            | 23,179,000  |             |  |            | 23,179,000 |            
|                                        |                                                                       |                                            |            |             |             |  |            |           
|                                        |                                                                       | TOTAL CURRENT LIABILITIES                  |            |             | 81,400,000  |  |            |            | 82,166,000  | 
|LONG-TERM DEBT                          |                                                                       |                                            | 14,351,000 |             |             |  | 17,516,000 |           
|DEFERRED GAIN                           |                                                                       |                                            | 2,146,000  |             |             |  |            |           
|DEFERRED INCOME TAXES                   |                                                                       |                                            |            |             |             |  | 169,000    |           
|DEFERRED RENT                           |                                                                       |                                            | 1,943,000  |             |             |  | 1,943,000  |           
|                                        |                                                                       |                                            |            |             |             |  |            |           
|                                        |                                                                       | TOTAL LIABILITIES                          |            |             | 99,840,000  |  |            |            | 101,794,000 | 
|                                        |                                                                       |                                            |            |             |             |  |            |           
|STOCKHOLDERS EQUITY:                   |                                                                       |                                            |            |             |             |  |            |           
|                                        | Common stock                                                          |                                            |            | 33,000      |             |  |            | 33,000     |            
|                                        | Additional paid-in capital                                            |                                            |            | 21,451,000  |             |  |            | 22,266,000 |            
|                                        | Retained earnings                                                     |                                            |            | 17,751,000  |             |  |            | 16,872,000 |            
|                                        | Accumulated other comprehensive loss                                  |                                            |            | (316,000    | )           |  |            | (316,000   | )          
|                                        | Notes receivable from officers                                        |                                            |            | (4,073,000  | )           |  |            | (4,435,000 | )          
|                                        |                                                                       |                                            |            |             |             |  |            |           
|                                        |                                                                       | TOTAL STOCKHOLDERS EQUITY                 |            |             | 34,846,000  |  |            |            | 34,420,000  | 
|                                        |                                                                       |                                            |            |             |             |  |            |           
|                                        |                                                                       | TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |            | $           | 134,686,000 |  |            | $          | 136,214,000 | 
|                                        |                                                                       |                                            |            |             |             |  |            |           

F-9



---



##### Table of Contents



CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                  |                                         |                                                            |             |             |             |   |             |             |             |  
|----------------------------------------------------------------- | --------------------------------------- | ---------------------------------------------------------- | ----------- | ----------- | ----------- | - | ----------- | ----------- | ----------- | -
|                                                                  |                                         |                                                           
|                                                                  |                                         | Year Ended                                                
|                                                                  |                                         | June 30, 2002                                             
|                                                                  |                                         |                                                           
|                                                                  |                                         | As Reported                                                |             | As Restated
|                                                                  |                                         |                                                            |             |            
|Sales and revenues                                                |                                         | $                                                          | 383,342,000 |             |             | $ | 383,342,000 |            
|                                                                  |                                         |                                                            |             |             |             |   |             |            
|Costs and Expenses:                                               |                                         |                                                            |             |             |             |   |             |            
|                                                                  | Costs of sales                          |                                                            |             | 253,264,000 |             |   |             | 253,264,000 |            
|                                                                  | Operating expenses                      |                                                            |             | 101,806,000 |             |   |             | 102,265,000 |            
|                                                                  |                                         |                                                            |             |             |             |   |             |            
|                                                                  |                                         | Total costs and expenses                                   |             |             | 355,070,000 |   |             |             | 355,529,000 |  
|                                                                  |                                         |                                                            |             |             |             |   |             |            
|                                                                  |                                         | Gross margin (excluding depreciation and
    amortization) |             |             | 28,272,000  |   |             |             | 27,813,000  |  
|                                                                  |                                         |                                                            |             |             |             |   |             |            
|Expenses (Income):                                                |                                         |                                                            |             |             |             |   |             |            
|                                                                  | Selling, general and administrative     |                                                            |             | 11,518,000  |             |   |             | 11,771,000  |            
|                                                                  | Provision for bad debts                 |                                                            |             | 1,358,000   |             |   |             | 1,358,000   |            
|                                                                  | Depreciation and amortization           |                                                            |             | 9,213,000   |             |   |             | 9,258,000   |            
|                                                                  | Interest expense                        |                                                            |             | 5,710,000   |             |   |             | 5,830,000   |            
|                                                                  | Gain on sale of facilities and property |                                                            |             | (8,929,000  | )           |   |             | (8,929,000  | )          
|                                                                  | Expenses of discontinued stock offering |                                                            |             | 985,000     |             |   |             | 985,000     |            
|                                                                  | Interest income                         |                                                            |             | (112,000    | )           |   |             | (77,000     | )          
|                                                                  |                                         |                                                            |             |             |             |   |             |            
|                                                                  |                                         | Total expenses                                             |             |             | 19,743,000  |   |             |             | 20,196,000  |  
|                                                                  |                                         |                                                            |             |             |             |   |             |            
|Income from continuing operations before income
    tax provision |                                         |                                                            | 8,529,000   |             |             |   | 7,617,000   |            
|Income tax provision                                              |                                         |                                                            | 3,326,000   |             |             |   | 2,930,000   |            
|                                                                  |                                         |                                                            |             |             |             |   |             |            
|Net income from continuing operations                             |                                         |                                                            | 5,203,000   |             |             |   | 4,687,000   |            
|Loss from discontinued operations, net of tax                     |                                         |                                                            | (170,000    | )           |             |   | (170,000    | )          
|                                                                  |                                         |                                                            |             |             |             |   |             |            
|Net income                                                        |                                         | $                                                          | 5,033,000   |             |             | $ | 4,517,000   |            
|                                                                  |                                         |                                                            |             |             |             |   |             |            
|Net income (loss) per common share:                               |                                         |                                                            |             |             |             |   |             |            
|                                                                  | Basic:                                  |                                                            |             |             |             |   |             |             |            
|                                                                  |                                         | From continuing operations                                 |             | $           | 1.58        |   |             | $           | 1.43        |  
|                                                                  |                                         | Loss from discontinued operations                          |             |             | (0.05       | ) |             |             | (0.05       | )
|                                                                  |                                         |                                                            |             |             |             |   |             |            
|                                                                  |                                         | Net income                                                 |             | $           | 1.53        |   |             | $           | 1.38        |  
|                                                                  |                                         |                                                            |             |             |             |   |             |            
|                                                                  | Diluted:                                |                                                            |             |             |             |   |             |             |            
|                                                                  |                                         | From continuing operations                                 |             | $           | 1.56        |   |             | $           | 1.40        |  
|                                                                  |                                         | Loss from discontinued operations                          |             |             | (0.05       | ) |             |             | (0.05       | )
|                                                                  |                                         |                                                            |             |             |             |   |             |            
|                                                                  |                                         | Net income                                                 |             | $           | 1.51        |   |             | $           | 1.35        |  
|                                                                  |                                         |                                                            |             |             |             |   |             |            

F-10



---



##### Table of Contents



CONSOLIDATED STATEMENT OF CASH FLOWS

|                                                                         |                                                                |                                                                    |                                           |             |             |            |            |             |             |            | 
|------------------------------------------------------------------------ | -------------------------------------------------------------- | ------------------------------------------------------------------ | ----------------------------------------- | ----------- | ----------- | ---------- | ---------- | ----------- | ----------- | ---------- | 
|                                                                         |                                                                |                                                                   
|                                                                         |                                                                | Year Ended June 30, 2002                                          
|                                                                         |                                                                |                                                                   
|                                                                         |                                                                | As Reported                                                        |                                           | As Restated
|                                                                         |                                                                |                                                                    |                                           |            
|CASH FLOWS FROM OPERATING ACTIVITIES:                                    |                                                                |                                                                    |                                           |             |             |            |            |            
|                                                                         | Net income                                                     |                                                                    | $                                         | 5,033,000   |             |            | $          | 4,517,000   |            
|                                                                         | Add: Loss from discontinued operations                         |                                                                    |                                           | 170,000     |             |            |            | 170,000     |            
|                                                                         |                                                                |                                                                    |                                           |             |             |            |            |            
|                                                                         | Income from continuing operations                              |                                                                    |                                           | 5,203,000   |             |            |            | 4,687,000   |            
|                                                                         | Adjustments to derive cash flow from operating
    activities: |                                                                    |                                           |             |             |            |            |             |            
|                                                                         |                                                                | Gain of sale of facilities and properties                          |                                           |             | (8,929,000  | )          |            |             | (8,929,000  | )         
|                                                                         |                                                                | Bad debt expense                                                   |                                           |             | 1,358,000   |            |            |             | 1,358,000   |           
|                                                                         |                                                                | Depreciation and amortization                                      |                                           |             | 9,213,000   |            |            |             | 9,258,000   |           
|                                                                         |                                                                | Deferred income taxes                                              |                                           |             | (1,150,000  | )          |            |             | (1,757,000  | )         
|                                                                         |                                                                | Deferred rent                                                      |                                           |             | 589,000     |            |            |             | 589,000     |           
|                                                                         |                                                                | Compensation expense related to remeasurement of
    stock options |                                           |             | 87,000      |            |            |             | 87,000      |           
|                                                                         |                                                                | Expense related to discount of executive stock
    purchase        |                                           |             | 394,000     |            |            |             | 792,000     |           
|                                                                         |                                                                | Executive loan amortization                                        |                                           |             |             |            |            |             | 34,000      |           
|                                                                         |                                                                | Amortization of senior subordinated note discount                  |                                           |             | 192,000     |            |            |             | 192,000     |           
|                                                                         |                                                                | Amortization of deferred gain                                      |                                           |             | (39,000     | )          |            |             |             |           
|                                                                         | Changes in operating assets and liabilities:                   |                                                                    |                                           |             |             |            |            |             |            
|                                                                         |                                                                | Trade accounts receivable                                          |                                           |             | 5,214,000   |            |            |             | 4,602,000   |           
|                                                                         |                                                                | Inventories                                                        |                                           |             | 1,084,000   |            |            |             | 1,084,000   |           
|                                                                         |                                                                | Prepaid expenses and other current assets                          |                                           |             | (195,000    | )          |            |             | (160,000    | )         
|                                                                         |                                                                | Accounts payable                                                   |                                           |             | 3,321,000   |            |            |             | 3,685,000   |           
|                                                                         |                                                                | Accrued expenses and other current liabilities                     |                                           |             | (1,898,000  | )          |            |             | (1,593,000  | )         
|                                                                         |                                                                |                                                                    |                                           |             |             |            |            |            
|                                                                         |                                                                |                                                                    | Net cash provided by operating activities |             |             | 14,444,000 |            |             |             | 13,929,000 | 
|                                                                         |                                                                |                                                                    |                                           |             |             |            |            |            
|CASH FLOWS FROM INVESTING ACTIVITIES:                                    |                                                                |                                                                    |                                           |             |             |            |            |            
|                                                                         | Increase in restricted cash                                    |                                                                    |                                           | (3,780,000  | )           |            |            | (3,780,000  | )          
|                                                                         | Increase in other assets                                       |                                                                    |                                           | (437,000    | )           |            |            | (437,000    | )          
|                                                                         | Increase in notes receivable                                   |                                                                    |                                           | (78,000     | )           |            |            | (78,000     | )          
|                                                                         | Proceeds from sale of facilities and property                  |                                                                    |                                           | 19,707,000  |             |            |            | 17,068,000  |            
|                                                                         | Additions to property, equipment and leaseholds                |                                                                    |                                           | (4,500,000  | )           |            |            | (4,500,000  | )          
|                                                                         |                                                                |                                                                    |                                           |             |             |            |            |            
|                                                                         | Net cash provided by investing activities                      |                                                                    |                                           | 10,912,000  |             |            |            | 8,273,000   |            
|                                                                         |                                                                |                                                                    |                                           |             |             |            |            |            
|CASH FLOWS FROM FINANCING ACTIVITIES:                                    |                                                                |                                                                    |                                           |             |             |            |            |            
|                                                                         | Net reduction of debt instruments                              |                                                                    |                                           | (22,993,000 | )           |            |            | (19,828,000 | )          
|                                                                         | Repurchase of stock for executive plan                         |                                                                    |                                           | (3,934,000  | )           |            |            | (3,934,000  | )          
|                                                                         | Repurchase of common stock                                     |                                                                    |                                           | (311,000    | )           |            |            | (311,000    | )          
|                                                                         | Proceeds from issuance of common stock                         |                                                                    |                                           | 40,000      |             |            |            | 40,000      |            
|                                                                         |                                                                |                                                                    |                                           |             |             |            |            |            
|                                                                         |                                                                | Net cash used in financing activities                              |                                           |             | (27,198,000 | )          |            |             | (24,033,000 | )         
|                                                                         |                                                                |                                                                    |                                           |             |             |            |            |            
|Effect of exchange rate changes on cash                                  |                                                                |                                                                    | (88,000                                   | )           |             |            | (88,000    | )          
|                                                                         |                                                                |                                                                    |                                           |             |             |            |            |            
|NET DECREASE IN CASH AND CASH EQUIVALENTS FROM
    CONTINUING OPERATIONS |                                                                |                                                                    | (1,930,000                                | )           |             |            | (1,919,000 | )          
|                                                                         | Net cash provided by discontinued operations                   |                                                                    |                                           | 3,598,000   |             |            |            | 3,598,000   |            
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                             |                                                                |                                                                    | 3,886,000                                 |             |             |            | 3,886,000  |            
|                                                                         |                                                                |                                                                    |                                           |             |             |            |            |            
|CASH AND CASH EQUIVALENTS, END OF YEAR                                   |                                                                | $                                                                  | 5,554,000                                 |             |             | $          | 5,565,000  |            
|                                                                         |                                                                |                                                                    |                                           |             |             |            |            |            
|CASH PAID DURING THE YEAR FOR:                                           |                                                                |                                                                    |                                           |             |             |            |            |            
|                                                                         | Interest                                                       |                                                                    | $                                         | 5,666,000   |             |            | $          | 5,786,000   |            
|                                                                         | Income taxes                                                   |                                                                    | $                                         | 470,000     |             |            | $          | 470,000     |            

F-11



---



##### Table of Contents





| |                            
| | ---------------------------
| | Principles of Consolidation

The consolidated financial statements include the
accounts of Mercury Air Group, Inc. and its wholly owned and
majority owned subsidiaries. All material intercompany
transactions and balances have been eliminated.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

Cash equivalents consist of short-term, highly
liquid investments that are readily convertible into cash and
were purchased with maturities of three months or less.



| |                
| | ---------------
| | Restricted Cash

Restricted cash primarily consists of cash held
in an escrow account to be used for the payment of taxes or debt
pursuant to an FBO sale agreement (See Note 12).



| |            
| | -----------
| | Inventories

Inventories are stated at the lower of
moving-average cost or market.



| |                                       
| | --------------------------------------
| | Property, Equipment and
    Leaseholds

Property, equipment and leaseholds are recorded
at cost. Depreciation is computed using the straight-line method
over the estimated useful life of the related asset
(3-25 years) and over the lesser of the lease term or
useful life for leasehold improvements. Expenditures incurred to
maintain and repair property, plant and equipment are expensed
as incurred. Expenditures which extend the estimated useful life
or improve productivity are charged to their respective property
accounts.



| |                                         
| | ----------------------------------------
| | Goodwill and Other Intangible
    Assets

Cost in excess of net assets acquired accounted
for under the purchase method is classified as goodwill.
Effective July 1, 2002 the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets. In accordance
with SFAS No. 142, goodwill and intangible assets with
indefinite lives are not amortized, but written down, as needed,
based upon an impairment analysis that must occur at least
annually or sooner if an event occurs or circumstances change
that would more likely than not result in an impairment loss.
All other intangible assets are amortized over their estimated
useful lives. SFAS No. 142 requires that the Company
perform step one of a two-part transitional impairment test to
compare the reporting units fair value with their
respective carrying amount, including goodwill. If the carrying
value exceeds the fair value, step two of the transitional
impairment test must be performed to measure the amount of the
impairment loss, if any.

During the quarter ended December 31, 2002,
with the assistance of an independent valuation firm, the
Company completed step one of the transitional test to determine
whether there was a potential impairment of goodwill at
July 1, 2002. Primarily based on a weighted value using a
market approach and an income approach, it was determined that
the fair values of the reporting units that have goodwill
exceeded their carrying values, therefore a step two impairment
test is not required. Since the completion of this valuation,
nothing has come to the attention of management which would lead
the Company to believe that impairment has occurred subsequent
to this valuation. In accordance with SFAS No. 142, the
Company will perform an impairment test annually to determine
whether any impairment has occurred.



| |                                    
| | -----------------------------------
| | Impairment of Long-Lived
    Assets

The Company reviews for impairment of long-lived
assets and certain identifiable intangibles whenever events or
changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. The Company evaluates the
carrying value of long-lived assets to be held and used, other
than goodwill and intangible assets with indefinite lives, when
events and circumstances warrant such a review and in
managements opinion an impairment in value may have
occurred. The carrying value of a long-lived asset is

F-12



---



##### Table of Contents



considered impaired when the anticipated
undiscounted cash flow from such asset is separately
identifiable and is less than its carrying value. In that event,
a loss is recognized based on the amount by which the carrying
value exceeds the fair value of the long-lived asset. Fair value
is determined primarily using the anticipated cash flows
discounted at a rate commensurate with the risk involved. Losses
on long-lived assets to be disposed of are determined in a
similar manner, except that fair values are reduced for the cost
of disposal. The cash flows used in such analyses are typically
derived from the expected cash flows associated with the asset
under review, which is determined from management estimates and
judgments of expected future results. Should the actual cash
flow vary from the estimated amount, a write-down of the asset
may be warranted in a future period.




| |                    
| | -------------------
| | Reverse Stock Split

All shares and net earnings (loss) per share
amounts have been adjusted to reflect the one-for-two reverse
common stock split effective June 18, 2003.



| |                   
| | ------------------
| | Stock Option Plans

In December 2002, the Financial Accounting
Standards Board (FASB) issued SFAS No. 148,
Accounting for Stock-Based Compensation Transition and
Disclosure. SFAS No. 148 provides alternative methods
of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. The
Company has elected to continue utilizing the intrinsic value
method to account for stock-based compensation as allowed by
SFAS No. 123, Accounting for Stock-Based
Compensation.

SFAS No. 148 also amends the disclosure
requirements of SFAS No. 123, to require disclosure in both
interim and annual financial statements about the method of
accounting for stock-based employee compensation and the effect
of the method used on reported results. SFAS No. 148 is
effective for the Companys fiscal year ended June 30,
2003 and for interim financial statements beginning
January 1, 2003.

The Company has four stock option plans, which
are more fully described in Note 11. As permitted under SFAS
No. 123, the Company measures compensation expense related
to employee stock options granted utilizing the intrinsic value
method as prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations
under the intrinsic value method. The following table
illustrates the pro forma effect on net income (loss) if
the Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation.

|                                                                                                                                     |  |                     |            |      |  |      |            |   |  |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------- | ---------- | ---- |  | ---- | ---------- | - |  | - | --------- | -
|                                                                                                                                     |  |                    
|                                                                                                                                     |  | Year Ended June 30,
|                                                                                                                                     |  |                    
|                                                                                                                                     |  | 2003                |            | 2002 |  | 2001
|                                                                                                                                     |  |                     |            |      |  |     
|Net income (loss), as reported                                                                                                       |  | $                   | (2,798,000 | )    |  | $    | 4,517,000  |   |  | $ | 2,412,000 |  
|Add stock-based employee compensation expense,
    included in net income (loss), net of tax                                         |  |                     | 473,000    |      |  |      | 561,000    |   |  |   |           |  
|Less total stock-based employee compensation
    expense determined under the fair value based method for all
    awards, net of tax |  |                     | (354,000   | )    |  |      | (1,193,000 | ) |  |   | (252,000  | )
|                                                                                                                                     |  |                     |            |      |  |      |            |   |  |   |           |  
|Pro forma net income (loss)                                                                                                          |  | $                   | (2,679,000 | )    |  | $    | 3,885,000  |   |  | $ | 2,160,000 |  
|                                                                                                                                     |  |                     |            |      |  |      |            |   |  |   |           |  
|Basic net income (loss) per
    share  as reported                                                                                  |  | $                   | (0.86      | )    |  | $    | 1.38       |   |  | $ | 0.74      |  
|Basic net income (loss) per
    share  pro forma                                                                                    |  |                     | (0.82      | )    |  |      | 1.18       |   |  |   | 0.66      |  
|Diluted net income (loss) per
    share  as reported                                                                                |  |                     | (0.86      | )    |  |      | 1.35       |   |  |   | 0.72      |  
|Diluted net income (loss) per
    share  pro forma                                                                                  |  | $                   | (0.82      | )    |  | $    | 1.16       |   |  | $ | 0.65      |  

F-13



---



##### Table of Contents



The weighted average per share fair value of
options granted in 2003, 2002 and 2001 is estimated as $2.55,
$4.53 and $5.20, respectively, on the date of grant using the
Black-Scholes option pricing model using the following weighted
average assumptions.

|                        |  |      |         |      |  |      |         |   |  |  |         |  
|----------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  |  | ------- | -
|                        |  | 2003 |         | 2002 |  | 2001
|                        |  |      |         |      |  |     
|Expected life           |  |      | 5 years |      |  |      | 5 years |   |  |  | 5 years |  
|Expected volatility     |  |      | 43      | %    |  |      | 45      | % |  |  | 43      | %
|Risk free interest rate |  |      | 0.97    | %    |  |      | 1.90    | % |  |  | 4.90    | %
|Dividend yield          |  |      | 0       | %    |  |      | 0       | % |  |  | 0       | %

The effect of applying SFAS No. 123 may not
be representative of the pro forma effect in future years since
additional options may be granted during those future years.



| |                 
| | ----------------
| | Operating Leases

The Company leases substantially all of its
facilities under long-term operating leases. The majority of
lease terms range from 2 to 20 years, and typically the
leases contain renewable options.



| |              
| | -------------
| | Deferred Rent

Deferred rent represents the cumulative effect of
reduced rental payments for one of the Companys facility
leases. The total rental cost is being recognized on a
straight-line basis over the life of the lease.



| |                                      
| | -------------------------------------
| | Environmental Related
    Liabilities

Liabilities related to environmental conditions
that will result in future expenditures are recorded when it is
determined that such liabilities are probable and the amount of
the expenditures can be reasonably estimated. The Company
considers that an environmental liability has been incurred when
an environmental assessment or investigation has identified a
condition that will require remedial action for which the
Company is responsible. The timing of the recognition of the
remediation costs is dependent upon the completion of the
assessment or evaluation and the commitment to an appropriate
remedial action plan. Liabilities associated with environmental
remediation activities are not discounted nor reduced by
possible recoveries from third parties.

Environmental related expenditures resulting from
the Companys operations are expensed when determined.
Environmental related expenditures resulting from operations
prior to the time that the Company owned and/or operated the
site or that are deemed to create future benefits to the Company
are capitalized.



| |                             
| | ----------------------------
| | Foreign Currency Translation

Assets and liabilities of the Companys
foreign subsidiaries are translated into U.S. dollars at
the exchange rate prevailing at the balance sheet date and,
where appropriate, at historical rates of exchange. Income and
expense accounts are translated at weighted average rates in
effect during the year. The aggregate effect of translating the
financial statements of the foreign subsidiaries is included in
other comprehensive income in the statement of
stockholders equity. Foreign exchange transaction gains
(losses) were not significant during the years presented.



| |                    
| | -------------------
| | Revenue Recognition

Revenues are recognized upon delivery of product
or the completion of service. For fuel delivered on an
into-plane basis, revenue is recognized on the date the fuel is
delivered into the aircraft. Aircraft maintenance contracts are
recognized as the labor and maintenance is completed. Cargo
handling and storage revenue is recognized in the period the
cargo is shipped out of the Companys cargo warehouses.
Space logistics and general cargo sales agent services are
recognized as revenue in the period that the related flights
occur or the commissions are earned. Revenue associated with
fixed rate fees of long-term service contracts is recognized on
a straight-line basis over the term of the contract. The Company
reviews its fixed priced contracts on an

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##### Table of Contents



annual basis to determine whether it expects to
incur losses over the remaining term of the contract. If the
Company expects to incur losses on a fixed price contract, the
loss is recognized in the period in which the determination is
made. Revenue associated with the variable rate fees of
long-term contracts is recognized in the period in which
services are performed and completed. The Companys
contracts with the United States Government are subject to
profit renegotiation. To date, the Company has not been required
to adjust profits arising from United States government
contracts.


In certain cases, the Company sells fuel to
customers on a prepaid basis. Revenue associated with these
sales is recognized upon delivery of fuel to the customer.
Amounts received in excess of the amounts recognized as revenue,
are reported as a current liability to the customer and are
reflected on the Companys balance sheet in Accrued
expenses and other current liabilities.



| |                      
| | ---------------------
| | Shipping and Handling

Revenue reported by the Company includes all
amounts billed to a customer including applicable shipping and
handling costs. In-bound freight and handling costs, or costs
incurred to transport product from the Companys supplier
to the Companys distribution point, are included as a
component of product cost and, if the product is held as
inventory, included as a component of inventory and expensed as
cost of sales when delivered to the customer. Outbound freight
and handling costs, or costs incurred to transport product from
the Companys distribution point to the customer, is
included as cost of sales in the period which the product is
delivered to the customer.



| |             
| | ------------
| | Income Taxes

Deferred income taxes are determined using the
liability method. A deferred tax asset or liability is
determined based on the difference between the financial
statement and tax basis of assets and liabilities as measured by
the enacted tax rates that will be in effect when these
differences reverse. Deferred tax expense is the result of
changes in the deferred tax asset or liability. If necessary,
valuation allowances are established to reduce deferred tax
assets to their expected realizable values.



| |                                        
| | ---------------------------------------
| | Fair Value of Financial
    Instruments

The Companys financial instruments consist
primarily of cash and cash equivalents, accounts receivable and
payable, and debt instruments. The book values of all financial
instruments, other than debt instruments, are representative of
their fair values due to their short-term maturity. The
estimated fair value of the Companys Senior Subordinated
Note was $24.0 million as of June 30, 2003 and
$20.0 million as of June 30, 2002.



| |                                                                
| | ---------------------------------------------------------------
| | Use of Estimates in the Preparation of
    Financial Statements

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America 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 for the reporting period. Actual
results could differ from those estimates.



| |                              
| | -----------------------------
| | New Accounting Pronouncements

On April 30, 2003, the FASB issued
SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This
standard amends and clarifies the accounting for derivative
instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities under
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The provisions of this
statement are generally effective for contracts entered into or
modified after June 30, 2003. The Company does not expect
that the adoption of this standard will have a material impact
on its consolidated financial statements.

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In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). This
interpretation elaborates on disclosures to be made by a
guarantor in its interim and annual financial statements with
regard to its obligations under certain guarantees that it has
issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the
guarantee. The disclosure requirements of FIN 45 are
effective for interim and annual periods ending after
December 15, 2002, and the Company has adopted those
requirements beginning with the second quarter of fiscal 2003.
The initial recognition and measurement requirements of
FIN 45 are effective prospectively for guarantees issued or
modified after December 31, 2002. The adoption of the
recognition and initial measurement requirements of FIN 45
did not have a material impact on the Companys
consolidated financial statements.

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest
Entities (FIN 46). This interpretation of
Accounting Research Bulletin No. 51, Consolidated
Financial Statements, addresses consolidation by business
enterprises of variable interest entities. Under current
practice, two enterprises generally have been included in
consolidated financial statements because one enterprise
controls the other through voting interests. FIN 46 defines
the concept of variable interests and requires
existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do
not effectively disperse risks among the parties involved. This
interpretation applies immediately to variable interest entities
created after January 31, 2003. It applies in the first
fiscal year or interim period beginning after December 15,
2003, to variable interest entities considered to be a special
purpose entity (SPE) in which an enterprise holds a
variable interest that it acquired before February 1, 2003.
For non-SPE variable interest entities acquired before
February 1, 2003, the interpretation must be adopted no
later than the first interim or annual report period ending
after March 15, 2004. The interpretation may be applied
prospectively with a cumulative-effect adjustment as of the date
on which it is first applied or by restating previously issued
financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first
year restated. The Company is currently evaluating the potential
impact of the adoption of FIN 46.

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity, which establishes standards for the classification
and measurement of certain financial instruments with
characteristics of both liabilities and equity.
SFAS No. 150 requires classification of financial
instruments within its scope as a liability, including financial
instruments issued in the form of shares that are mandatorily
redeemable, because those financial instruments are deemed to
be, in essence, obligations of the issuer. The Company does not
expect that the adoption of this standard will have a material
impact on its consolidated financial statements.



| |                  
| | -----------------
| | Reclassifications

Certain reclassifications were made to prior
years financial statements to conform to the June 30,
2003 presentation.



| |                        
| | -----------------------
| | Risks and Uncertainties

As of June 30, 2003, the $24.0 million
Senior Subordinated 12% Note (the Note) contained
provisions that provided incentives to prepay the principal of
the Note. If the entire principal of the Note is not prepaid by
December 31, 2003, the Note Holder would have been entitled
to stock warrants equivalent to 5% of the Companys
outstanding shares of common stock then outstanding, exercisable
for nominal consideration. If the principal amount of the Note
was in excess of $12.0 million on December 31, 2003,
the Note Holder would have been entitled to receive stock
warrants equivalent to an additional 5% of the number of shares
of common stock outstanding at that date, exercisable for
nominal consideration, along with an additional note with a
principal amount of $5.0 million. In addition, beginning
January 2004 and continuing through June 2004, the interest rate
was to increase by 1% per annum each month up to a maximum rate
of 18%. As of the effective date of the amended Note, the
Company estimated that the Note would be outstanding for the full

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##### Table of Contents



term of the Note and, therefore, accrued for the
premium associated with the issuance of the additional
consideration over the remaining term of the Note which was
36 months. However, on October 28, 2003, the Company
announced that Allied had purchased the Note from the holder and
had waived the provisions of the Note regarding the stock
warrants, equivalent to 10% of the Companys outstanding
common stock, that would have been issued on December 31,
2003, as well as the provision regarding the additional
$5 million note. In conjunction with the acquisition of the
Note by Allied, the Company and Allied entered into a definitive
agreement for Allied to purchase 100% of the outstanding common
stock of Air Centers from the Company, subject to the
Companys shareholders approval, completion of due
diligence and regulatory agency approvals. The purchase price
for the Air Centers is $70 million, subject to adjustment
for working capital and for certain capital investments made by
the Company. At the close of the sale $8.3 million will be
deposited into an escrow account pending the award of a new
lease for the FBO located at Atlantas Hartsfield
International Airport. The closing date for the sale of Air
Centers is January 16, 2004 with Allied having the right to
extend the closing date through April 16, 2004. The Company
expects the sale of Air Centers to close in the Companys
third quarter of fiscal 2004.


In April 2002, the Company received a notice from
Los Angeles World Airports (LAWA) of a proposed rent
increase for one of Air Cargos warehouse facilities at LAX
(the Avion Warehouse) retroactive to June 18,
2001. In response to this notice, the Company submitted protests
to the LAWA Staff and Board of Commissioners regarding the
proposed increase on the basis that: 1) the Company had
made a substantial investment in the warehouse facility and the
proposed rental increase would greatly reduce the Companys
ability to achieve an acceptable rate of return on the
Companys investment to date; 2) if any increase is to
be made, it should be determined based on the Company being a
developer of the facility and not strictly a tenant; and
3) that the amount of the proposed increase is not
justified given the general business environment of the air
cargo handling operations. In response to the Companys
protests to the proposed increase, in September 2002 the Company
received a revised notice from LAWA of a reduced proposal for a
rental increase for the Avion Warehouse. The LAWA Staff intend
to present their recommended rental increase to the LAWA Board
of Commissioners for approval in late January 2004. From
June 18, 2001 through June 30, 2003, the accumulated
amount of the retroactive rent increase is $1,579,000, which
will be partially offset by recoverable retroactive sublease
rental income of $661,000. The LAWA Staff has indicated that the
retroactive portion of the rent increase would be payable by the
Company in equal monthly installments over the remaining term of
the lease agreement, which is scheduled to expire in June 2006.
The proposed increase in the monthly rent, on a go-forward
basis, would be $64,600, or 35%, from the existing monthly rent.
The Company has accrued $459,000 for the retroactive rent
increase, which is net of increased recoverable retroactive
sublease rental income, as of June 30, 2002, and has
accrued an additional $114,750 on a quarterly basis in fiscal
2003, resulting in a total accrual of $918,000 as of
June 30, 2003. See the discussion above in this Note 1
under Restatement regarding the restatement of the
fiscal 2002 financial statements and the first three quarters of
fiscal 2003 related to the retroactive rent adjustment.

Accounts receivable is comprised primarily of
trade receivables from customers and is net of an allowance for
doubtful accounts. The Companys credit risk is based in
part on the following: 1) substantially all receivables are
related to the aviation industry, 2) there is a concentration of
credit risk as there are several customers who at any time have
significant balances owed to the Company, and 3) significant
balances are owed by certain customers that are not adequately
capitalized. In addition, significantly higher fuel prices for
extended periods of time may have a negative impact on the
aviation industry as it substantially increases airlines
operating expenses. Smaller airlines with lower levels of
capital may be more seriously impacted. The Company assesses its
credit portfolio on an ongoing basis and establishes allowances
which it believes are adequate to absorb potential credit
problems that can be reasonably anticipated.

The Company purchases fuel from a limited number
of suppliers. If the Companys relationship with any of
these key suppliers terminates, the Company may not be able to
obtain a sufficient quantity of fuel on favorable terms or may
experience difficulty in obtaining fuel from alternative
suppliers. Furthermore, difficulties faced by these suppliers or
fuel shortages or the inability to obtain fuel from alternate
sources at acceptable prices and terms, could impair the
Companys ability to sell fuel to its customers at
competitive prices and terms.

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| |            
| | -----------
| | Seasonality

The Companys commercial fuel sales, Air
Centers and aircraft support operations are seasonal in nature,
being relatively stronger during the months of April through
December in its fueling operations and FBOs than during
the winter months due in part to weather conditions, and
stronger during the summer months due in part to additional
commercial and charter flights. Air Cargos business is
lower during the months of January and February and increases
from March through June and September through December. The
cargo business is affected by the fluctuations in international
trade. Operations at military facilities are not seasonal but
may vary with the needs of the military.

Note 2  Discontinued
Operations:

On July 3, 2001, the Company completed the
sale of its subsidiary, RPA Airline Automation Services, Inc.
(RPA), which provided airline revenue accounting and
management information software consisting of proprietary
software programs which are marketed to foreign and domestic
airlines. The Company has reclassified its consolidated
financial statements to reflect the sale of RPA and to segregate
the revenues, direct costs and expenses (excluding allocated
costs), assets and liabilities, and cash flows of RPA. Since
this transaction qualifies as a discontinued operation under the
provisions of APB Opinion No. 30, Reporting the
Results of Operations  Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, the
net operating results and net cash flows of this business have
been reported as Discontinued Operations in the
accompanying consolidated financial statements.

Pursuant to the sale agreement, the Company
received a cash purchase price of $3.6 million. As of
June 30, 2001, the Company realized a loss on sale of
discontinued operations of $477,000 (net of an income tax
benefit of $305,000). During the quarter ended
September 30, 2001, the Company recorded an additional loss
of $42,000 related to the sale of a building that had previously
been RPAs corporate headquarters. Additional other
expenses during the fiscal year ended June 30, 2002 relate
primarily to payroll costs of certain RPA employees not
transferred to the buyer. At June 30, 2002, the Company no
longer retained any significant assets or liabilities related to
RPA. The following is summarized financial information for RPA:

|                         |  |                            |          |      |  |   |            |  
|------------------------ |  | -------------------------- | -------- | ---- |  | - | ---------- | -
|                         |  |                           
|                         |  | Fiscal Year Ended June 30,
|                         |  |                           
|                         |  | 2002                       |          | 2001
|                         |  |                            |          |     
|Service revenues         |  |                            |          |      |  | $ | 4,224,000  |  
|Operating expense        |  |                            |          |      |  |   | 4,334,000  |  
|                         |  |                            |          |      |  |   |            |  
|Gross loss               |  |                            |          |      |  |   | (110,000   | )
|                         |  |                            |          |      |  |   |            |  
|Other expense            |  | $                          | 279,000  |      |  |   | 1,296,000  |  
|                         |  |                            |          |      |  |   |            |  
|Loss before income taxes |  |                            | (279,000 | )    |  |   | (1,406,000 | )
|Income tax benefit       |  |                            | (109,000 | )    |  |   | (548,000   | )
|                         |  |                            |          |      |  |   |            |  
|Net loss                 |  | $                          | (170,000 | )    |  | $ | (858,000   | )
|                         |  |                            |          |      |  |   |            |  

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Note 3  Property, Equipment
and Leaseholds:

Property, equipment and leaseholds consist of the
following components:

|                                               |  |          |             |      |  |   |             |  
|---------------------------------------------- |  | -------- | ----------- | ---- |  | - | ----------- | -
|                                               |  |         
|                                               |  | June 30,
|                                               |  |         
|                                               |  | 2003     |             | 2002
|                                               |  |          |             |     
|Land, buildings and leasehold improvements     |  | $        | 88,706,000  |      |  | $ | 85,541,000  |  
|Equipment, furniture and fixtures              |  |          | 30,201,000  |      |  |   | 29,668,000  |  
|Construction in progress                       |  |          | 998,000     |      |  |   | 268,000     |  
|                                               |  |          |             |      |  |   |             |  
|                                               |  |          | 119,905,000 |      |  |   | 115,477,000 |  
|Less accumulated depreciation and amortization |  |          | (61,061,000 | )    |  |   | (54,383,000 | )
|                                               |  |          |             |      |  |   |             |  
|                                               |  | $        | 58,844,000  |      |  | $ | 61,094,000  |  
|                                               |  |          |             |      |  |   |             |  

Included in Property, equipment and
leaseholds are leasehold interests relating to the
acquisition of leaseholds at certain FBO locations. The
capitalized value of these leasehold interests was $16,257,000
at June 30, 2003 and 2002. Accumulated amortization of the
leasehold interests was $6,474,000 and $5,434,000 at
June 30, 2003 and 2002, respectively. Estimated
amortization expense in each of the next five years is as
follows: $1,041,000 in 2004; $1,011,000 in 2005; $1,001,000 in
2006; $918,000 in 2007; $816,000 in 2008 and $4,996,000
thereafter.

Note 4  Goodwill and Other
Intangible Assets:

The following table presents the transitional
disclosures for net income (loss) and fully diluted net income
(loss) per share for the years ended June 30, 2003,
2002 and 2001 to reflect the adoption of SFAS No. 142
as of July 1, 2002. Such disclosures add back goodwill
amortization to the 2002 and 2001 results to be comparable with
the 2003 results, which do not include goodwill amortization
with the adoption of SFAS No. 142.

|                                                           |  |                     |            |      |  |      |           |  |  |   |           | 
|---------------------------------------------------------- |  | ------------------- | ---------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                                           |  |                    
|                                                           |  | Year Ended June 30,
|                                                           |  |                    
|                                                           |  | 2003                |            | 2002 |  | 2001
|                                                           |  |                     |            |      |  |     
|Net income (loss) as reported                              |  | $                   | (2,798,000 | )    |  | $    | 4,517,000 |  |  | $ | 2,412,000 | 
|Goodwill amortization (net of tax)                         |  |                     |            |      |  |      | 248,000   |  |  |   | 238,000   | 
|                                                           |  |                     |            |      |  |      |           |  |  |   |           | 
|Net income (loss), as adjusted                             |  | $                   | (2,798,000 | )    |  | $    | 4,765,000 |  |  | $ | 2,650,000 | 
|                                                           |  |                     |            |      |  |      |           |  |  |   |           | 
|Fully diluted net income (loss) per share,
    as adjusted |  | $                   | (0.86      | )    |  | $    | 1.42      |  |  | $ | 0.79      | 
|Fully diluted net income (loss) per share,
    as reported |  | $                   | (0.86      | )    |  | $    | 1.35      |  |  | $ | 0.72      | 

The Company had $1,033,000 and $233,000 of net
intangible assets at June 30, 2003 and 2002, respectively.
Accumulated amortization for intangible assets was $967,000 and
$767,000 at June 30, 2003 and 2002, respectively.
Intangible assets at June 30, 2003 consist of covenants not
to compete agreements and fuel sales contracts amortized over
three to five years. Amortization expense for intangible assets
was $200,000, $150,000 and $200,000 for the years ended
June 30, 2003, 2002 and 2001, respectively. Estimated
amortization expense in each of the next five years is as
follows: $300,000 in 2004; $233,000 in 2005; $200,000 in 2006;
$200,000 in 2007; and $100,000 in 2008.

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Note 5  Other
Assets:

Other assets consist of the following components:

|                                 |  |          |           |      |  |   |           | 
|-------------------------------- |  | -------- | --------- | ---- |  | - | --------- | 
|                                 |  |         
|                                 |  | June 30,
|                                 |  |         
|                                 |  | 2003     |           | 2002
|                                 |  |          |           |     
|Deferred loan fees, net (Note 8) |  | $        | 3,339,000 |      |  | $ | 2,142,000 | 
|Capitalized acquisition costs    |  |          | 321,000   |      |  |   | 375,000   | 
|Internally developed software    |  |          | 603,000   |      |  |   | 754,000   | 
|Other                            |  |          | 208,000   |      |  |   | 825,000   | 
|                                 |  |          |           |      |  |   |           | 
|                                 |  | $        | 4,471,000 |      |  | $ | 4,096,000 | 
|                                 |  |          |           |      |  |   |           | 

Deferred loan fees represent costs incurred in
connection with outstanding debt and are being amortized over
the term of the debt.

Note 6  Accrued Expenses and
Other Current Liabilities:

Accrued expenses and other current liabilities
consist of the following components:

|                              |  |          |            |      |  |   |           | 
|----------------------------- |  | -------- | ---------- | ---- |  | - | --------- | 
|                              |  |         
|                              |  | June 30,
|                              |  |         
|                              |  | 2003     |            | 2002
|                              |  |          |            |     
|Salaries, wages, and benefits |  | $        | 3,310,000  |      |  | $ | 3,399,000 | 
|Sales and fuel taxes          |  |          | 2,086,000  |      |  |   | 2,513,000 | 
|Other                         |  |          | 4,766,000  |      |  |   | 2,949,000 | 
|                              |  |          |            |      |  |   |           | 
|                              |  | $        | 10,162,000 |      |  | $ | 8,861,000 | 
|                              |  |          |            |      |  |   |           | 

Note 7  Income Taxes:

The income tax provision (benefit) consists
of the following components:

|                                                   |                   |                     |            |            |   |      |           |            |   |   |           |           | 
|-------------------------------------------------- | ----------------- | ------------------- | ---------- | ---------- | - | ---- | --------- | ---------- | - | - | --------- | --------- | 
|                                                   |                   |                    
|                                                   |                   | Year Ended June 30,
|                                                   |                   |                    
|                                                   |                   | 2003                |            | 2002       |   | 2001
|                                                   |                   |                     |            |            |   |     
|Current:                                           |                   |                     |            |            |   |      |           |            |   |   |           |          
|                                                   | Federal           |                     | $          | 251,000    |   |      | $         | 3,828,000  |   |   | $         | 1,855,000 | 
|                                                   | State             |                     |            | 330,000    |   |      |           | 859,000    |   |   |           | 272,000   | 
|                                                   |                   |                     |            |            |   |      |           |            |   |   |           |          
|                                                   |                   |                     | 581,000    |            |   |      | 4,687,000 |            |   |   | 2,127,000 |          
|Deferred:                                          |                   |                     |            |            |   |      |           |            |   |   |           |          
|                                                   | Federal and state |                     |            | (2,052,000 | ) |      |           | (1,757,000 | ) |   |           | 270,000   | 
|                                                   |                   |                     |            |            |   |      |           |            |   |   |           |          
|Provision for (benefit from) continuing operations |                   |                     | (1,471,000 | )          |   |      | 2,930,000 |            |   |   | 2,397,000 |          
|Discontinued operations                            |                   |                     |            |            |   |      | (109,000  | )          |   |   | (853,000  | )        
|                                                   |                   |                     |            |            |   |      |           |            |   |   |           |          
|Income tax provision (benefit)                     |                   | $                   | (1,471,000 | )          |   | $    | 2,821,000 |            |   | $ | 1,544,000 |          
|                                                   |                   |                     |            |            |   |      |           |            |   |   |           |          

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Deferred tax assets and
(liabilities) consist of following components:

|                                |  |          |            |      |  |   |            |  
|------------------------------- |  | -------- | ---------- | ---- |  | - | ---------- | -
|                                |  |         
|                                |  | June 30,
|                                |  |         
|                                |  | 2003     |            | 2002
|                                |  |          |            |     
|Depreciation and amortization   |  | $        | 690,000    |      |  | $ | (461,000   | )
|Prepaid expenses                |  |          | (1,093,000 | )    |  |   | (1,147,000 | )
|State income taxes              |  |          | (205,000   | )    |  |   | 47,000     |  
|Allowance for doubtful accounts |  |          | 1,055,000  |      |  |   | 665,000    |  
|Deferred rent                   |  |          | 792,000    |      |  |   | 816,000    |  
|Installment sale deferral       |  |          | 449,000    |      |  |   | 432,000    |  
|Accrued expenses                |  |          | 1,061,000  |      |  |   | 361,000    |  
|Other                           |  |          | 436,000    |      |  |   | 420,000    |  
|                                |  |          |            |      |  |   |            |  
|                                |  | $        | 3,185,000  |      |  | $ | 1,133,000  |  
|                                |  |          |            |      |  |   |            |  

The following is a reconciliation of the federal
statutory rate to the Companys effective tax rate on
pretax income (loss):

|                                                          |  |                     |      |      |  |      |      |   |  |  |      |  
|--------------------------------------------------------- |  | ------------------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                                          |  |                    
|                                                          |  | Year Ended June 30,
|                                                          |  |                    
|                                                          |  | 2003                |      | 2002 |  | 2001
|                                                          |  |                     |      |      |  |     
|Federal tax (benefit) at statutory rate                   |  |                     | 34.0 | %    |  |      | 34.0 | % |  |  | 34.0 | %
|State income taxes, net of federal income tax
    benefit |  |                     | 2.7  |      |  |      | 4.7  |   |  |  | 5.0  |  
|Non-deductible expenses                                   |  |                     | (1.9 | )    |  |      | (0.9 | ) |  |  | (0.9 | )
|Other, net                                                |  |                     | (0.3 | )    |  |      | 0.7  |   |  |  | 0.9  |  
|                                                          |  |                     |      |      |  |      |      |   |  |  |      |  
|Effective income tax rate                                 |  |                     | 34.5 | %    |  |      | 38.5 | % |  |  | 39.0 | %
|                                                          |  |                     |      |      |  |      |      |   |  |  |      |  

Note 8  Long-Term
Debt:

Long-term debt consists of the following
components:

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |          |            |      |  |   |            | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------- | ---------- | ---- |  | - | ---------- | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | June 30,
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | 2003     |            | 2002
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |          |            |     
|Notes payable to banks                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | $        | 11,588,000 |      |  | $ | 12,968,000 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Tax exempt bond pursuant to a loan agreement
    between the Company and the California Economic Development
    Financing Authority (CEDFA). Repayment terms consist
    of semi-annual principal payment of $500,000 with a redemption
    of $4.0 million at the end of the fifteenth year (2013).
    The loan carries a variable rate which is based on a weekly
    remarketing of the bonds. The rate at June 30, 2003 was
    1.2% per annum. In addition, a letter of credit has been issued
    by the Companys senior lender to guaranty the credit at an
    annual cost of approximately 3.1% of the principal |  |          | 14,000,000 |      |  |   | 15,000,000 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Note payable to lender in monthly installments of
    $25,779 per month including interest at 7.5% per annum
    collateralized by the Companys corporate office, maturing
    in December 2011                                                                                                                                                                                                                                                                                                                                                                                                                               |  |          | 3,090,000  |      |  |   | 3,165,000  | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Note payable to lender in monthly installments of
    $5,778 per month including interest at 5.59% per annum,
    collateralized by an aircraft. The rate is fixed for 36 months
    through March 2006, at which time the rate is adjusted at three
    year intervals, to the federal home loan bank rate plus 275
    basis points. (See Note 15)                                                                                                                                                                                                                                                                           |  |          | 696,000    |      |  |   |            | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Note payable to trustee for bankrupt airline                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |          |            |      |  |   | 504,000    | 

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|                                                                                                                                                                                                                          |  |          |            |      |  |   |            | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | ---------- | ---- |  | - | ---------- | 
|                                                                                                                                                                                                                          |  |         
|                                                                                                                                                                                                                          |  | June 30,
|                                                                                                                                                                                                                          |  |         
|                                                                                                                                                                                                                          |  | 2003     |            | 2002
|                                                                                                                                                                                                                          |  |          |            |     
|Mortgage payable to a financial institution in
    aggregate monthly principal installments of $4,447 plus interest
    at 9% per annum, collateralized by land and buildings, maturing
    in May 2010                   |  |          | 267,000    |      |  |   | 298,000    | 
|                                                                                                                                                                                                                         
|Convertible subordinated debentures payable to
    seller of Excel Cargo in monthly installments of $13,810
    including interest at 8.5% per annum, collateralized by property
    acquired, maturing in September 2003 |  |          | 54,000     |      |  |   | 208,000    | 
|                                                                                                                                                                                                                         
|Other                                                                                                                                                                                                                     |  |          |            |      |  |   | 50,000     | 
|                                                                                                                                                                                                                          |  |          |            |      |  |   |            | 
|                                                                                                                                                                                                                          |  |          | 29,695,000 |      |  |   | 32,193,000 | 
|Less current portion of long term debt                                                                                                                                                                                    |  |          | 4,194,000  |      |  |   | 14,677,000 | 
|                                                                                                                                                                                                                          |  |          |            |      |  |   |            | 
|                                                                                                                                                                                                                          |  | $        | 25,501,000 |      |  | $ | 17,516,000 | 
|                                                                                                                                                                                                                          |  |          |            |      |  |   |            | 

Notes payable to banks at June 30, 2003
consists of a loan and security agreement (the
Facility), entered into on December 30, 2002
with Wells Fargo Foothill (WFF), a division of Wells
Fargo Bank and Cerberus Partners for a five year term expiring
December 30, 2007 that replaced the Companys former
collateralized credit facilities. Outstanding borrowings under
the Facility as of June 30, 2003 consisted of a term loan
and a revolving line of credit, in the amount of
$11.5 million and $88,000, respectively.

The Facility provides a total of up to
$42.5 million in revolving and term loans. The term loan
was initially for an amount equal to $12.5 million, while
the revolving loan is for an amount not to exceed 85% of
Eligible Accounts Receivable (as defined in the loan agreement),
subject to certain limitations. The term loan is payable in
$1.0 million installments each April 1 and
October 1, beginning April 1, 2003 and in
$0.5 million installments each July 1 and
December 31, until paid in full. Amounts repaid under the
term loan increase the maximum availability under the revolving
loan. The Facility also provides for the issuance of certain
letters of credit. The terms of the Facility requires that the
Company maintain a minimum availability on the revolving line of
credit of $2.5 million. As of June 30, 2003, the
Company had $4.4 million of availability on the revolving
line of credit. The amount of the available revolving credit
line fluctuates on a daily basis dependent upon the amount of
Eligible Accounts Receivables, as defined; the amount of letters
of credit outstanding; and the amount of outstanding cash
borrowings against the revolving credit facility.

The Facility may be terminated on
December 23, 2005, if the Senior Subordinated Note (See
Note 9) is not paid in full or refinanced, on terms
acceptable to Wells Fargo Foothill, prior to October 31,
2005. The Facility is collateralized by substantially all of the
assets of the Company and its subsidiaries. The Facility
contains provisions that require the maintenance of certain
financial ratios including minimum EBITDA levels, minimum fixed
charge coverage ratios, and maximum annual capital expenditure
levels. In addition, under the Facility, the Company is
prohibited from paying non-intercompany cash dividends.

At June 30, 2002, the notes payable to banks
consisted principally of a credit facility (the Credit
Facility) which provided for a term loan (the Term
Loan), an acquisition line (the Acquisition
Line) and a revolving line of credit (the
Revolver). Borrowings under the Term Loan were
$4.1 million at June 30, 2002. Outstanding borrowings
under the Acquisition Line were $5.9 million at June 30,
2002. Outstanding borrowings under the Revolver at June 30,
2002 were $3.0 million. Interest for the Term Loan and the
Acquisition Line accrue at LIBOR+ 2.50% (4.34% based on
30 day LIBOR rates in effect at June 30, 2002). The
Revolver accrued interest at a base rate of 5% at June 30,
2002.

The Company was in discussions with the lenders
of the Companys former collateralized credit facility and
the Note Holder to obtain debt covenant waivers regarding the
maximum unfunded capital expenditures, as defined, for the
fiscal year ended June 30, 2002 and the minimum quarterly
net earnings for the second and third quarters of fiscal 2002.
Until these covenant waivers were agreed to or the debt was
refinanced, the lenders had the right to provide written notice
to the Company declaring the principal and accrued interest
associated with this debt instrument to be immediately due and
payable. As such, the entire amount of principal outstanding as
of June 30, 2002 was classified as current portion of long
term debt.

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The note payable to lender in the amount of
$3.1 million and $3.2 million at June 30, 2003
and 2002, respectively, collateralized by the Companys
corporate office and maturing in December 2011, was incurred in
connection with the acquisition by CFK Realty of the
Companys corporate headquarters in January 2002. See
Note 1 regarding the restatement of the fiscal 2002
financial statements which required the consolidation of CFK
Realty.

Note payable to trustee for bankrupt airline
results from a bankruptcy court approved settlement related to
preference payments received in connection with the
Chapter 7 bankruptcy filing of Western Pacific Airlines,
Inc. (WPAI). The settlement consists of ten
quarterly payments of $175,000. The outstanding balance was
$0.5 million at June 30, 2002 which was paid during
the current fiscal year.

The following is long-term debt payable
(including the current portion ) but excluding the Senior
Subordinated Notes (See Note 9) at June 30, 2003:

|           |  |   |            | 
|---------- |  | - | ---------- | 
|2004       |  | $ | 4,194,000  | 
|2005       |  |   | 4,145,000  | 
|2006       |  |   | 4,154,000  | 
|2007       |  |   | 3,664,000  | 
|2008       |  |   | 1,174,000  | 
|Thereafter |  |   | 12,364,000 | 
|           |  |   |            | 
|           |  | $ | 29,695,000 | 
|           |  |   |            | 

Note 9  Senior Subordinated
Note:

On September 10, 1999, the Company issued,
in a private placement, $24.0 million Senior Subordinated
12% Note (the Note) due in 2006 with detachable
warrants to acquire 251,563 shares of the Companys common
stock originally exercisable at $13.00 per share, as adjusted
for the reverse stock split. The Note agreement was first
amended on November 16, 2001, whereby the exercise price of
the warrants was reduced to $11.00 per share. The Note Agreement
was then subsequently amended on December 30, 2002 whereby,
among other things, the exercise price on the original stock
warrants was reduced to $7.484 per share. On October 28,
2003, the Company reduced the exercise price on these original
warrants to $6.10 per share in connection with the acquisition
of the Note by Allied (see below).

The amended Note Agreement dated as of
December 30, 2002 also included provisions for the Company
to issue warrants to purchase an additional 5% of the
Companys common stock, exercisable for nominal
consideration, if the principal amount of the Note is not
prepaid in full by December 31, 2003. Warrants to purchase
a second 5% of the Companys common stock, for nominal
consideration, along with an additional note in the original
principal amount of $5.0 million (the Additional
Note) will also be issued if the outstanding principal of
the Note is greater than $12.0 million as of
December 31, 2003. In addition to these provisions, the
amendment also provides that beginning January 2004 and
continuing through June 2004, the interest rate will increase by
1% per annum each month up to a maximum of 18% per annum. As of
the effective date of the amended Note, the Company estimated
that the Note would be outstanding for the full term of the Note
and, therefore, accrued the premium associated with the issuance
of the additional consideration over the remaining term of the
Note which was 36 months. However, on October 28,
2003, the Company announced that Allied had purchased the Note
from the holder and had waived the provisions of the Note
regarding the stock warrants, equivalent to 10% of the
Companys outstanding common stock, that would have been
issued on December 31, 2003 as well as the provision
regarding the additional $5 million note.

The December 30, 2002 amended Note Agreement
contains similar covenants as in the original Note Agreement
and, among other things, limits the amount of senior
indebtedness, restricts the payment of dividends, and includes
guidelines on the use of funds received by the Company from the
disposition of assets. This amended Note Agreement also includes
financial covenants that require the maintenance of minimum

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##### Table of Contents



EBITDA levels, as defined in the amended Note
Agreement, minimum fixed charge coverage ratios, minimum excess
availability on the Companys Revolving Line of Credit, and
limits on capital expenditures.


While the Note is subordinate to the Facility,
the loan and security agreement does allow for the prepayment of
principal on both the Note and the Facility under certain
conditions. Under the terms of the loan and security agreement,
the first $15.0 million of principal prepayment made by the
Company is to be applied equally to the outstanding principal on
the Facilitys term loan and the Note. The next
$4.5 million of principal prepayment is to be applied
entirely to the outstanding principal of the Note. The next
principal prepayments will then either be applied equally to the
outstanding principal of the Facility and the Note or entirely
to the outstanding principal of the Note, depending upon certain
conditions, until such time as the entire $24.0 million of
the Note has been repaid in full.

As required by the Note, the Company has formed
committees consisting of its independent directors to seek
opportunities for asset sales and other financing transactions,
with an intention of reducing the Companys total debt.

The following are the components of the Note at
June 30, 2003 and 2002:

|                                                                 |  |      |            |      |  |   |            |  
|---------------------------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                                                                 |  | 2003 |            | 2002
|                                                                 |  |      |            |     
|Senior Subordinated Note, before discount                        |  | $    | 24,000,000 |      |  | $ | 24,000,000 |  
|Valuation of warrants credited to additional
    paid-in-capital |  |      | (1,427,000 | )    |  |   | (1,349,000 | )
|Accumulated amortization of warrants                             |  |      | 872,000    |      |  |   | 528,000    |  
|                                                                 |  |      |            |      |  |   |            |  
|Senior Subordinated Note                                         |  | $    | 23,445,000 |      |  | $ | 23,179,000 |  
|                                                                 |  |      |            |      |  |   |            |  

On October 28, 2003 the Company announced
that Allied had acquired the Note from Whitney and waived the
provisions for the additional warrants equivalent to 10% of the
Companys outstanding common stock and the additional
$5 million note. Beginning January 2004 and continuing
through June 2004, the interest rate will increase by 1% per
annum each month up to a maximum rate of 18%. The amended note
contains similar covenants as the original Note, including
covenants that, among other matters, limit senior indebtedness,
the payment of dividends, and the disposition of assets. The
revised covenants also include minimum EBITDA requirements and
capital expenditure limitations. See Note 19 
Subsequent Events for more information.

Note 10  Mandatorily
Redeemable Preferred Stock:

During December 2002, the Company issued 462,627
shares of Series A 8% Cumulative Convertible Preferred
Stock (the Preferred Stock) at a stated value of
$1.00 per share with a par value of $0.01 per share to investors
having a pre-existing relationship with the Company, comprised
of customers and employees. The issuance of the Preferred Stock
occurred after the Company was unable to draw-down on the
previous revolving credit facility.

The shares of the Preferred Stock are convertible
to common stock, at the option of the stockholder, at a
conversion price of $7.50 per share. Dividends on the Preferred
Stock are accrued on a semi-annual basis at an annual rate of
8.0% and paid, either in cash or in-kind at the election of the
Company. Accrued dividends at June 30, 2003 were $19,000.
During a 30-day period immediately following the third, fourth,
fifth and each subsequent anniversary date of the issuance of
the Preferred Stock, both the Company and the stockholder have
the option to redeem the then outstanding shares of Preferred
Stock for an amount equal to $1.00 plus all accrued but unpaid
dividends for each share of Preferred Stock redeemed. The
Company has the option, whether the Company or the Stockholder
exercised their redemption option, to pay all or part of the
redemption in shares of the Companys common stock. In the
event of any liquidation of the Company, the holders of
Preferred Stock have a liquidation preference over common stock,
plus all declared but unpaid dividends. In the event the assets
are insufficient to cover the aforesaid amounts, the preferred
stockholders would share in the assets ratably in proportion to
the full preferential amount.

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##### Table of Contents



Note 11  Employee Stock Option
Plans:

The Company has the following stock option plans:
the 1990 Long-Term Incentive Plan (1990 Incentive
Plan); the 1990 Directors Stock Option Plan (1990
Directors Plan); the 1998 Long-Term Incentive Plan
(1998 Incentive Plan); the 1998 Directors Stock
Option Plan (1998 Directors Plan); and the 2001
Stock Incentive Plan (2001 Incentive Plan). The
Company has reserved 906,500 shares related to the Incentive
Plans and 293,500 shares related to the Directors Plans.
The Company has also reserved 3,438 shares for special option
grants made outside the plans. Options granted pursuant to the
plans and special grants are generally made at the fair market
value of such shares on the date of grant and generally vest
over twelve months. The contractual lives of the options are
generally ten years.

The following is a summary of stock option
activity:

|                          |  |               |       |           |  |               |         |              |  |               |       |         |  |               |         |            |  |  |       |  |  |  |         |   |  |  |       |  |  |  |        | 
|------------------------- |  | ------------- | ----- | --------- |  | ------------- | ------- | ------------ |  | ------------- | ----- | ------- |  | ------------- | ------- | ---------- |  |  | ----- |  |  |  | ------- | - |  |  | ----- |  |  |  | ------ | 
|                          |  | Weighted      |       | Long-Term |  | Weighted      |         | Directors   |  | Weighted      |       | Special |  | Weighted      |         |           
|                          |  | Average       |       | Incentive |  | Average       |         | Stock Option |  | Average       |       | Option  |  | Average       |         | 2002 Mgmt 
|                          |  | Option Prices |       | Plans     |  | Option Prices |         | Plans        |  | Option Prices |       | Grants  |  | Option Prices |         | Stock Plan
|                          |  |               |       |           |  |               |         |              |  |               |       |         |  |               |         |           
|Outstanding June 30, 2000 |  |               | 11.2  |           |  |               | 207,565 |              |  |               | 9.78  |         |  |               | 178,813 |            |  |  | 4.86  |  |  |  | 75,750  |   |  |  |       |  |  |  |        | 
|Granted                   |  |               | 12.25 |           |  |               | 23,200  |              |  |               | 11.46 |         |  |               | 45,000  |            |  |  |       |  |  |  |         |   |  |  |       |  |  |  |        | 
|Exercised                 |  |               |       |           |  |               |         |              |  |               | 10.72 |         |  |               | (22,688 | )          |  |  | 6.40  |  |  |  | (29,175 | ) |  |  |       |  |  |  |        | 
|Repurchased               |  |               |       |           |  |               |         |              |  |               |       |         |  |               |         |            |  |  | 3.08  |  |  |  | (43,137 | ) |  |  |       |  |  |  |        | 
|Cancelled                 |  |               | 15.2  |           |  |               | (6,500  | )            |  |               | 14.26 |         |  |               | (17,562 | )          |  |  |       |  |  |  |         |   |  |  |       |  |  |  |        | 
|                          |  |               |       |           |  |               |         |              |  |               |       |         |  |               |         |            |  |  |       |  |  |  |         |   |  |  |       |  |  |  |        | 
|Outstanding June 30, 2001 |  |               | 11.19 |           |  |               | 224,265 |              |  |               | 9.65  |         |  |               | 183,563 |            |  |  | 14.36 |  |  |  | 3,438   |   |  |  | 0     |  |  |  | 0      | 
|Granted                   |  |               | 10.9  |           |  |               | 250,000 |              |  |               | 13.22 |         |  |               | 5,000   |            |  |  |       |  |  |  |         |   |  |  | 15.00 |  |  |  | 68,448 | 
|Exercised                 |  |               | 3.26  |           |  |               | (12,225 | )            |  |               |       |         |  |               |         |            |  |  |       |  |  |  |         |   |  |  |       |  |  |  |        | 
|Cancelled                 |  |               | 15.88 |           |  |               | (19,647 | )            |  |               | 2.98  |         |  |               | (7,555  | )          |  |  |       |  |  |  |         |   |  |  |       |  |  |  |        | 
|                          |  |               |       |           |  |               |         |              |  |               |       |         |  |               |         |            |  |  |       |  |  |  |         |   |  |  |       |  |  |  |        | 
|Outstanding June 30, 2002 |  |               | 11.04 |           |  |               | 442,393 |              |  |               | 9.74  |         |  |               | 181,008 |            |  |  | 14.36 |  |  |  | 3,438   |   |  |  | 15.00 |  |  |  | 68,448 | 
|Granted                   |  |               | 6.60  |           |  |               | 30,000  |              |  |               |       |         |  |               |         |            |  |  |       |  |  |  |         |   |  |  |       |  |  |  |        | 
|Exercised                 |  |               | 2.81  |           |  |               | (20,630 | )            |  |               | 3.54  |         |  |               | (52,941 | )          |  |  |       |  |  |  |         |   |  |  |       |  |  |  |        | 
|Cancelled                 |  |               | 13.60 |           |  |               | (49,599 | )            |  |               | 12.96 |         |  |               | (27,563 | )          |  |  |       |  |  |  |         |   |  |  |       |  |  |  |        | 
|                          |  |               |       |           |  |               |         |              |  |               |       |         |  |               |         |            |  |  |       |  |  |  |         |   |  |  |       |  |  |  |        | 
|Outstanding June 30, 2003 |  |               | 10.81 |           |  |               | 402,164 |              |  |               | 12.13 |         |  |               | 100,504 |            |  |  | 14.36 |  |  |  | 3,438   |   |  |  | 15.00 |  |  |  | 68,448 | 

The following is a summary of information about
stock options issued and outstanding pursuant to the Incentive
Plan, Directors Plan and special option grants at June 30,
2003:

|                     |                 |                     |         |                     |         |          |      |                |      |          |       |       |       |  |         |         |         |   |      |       |       | 
|-------------------- | --------------- | ------------------- | ------- | ------------------- | ------- | -------- | ---- | -------------- | ---- | -------- | ----- | ----- | ----- |  | ------- | ------- | ------- | - | ---- | ----- | ----- | 
|                     |                 |                     |         |                    
|                     |                 | Options Outstanding |         | Options Exercisable
|                     |                 |                     |         |                    
|                     |                 |                     |         | Weighted            |         | Weighted |      |                |      | Weighted
|                     |                 | Shares              |         | Average             |         | Average  |      | Shares         |      | Average 
|                     |                 | Outstanding at      |         | Contractual         |         | Exercise |      | Exercisable at |      | Exercise
|Exercise Price Range |                 | June 30, 2003       |         | Remaining Life      |         | Price    |      | June 30, 2003  |      | Price   
|                     |                 |                     |         |                     |         |          |      |                |      |         
|$ 2.806 -  6.600     |                 |                     | 53,758  |                     |         |          | 6.84 |                |      | $        | 5.36  |       |       |  | 23,758  |         |         | $ | 3.79 |      
|                     |                 | 9.252 - 10.900      |         |                     | 257,626 |          |      |                | 7.94 |          |       |       | 10.80 |  |         |         | 257,626 |   |      |       | 10.80 | 
|                     | 11.200 - 12.908 |                     |         | 133,140             |         |          |      | 4.74           |      |          |       | 11.92 |       |  |         | 133,140 |         |   |      | 11.92 |      
|                     | 14.364 - 16.875 |                     |         | 130,030             |         |          |      | 6.89           |      |          |       | 15.24 |       |  |         | 61,582  |         |   |      | 15.51 |      
|                     |                 |                     |         |                     |         |          |      |                |      |          |       |       |       |  |         |         |         |   |      |      
|                     |                 |                     | 574,554 |                     |         |          | 6.86 |                |      | $        | 11.56 |       |       |  | 476,106 |         |         |   |      |      
|                     |                 |                     |         |                     |         |          |      |                |      |          |       |       |       |  |         |         |         |   |      |      

The Company had shares exercisable under the
various options plans of 381,828 and 340,056 at June 30,
2002 and 2001, respectively, at a weighted average exercise
price of $10.68 and $10.28, respectively.

During fiscal 2003, the Company extended the
termination dates of options by an additional five years for
55,730 shares held by a director, an officer, and several
employees of the Company, resulting in compensation expense of
$318,000. No other terms were modified including the vesting
period or exercise price.

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##### Table of Contents



During fiscal 2002, the Company extended the
termination dates of options by an additional five years for
16,625 shares held by an officer and a director, resulting in
compensation expense of $87,000. No other terms were modified
including the vesting period or exercise price.

During fiscal 1996, the Company sold 68,750
shares of its common stock to two officers for $812,500. The
officers each paid $40,000 in cash and issued promissory notes
of $732,500 for the balance of the purchase price. The notes are
payable over ten years and due in fiscal 2006. As of
June 30, 2003, $533,000 remained outstanding.

During fiscal 2002 in connection with the 2002
Management Stock Purchase Plan the Company loaned certain
officers a total of $3.9 million to purchase shares in the
Companys stock from CFK Partners (see Note 15) at a
price of $15.00 per share, as adjusted for the one-for-two
reverse stock split effective June 18, 2003. The trading
price of the shares at that time was $9.80 per share. Included
in this amount was a full recourse loan of approximately
$2.9 million made to the Companys CEO (Full
Recourse Note). The remaining $1 million in loans
(Non-Recourse Loans) to the other executives of the
Company are collateralized by the related common stock. During
fiscal 2002, the Company recorded a compensation charge of
$792,000 in connection with these loans to reflect the benefit
received by CFK Partners represented by the purchase price paid
for the shares in excess of the market value of such shares at
that time. The loans to the executives (including the Full
Recourse Note), were made pursuant to employment agreements and
contain provisions to be forgiven over either an eight-year or a
ten-year period under certain conditions. The Non-Recourse Loans
are being accounted for as a variable stock plan pursuant to APB
Opinion No. 25, and the Full Recourse Note is being
accounted for as a fixed stock plan. Compensation expense will
be charged annually as the loans are forgiven. The amount of
compensation expense recorded in fiscal 2003 and 2002 associated
with the forgiveness of the loans was $403,000 and $34,000,
respectively. See Note 1 regarding the restatement of the fiscal
2002 financial statements related to the purchase of shares of
common stock of the Company from CFK Partners.

Note 12  Acquisitions and
Divestitures:

The Company acquired various businesses during
fiscal 2001. All acquisitions have been accounted for under the
purchase method of accounting. Pro forma disclosures have not
been provided as the aggregate annual purchases are not
material. In fiscal 2002, the Company sold RPA (See Note 2)
and one of its FBO facilities. The following describes the
various purchases and the FBO disposition.



| |            
| | -----------
| | Fiscal 2002

In June 2002, the Company sold its FBO operations
at Bedford, Massachusetts for $15.5 million in cash,
resulting in a pre-tax gain of $8.9 million. Estimated
taxes of $3.5 million for this sale were transferred to a
bank escrow account pending payment of the related federal and
state taxes or payment of bank debt. The remaining cash proceeds
of $12.0 million were utilized to repay bank debt.



| |            
| | -----------
| | Fiscal 2001

On September 1, 2000, the Company acquired
the assets of an FBO in Birmingham, Alabama from Raytheon
Aircraft Services, Inc. (RAS) for $6.6 million
in cash funded under the Companys Acquisition Line. The
acquisition was accounted for under the purchase method of
accounting. The purchase price was allocated principally to
Property, Equipment and Leaseholds.

In July 2000, the Company purchased hangars,
buildings and leaseholds at its Tulsa, Oklahoma FBO and paid
$3.8 million which was borrowed from its Acquisition Line.

Note 13  Mercfuel Private
Placement:

On March 7, 2001, the Company announced its
plan to create an independent publicly traded company, MercFuel,
Inc. (MercFuel). MercFuel was organized in Delaware
on October 27, 2000 as a wholly owned subsidiary of the
Company. On January 1, 2001, the Company transferred to
MercFuel the assets and

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liabilities of its Fuel Sales division. On
May 16, 2001, and amended twice thereafter, MercFuel filed
a registration statement related to the proposed offering. Due
to market conditions, the Company was not able to complete the
offering. The Company incurred $985,000 of expenses associated
with the offering and private placement which were expensed
during the second quarter of fiscal 2001.


Note 14  Commitments and
Contingencies:



| |       
| | ------
| | Leases

The Company is obligated under noncancellable
operating leases. Certain leases include renewal clauses and
require payment of real estate taxes, insurance and other
operating costs. Total rental expense on all such leases for
fiscal 2003, 2002 and 2001 was $14,133,000, $12,547,000 and
$10,133,000, respectively, which is net of sublease rental
income of approximately $63,000, $183,000 and $332,000 for
fiscal 2003, 2002 and 2001, respectively. The minimum annual
rentals on all noncancellable operating leases having a term of
more than one year at June 30, 2003 are as follows:

|                                |  |   |            | 
|------------------------------- |  | - | ---------- | 
|2004                            |  | $ | 12,821,000 | 
|2005                            |  |   | 11,937,000 | 
|2006                            |  |   | 11,078,000 | 
|2007                            |  |   | 6,993,000  | 
|2008                            |  |   | 5,930,000  | 
|Thereafter                      |  |   | 50,051,000 | 
|                                |  |   |            | 
|Total minimum payments required |  | $ | 98,810,000 | 
|                                |  |   |            | 

The above minimum payments include amounts for
the proposed rent increase for Air Cargos Avion Warehouse
as discussed in Note 1 to the consolidated financial
statements.



| |                     
| | --------------------
| | Purchase Commitments

On April 1, 2003, Air Cargo entered into a
one-year renewal of its contract to purchase all of South
African Airlines cargo capacity on its passenger flights from
the United States and Canada to South Africa. MACs
one-year commitment for these routes is approximately
$4.6 million, when is essentially unchanged from the
previous year.



| |           
| | ----------
| | Litigation

On May 1, 2002, Mercury received a Notice of
Violation (NOV) for its Fort Wayne, Indiana FBO
facility alleging that Mercurys Spill Prevention, Control
and Countermeasure Plan (the SPCC Plan) did not meet
certain federal regulatory guidelines. Specifically, the
Environmental Protection Agency (the EPA) alleged
that Mercurys SPCC Plan failed to provide for proper
parking, secondary containment, and proper drainage of its
refueler trucks. Mercury entered into discussions with the EPA
and responded to the NOV. On January 29, 2003, the Company
was notified by the EPA of some deficiencies in its latest SPCC
Plan and requested the Company to submit a written response to
its allegations within 30 days. On March 14, 2003, the
Company received a NOV from the United States Environmental
Protection Agency, Region 5 (the EPA Region 5)
alleging certain deficiencies in the SPCC Plan for its Fort
Wayne, Indiana FBO facility, submitted to the EPA in November
2002. The Company believes that it has resolved all deficiencies
except for alleged deficiencies related to secondary containment
for its refueler trucks and for the discrete fuel loading areas.
Pursuant to an agreement detailed in a letter submitted to the
EPA Region 5 on April 16, 2003, Mercury has been permitted
to suspend modifications to its SPCC Plan regarding the
installation of secondary containment for its refueler trucks,
pending resolution of federal regulatory issues associated with
secondary containment for such trucks. The EPA has also extended
national compliance with regulations related to discrete loading
areas until August 17, 2004. In the opinion of management,
the ultimate resolution of this matter is not expected to have a
material effect on the Companys consolidated financial
statements.

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On April 16, 2003, the Plan Committee of
Shuttle America Corp. filed an Adversary Proceeding in the
United States Bankruptcy Court, District of Connecticut alleging
preferential transfers in the amount of $995,000. The parties
reached a settlement agreement, which provides that the Company
will pay Shuttle America $40,000. The settlement agreement is
subject to approval of the Bankruptcy Court.

In December 2001, a jury returned its verdict on
Michael Marignys (Plaintiff) cause of action
for retaliation in violation of California Fair Employment and
Housing Act in favor of the Defendant, the Company, but awarded
damages in the amount of $15,000 for Plaintiffs cause of
action for intentional of emotional distress. In February 2002,
Plaintiff filed a notice of appeal with the Second Appellate
Court (Court). The Court ruled on this appeal in
August of 2003 affirming in part and reversing in part the
judgment and the case was remanded for retrial. A new trial date
has not been set at this time.

On November 26, 2003, Signature Flight
Support Corporation filed a complaint against Air Centers and
Allied alleging: 1) breach of contract and tortuous interference
with contract against Allied; 2) tortuous interference with
prospective economic advantage against Allied; and 3) unfair
business practices against Mercury and Allied. The Company
believes that the allegations are without merit and is in the
process of preparing a response. In the opinion of management,
the ultimate resolution of this complaint will not have a
material effect on the Companys consolidated financial
statements.

The Company is also a defendant in certain
litigation arising in the normal course of business. In the
opinion of management, the ultimate resolution of such
litigation will not have a material effect on either its
financial position or operating results.

Note 15  Related Party
Transactions:

CFK Partners is a partnership consisting of three
of the Companys directors, one of whom also serves as the
Companys Chief Executive Officer and another who serves as
Chairman of the Board. In addition, CFK Partners also owns
approximately 30% of the Companys outstanding common stock.

In January 2002, the Company sold the land and
the office building which houses its corporate headquarters to
CFK Realty Partners, LLC (CFK Realty) for
$4,200,000, consisting of $2,800,000 in cash and a note
receivable of $1,400,000. The note accrues interest at 5% and
contains provisions whereby CFK Realty can elect to extend the
maturity date in one year increments through December 31,
2004. The note had an original maturity date of
December 31, 2002. In early December 2002, the Company
received notification from CFK Realty that it was exercising its
right to extend the maturity date of the note for an additional
one year period. Concurrently with the sale, the Company also
entered into a ten-year lease of the property for a monthly
rental amount of approximately $37,000. During fiscal 2003, the
Company expended $275,000 for leasehold improvements on its
corporate headquarters. This amount will be amortized over the
office lease term. CFK Realty financed the purchase of the
headquarters through a $3.2 million loan. See Note 1
regarding the restatement of the fiscal 2002 financial
statements related to the consolidation of CFK Realty.

The Company and its Chairman (collectively, the
Members) each own an equity interest in MercMed LLC
(MercMed) of 64.94% and 35.06%, respectively.
Accordingly, as more fully discussed below, MercMed has been
included in the Companys consolidated financial statements
as of June 30, 2003. Minority Interest on the
Companys consolidated balance sheet represents the
minority members equity in MercMed. MercMed was formed for
the purpose of owning and operating an aircraft for the Members.
In June 2003, the Members amended the MercMed Operating
Agreement to amend each Members ownership interest from
50% for each Member to the ownership percentages previously
noted. On March 27, 2003, MercMed obtained new financing
for the aircraft which is a 15-year loan with the interest rate
being fixed for the initial 36-month period. At the end of the
initial 36-month period, the interest rate will be reviewed and
fixed at the then Federal Home Loan Banks regular
three-year interest rate plus 275 basis points. Each of the
Members are guarantors of this note. Since the inception of the
new loan and through June 30, 2003, MercMed is current on the
payments due. The outstanding principal amount of the loan was
$696,000 as of June 30, 2003.

The Company uses the services of the legal firm
McBreen and Kopko (the Firm) for various general
corporate legal matters. Mr. Frederick H. Kopko, Jr., a
partner of the Firm, is a member of the Companys

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Board of Directors and is a partner with CFK
Partners, LLC. For the twelve month periods ended June 30, 2003,
2002 and 2001, the Company paid the Firm $699,000, $785,000 and
$317,000, respectively, for legal services rendered.


Note 16  Major Customers and
Foreign Customers:

AirTran Airways represented approximately 19%,
15% and 14% of consolidated revenues for fiscal 2003, 2002 and
2001, respectively. Government contract services consist of
revenues from agencies of the United States government. Revenue
from this segment represented approximately 6%, 7% and 6% of the
Companys consolidated revenues for fiscal 2003, 2002 and
2001, respectively. National, a customer of MercFuel, ceased
operations on November 6, 2002. The Company had been
providing fuel to National since May 1999. In December 2000,
National filed for Chapter 11 bankruptcy protection and the
Company continued to sell fuel to National on a secured basis
under the auspices of the bankruptcy court. Sales to National
represented approximately 6%, 13% and 14% of consolidated
revenues for fiscal 2003, 2002 and 2001, respectively. No other
customers accounted for over 10% of the Companys
consolidated revenues.

The Company does business with a number of
foreign airlines, principally in the sale of aviation fuels. For
the most part, such sales are made within the United States and
utilize the same assets and generally the same personnel as are
utilized in the Companys domestic business. Revenues
related to these foreign airlines amounted to approximately 23%,
18% and 18% of consolidated revenues for fiscal 2003, 2002 and
2001, respectively.

Note 17  Net Income (Loss) Per
Share:

Basic net income (loss) per common share is
computed by dividing net income available to common shareholders
by the weighted average number of common shares outstanding
during the period.

Diluted net income (loss) per share is
computed by dividing net income (loss) available to common
shareholders by the weighted average number of common shares and
dilutive common stock equivalents. Common stock equivalents
include stock options and shares resulting from the assumed
conversion of subordinated debentures, when dilutive.

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The weighted average number of common shares
outstanding and equivalent common shares outstanding have been
adjusted retroactively to reflect the effect of the one-for-two
reverse stock split that was effective June 18, 2003.

|                                                                                                 |                                   |                                         |            |               |  |               |            |         |  |       |           |          |   |   |           |          |   |   |           |          |          |   |           |          |          |  
|------------------------------------------------------------------------------------------------ | --------------------------------- | --------------------------------------- | ---------- | ------------- |  | ------------- | ---------- | ------- |  | ----- | --------- | -------- | - | - | --------- | -------- | - | - | --------- | -------- | -------- | - | --------- | -------- | -------- | -
|                                                                                                 |                                   |                                         |            |               |  |              
|                                                                                                 |                                   | Year Ended                              |            | Year Ended    |  | Year Ended   
|                                                                                                 |                                   | June 30, 2003                           |            | June 30, 2002 |  | June 30, 2001
|                                                                                                 |                                   |                                         |            |               |  |              
|                                                                                                 |                                   | Basic                                   |            | Diluted       |  | Basic         |            | Diluted |  | Basic |           | Diluted 
|                                                                                                 |                                   |                                         |            |               |  |               |            |         |  |       |           |         
|Weighted average number of common stock
    outstanding during the period                        |                                   |                                         | 3,263,000  |               |  |               | 3,263,000  |         |  |       | 3,282,500 |          |   |   | 3,282,500 |          |   |   | 3,265,500 |          |          |   | 3,265,500 |         
|Common stock equivalents resulting from the
    assumed exercise of stock options                |                                   |                                         |            |               |  |               |            |         |  |       |           |          |   |   | 60,500    |          |   |   |           |          |          |   | 88,000    |         
|Common stock resulting from the assumed
    conversion of debentures                             |                                   |                                         |            |               |  |               |            |         |  |       |           |          |   |   | 12,000    |          |   |   |           |          |          |   | 20,000    |         
|                                                                                                 |                                   |                                         |            |               |  |               |            |         |  |       |           |          |   |   |           |          |   |   |           |          |          |   |           |         
|Weighted average number of common and common
    equivalent shares outstanding during the period |                                   |                                         | 3,263,000  |               |  |               | 3,263,000  |         |  |       | 3,282,500 |          |   |   | 3,355,000 |          |   |   | 3,265,500 |          |          |   | 3,373,500 |         
|                                                                                                 |                                   |                                         |            |               |  |               |            |         |  |       |           |          |   |   |           |          |   |   |           |          |          |   |           |         
|Net income (loss) from continuing operations                                                     |                                   | $                                       | (2,798,000 | )             |  | $             | (2,798,000 | )       |  | $     | 4,687,000 |          |   | $ | 4,687,000 |          |   | $ | 3,747,000 |          |          | $ | 3,747,000 |         
|Add: Interest expense, net of tax, on convertible
    debentures                                 |                                   |                                         |            |               |  |               |            |         |  |       |           |          |   |   | 15,000    |          |   |   |           |          |          |   | 20,000    |         
|                                                                                                 |                                   |                                         |            |               |  |               |            |         |  |       |           |          |   |   |           |          |   |   |           |          |          |   |           |         
|Adjusted income (loss) from continuing operations                                                |                                   | $                                       | (2,798,000 | )             |  | $             | (2,798,000 | )       |  | $     | 4,687,000 |          |   | $ | 4,702,000 |          |   | $ | 3,747,000 |          |          | $ | 3,767,000 |         
|Preferred stock dividends                                                                        |                                   |                                         | (19,000    | )             |  |               | (19,000    | )       |  |       |           |          |   |   |           |          |   |   |           |          |          |   |           |         
|Discontinued Operations:                                                                         |                                   |                                         |            |               |  |               |            |         |  |       |           |          |   |   |           |          |   |   |           |          |          |   |           |         
|                                                                                                 | Loss from discontinued operations |                                         |            |               |  |               |            |         |  |       |           | (170,000 | ) |   |           | (170,000 | ) |   |           | (858,000 | )        |   |           | (858,000 | )       
|                                                                                                 |                                   | Loss on sale of discontinued operations |            |               |  |               |            |         |  |       |           |          |   |   |           |          |   |   |           |          | (477,000 | ) |           |          | (477,000 | )
|                                                                                                 |                                   |                                         |            |               |  |               |            |         |  |       |           |          |   |   |           |          |   |   |           |          |          |   |           |         
|Adjusted net income (loss) applicable to
    common stockholders                                 |                                   | $                                       | (2,817,000 | )             |  | $             | (2,817,000 | )       |  | $     | 4,517,000 |          |   | $ | 4,532,000 |          |   | $ | 2,412,000 |          |          | $ | 2,432,000 |         
|Common stock and common stock equivalents                                                        |                                   |                                         | 3,263,000  |               |  |               | 3,263,000  |         |  |       | 3,282,500 |          |   |   | 3,355,000 |          |   |   | 3,265,500 |          |          |   | 3,373,500 |         
|Net income (loss) per share:                                                                     |                                   |                                         |            |               |  |               |            |         |  |       |           |          |   |   |           |          |   |   |           |          |          |   |           |         
|From continuing operations                                                                       |                                   | $                                       | (0.86      | )             |  | $             | (0.86      | )       |  | $     | 1.43      |          |   | $ | 1.40      |          |   | $ | 1.15      |          |          | $ | 1.12      |         
|Loss from discontinued operations                                                                |                                   |                                         |            |               |  |               |            |         |  |       | (0.05     | )        |   |   | (0.05     | )        |   |   | (0.26     | )        |          |   | (0.26     | )       
|Loss on sale of discontinued operations                                                          |                                   |                                         |            |               |  |               |            |         |  |       |           |          |   |   |           |          |   |   | (0.15     | )        |          |   | (0.14     | )       
|                                                                                                 |                                   |                                         |            |               |  |               |            |         |  |       |           |          |   |   |           |          |   |   |           |          |          |   |           |         
|Net income (loss) per share                                                                      |                                   | $                                       | (0.86      | )             |  | $             | (0.86      | )       |  | $     | 1.38      |          |   | $ | 1.35      |          |   | $ | 0.74      |          |          | $ | 0.72      |         
|                                                                                                 |                                   |                                         |            |               |  |               |            |         |  |       |           |          |   |   |           |          |   |   |           |          |          |   |           |         

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Note 18  Segment
Reporting:

The Company operates and reports its activities
through four principal units: 1) MercFuel, 2) Air
Centers, 3) Air Cargo and 4) Government Contract
Services. Additionally, the Company had a fifth operating unit,
RPA, which was sold on July 3, 2001 and is shown as a
discontinued operation. As a result, RPAs historical
operating results have been reclassified as discontinued
operations. The segment data included below has been restated to
exclude amounts related to the RPA business unit.

|                              |  |          |         |             |  |                        |        |            |  |             |        |       |  |   |        |  |  |   |        |   |  |   |         | 
|----------------------------- |  | -------- | ------- | ----------- |  | ---------------------- | ------ | ---------- |  | ----------- | ------ | ----- |  | - | ------ |  |  | - | ------ | - |  | - | ------- | 
|                              |  |          |         |             |  |                        |        | Government |  | Corporate   |        |      
|                              |  |          |         |             |  |                        |        | Contract   |  | or          |        |      
|                              |  | MercFuel |         | Air Centers |  | Air Cargo              |        | Services   |  | Unallocated |        | Total
|                              |  |          |         |             |  |                        |        |            |  |             |        |      
|                              |  |          |         |             |  |                        |        |            |  |            
|                              |  |          |         |             |  | (Dollars in Thousands) |        |            |  |            
|2003                          |  |          |         |             |  |                        |        |            |  |             |        |       |  |   |        |  |  |   |        |   |  |   |         | 
|Revenues                      |  | $        | 280,136 |             |  | $                      | 96,249 |            |  | $           | 32,691 |       |  | $ | 24,421 |  |  | $ | (4,482 | ) |  | $ | 429,015 | 
|Gross margin                  |  |          | 5,926   |             |  |                        | 12,854 |            |  |             | 2,585  |       |  |   | 4,598  |  |  |   |        |   |  |   | 25,963  | 
|Depreciation and amortization |  |          | 318     |             |  |                        | 5,179  |            |  |             | 1,887  |       |  |   | 349    |  |  |   | 230    |   |  |   | 7,963   | 
|Capital expenditures          |  |          | 7       |             |  |                        | 3,675  |            |  |             | 60     |       |  |   | 4      |  |  |   | 319    |   |  |   | 4,065   | 
|Segment assets                |  |          | 29,460  |             |  |                        | 59,085 |            |  |             | 16,226 |       |  |   | 10,773 |  |  |   | 17,411 |   |  |   | 132,955 | 
|2002 (Restated, see Note 1)   |  |          |         |             |  |                        |        |            |  |             |        |       |  |   |        |  |  |   |        |   |  |   |         | 
|Revenues                      |  | $        | 232,573 |             |  | $                      | 94,417 |            |  | $           | 28,124 |       |  | $ | 28,228 |  |  |   |        |   |  | $ | 383,342 | 
|Gross margin                  |  |          | 6,581   |             |  |                        | 13,545 |            |  |             | 898    |       |  |   | 6,789  |  |  |   |        |   |  |   | 27,813  | 
|Depreciation and amortization |  |          | 63      |             |  |                        | 5,780  |            |  |             | 2,292  |       |  |   | 715    |  |  |   | 408    |   |  |   | 9,258   | 
|Capital expenditures          |  |          | 30      |             |  |                        | 3,954  |            |  |             | 332    |       |  |   | 122    |  |  |   | 62     |   |  |   | 4,500   | 
|Segment assets                |  |          | 27,183  |             |  |                        | 60,479 |            |  |             | 16,159 |       |  |   | 12,995 |  |  |   | 19,398 |   |  |   | 136,214 | 
|2001                          |  |          |         |             |  |                        |        |            |  |             |        |       |  |   |        |  |  |   |        |   |  |   |         | 
|Revenues                      |  | $        | 318,857 |             |  | $                      | 99,482 |            |  | $           | 31,337 |       |  | $ | 28,770 |  |  |   |        |   |  | $ | 478,446 | 
|Gross margin                  |  |          | 7,493   |             |  |                        | 15,012 |            |  |             | 6,089  |       |  |   | 5,671  |  |  |   |        |   |  |   | 34,265  | 
|Depreciation and amortization |  |          | 62      |             |  |                        | 5,389  |            |  |             | 2,363  |       |  |   | 841    |  |  |   | 676    |   |  |   | 9,331   | 
|Capital expenditures          |  |          | 14      |             |  |                        | 4,462  |            |  |             | 1,884  |       |  |   | 77     |  |  |   | 34     |   |  |   | 6,471   | 
|Segment assets                |  |          | 35,608  |             |  |                        | 69,779 |            |  |             | 18,996 |       |  |   | 11,907 |  |  |   | 11,860 |   |  |   | 148,150 | 

Gross margin is used as the measure of profit and
loss for segment reporting purposes as it is viewed by key
decision makers as the principal operating indicator in
measuring segment profitability. The key decision makers also
view bad debt expense as an important measure of profit and
loss. The predominant component of bad debt expense relates to
MercFuel. Bad debt expense for MercFuel was approximately
$1,060,000, $994,000 and $3,025,000 in fiscal 2003, 2002 and
2001, respectively; total bad debt expense was $1,648,000,
$1,358,000 and $3,425,000 in fiscal 2003, 2002 and 2001,
respectively.

Note 19  Subsequent
Events:

On October 28, 2003, the Company announced
that Allied had acquired the Companys $24.0 million
Senior Subordinated 12% Note from J. H. Whitney Co. Mezzanine
Fund (the Whitney Note) and that the Company and
Allied had entered into a definitive agreement, subject to the
Companys stockholders approval, completion of due
diligence and regulatory agencies approvals and consents,
to sell 100% of the outstanding common stock of Air Centers to
Allied for $70 million (the FBO Sale). The actual
cash proceeds to be received by the Company is subject to the
establishment of an escrow account of $8,270 thousand
associated with the month-to-month lease terms of the Air
Centers FBO located at the Hartsfield Airport,
reimbursement for certain FBO capital investments made by the
Company, minimum Air Center working capital at closing and other
customary terms and conditions. In accordance with the terms of
the definitive agreement, as amended, the FBO Sale is to close
on January 16, 2004 but the closing date can be extended,
at Allieds discretion, to April 16, 2004. The Company
expects the FBO Sale to close in the Companys third
quarter of fiscal 2004.

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The Whitney Note, as amended, included provisions
whereby the Company, if any amount of the principal on the
Whitney Note remained outstanding as of December 31, 2003,
would issue warrants to the note holder to purchase 5% of the
Companys outstanding common stock, exercisable for nominal
consideration, and, if the amount of principal on the Whitney
Note was greater than $12.0 million as of December 31,
2003, would issue warrants to the note holder to purchase an
additional 5% of the Companys outstanding common stock,
exercisable for nominal consideration, along with an additional
note in the original principal amount of $5.0 million. In
addition, the Whitney Note, as amended, also provided that
beginning January 2004 and continuing through June 2004, the
interest rate will increase by 1% per annum each month up to a
maximum of 18% per annum. Allied, in the new promissory note
issued in replacement of the Whitney Note (the Allied
Note), has waived the penalty provisions that were
included in the Whitney Note. However, if the Allied Note is not
prepaid in full by December 31, 2003 beginning January 2004
and continuing through June 2004, the interest rate will
increase by 1% per annum each month up to a maximum of 18% per
annum.

Under the definitive agreement, the Company has
agreed to sell its interest in Mercury Air Centers, Inc.
(Air Centers) to Allied for a purchase price of
$70 million, subject to an $8.3 million escrow account
relating to a lease extension, reimbursement to Mercury related
to certain capital investments made by Mercury, and adjustments
for working capital and other customary terms and conditions.
The sale of the Air Centers is subject to the Companys
shareholders approval, the completion of Allieds due
diligence, expiration of the Hart-Scott-Rodino waiting period
and lender approval. In accordance with the terms of the
definitive agreement, as amended, the close of the sale
transaction is scheduled for January 16, 2004 but can be
extended at Allieds discretion through April 16,
2004. The Company anticipates that this transaction will close
in the Companys third quarter of fiscal 2004.

On December 12, 2003 the Company entered
into a settlement agreement (the Hambro Settlement)
relating to litigation with J O Hambro Capital
Management and certain of its affiliates and private clients
(J O Hambro) whereby the Company issued
three promissory notes for an aggregate principle amount of
$3,586,000 (the Hambro Notes) in exchange for the
following, among other things: 1) the repurchase of
343,600 shares of the Companys common stock owned by
J O Hambro; 2) reimbursement of certain costs
associated with the mutual release of claims; 3) standstill
agreement associated with the pending lawsuits and anticipated
proxy solicitations. The Hambro Notes: 1) are subordinated
to the Senior Secured Credit Facility and to the Senior
Subordinated Note; 2) are due on the earlier of
(a) March 31, 2006, provided that if the Senior
Secured Credit Facility Matures on December 31, 2007 then
such date shall be March 31, 2008 and (b) the
ninetieth day following payment in full of the Senior Secured
Credit Facility and the termination of commitments for the
Senior Secured Lender to provide financing under the Senior
Secured Credit Facility; and 3) bear and accrue interest at
the rate of 12% per annum commencing on December 31, 2003
but will increase to 16% per annum for any amount of unpaid
principal after June 30, 2004. During the second quarter of
fiscal 2004, the Company will recognize expense of
$1.8 million, which represents the consideration paid to
J O Hambro in excess of the market value of the shares
at that time.

At the close of the FBO Sale, the Company
estimates gross sales proceeds of $73.1 million. The
Company intends to use these proceeds to: 1) prepay the
outstanding principal amount on the Senior Secured Term Loan of
$10 million; 2) repay all outstanding cash advances on
the Revolving Line of Credit; 3) pay all accrued interest,
fees and expenses associated with the Senior Secured Credit
Facility; 4) provide cash collateral for the outstanding
Letters of Credit of approximately $16.0 million;
5) prepay the outstanding principal amount on the Allied
Note; 6) pay all accrued interest, fees and expenses
associated with the Allied Note; 7) establish an escrow
account for the FBO located at the Hartsfield Airport in the
amount of $8.3 million; 8) repay the outstanding principal
amount due on the Hambro Note of $3.6 million;
9) repay all accrued interest on the Hambro Note; and
10) pay all commissions, fees and expenses associated with
the FBO Sale. After settlement of the all of the obligations
noted above, the Company estimates that the FBO Sale will result
in surplus cash proceeds of $4.0 million, of which an
estimated $1.5 million will be required to settle the
Companys current income tax obligation associated with the
FBO Sale.

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##### Table of Contents



Note 20  Quarterly Financial Data
(Unaudited):

|                    |          |                             |             |             |   |          |             |         |   |   |             |       |   |   |            |       |  
|------------------- | -------- | --------------------------- | ----------- | ----------- | - | -------- | ----------- | ------- | - | - | ----------- | ----- | - | - | ---------- | ----- | -
|                    |          |                            
|                    |          | 2003 (Restated, see Note 1)
|                    |          |                            
|                    |          | September 30                |             | December 31 |   | March 31 |             | June 30
|                    |          |                             |             |             |   |          |             |        
|Sales and revenues  |          | $                           | 107,895,000 |             |   | $        | 113,962,000 |         |   | $ | 111,027,000 |       |   | $ | 96,131,000 |      
|Gross margin        |          |                             | 5,950,000   |             |   |          | 6,888,000   |         |   |   | 6,119,000   |       |   |   | 7,006,000  |      
|                    |          |                             |             |             |   |          |             |         |   |   |             |       |   |   |            |      
|Net loss            |          |                             | (589,000    | )           |   |          | (596,000    | )       |   |   | (1,098,000  | )     |   |   | (515,000   | )    
|                    |          |                             |             |             |   |          |             |         |   |   |             |       |   |   |            |      
|Net loss per share: |          |                             |             |             |   |          |             |         |   |   |             |       |   |   |            |      
|                    | Basic:   |                             | $           | (0.18       | ) |          | $           | (0.18   | ) |   | $           | (0.33 | ) |   | $          | (0.17 | )
|                    |          |                             |             |             |   |          |             |         |   |   |             |       |   |   |            |      
|                    | Diluted: |                             | $           | (0.18       | ) |          | $           | (0.18   | ) |   | $           | (0.33 | ) |   | $          | (0.17 | )
|                    |          |                             |             |             |   |          |             |         |   |   |             |       |   |   |            |      

|                    |          |                                |             |             |   |          |             |         |   |   |             |       |   |   |            |       |  
|------------------- | -------- | ------------------------------ | ----------- | ----------- | - | -------- | ----------- | ------- | - | - | ----------- | ----- | - | - | ---------- | ----- | -
|                    |          |                               
|                    |          | 2003 (As reported, see Note 1)
|                    |          |                               
|                    |          | September 30                   |             | December 31 |   | March 31 |             | June 30
|                    |          |                                |             |             |   |          |             |        
|Sales and revenues  |          | $                              | 107,895,000 |             |   | $        | 113,962,000 |         |   | $ | 111,027,000 |       |   | $ | 96,131,000 |      
|Gross margin        |          |                                | 6,065,000   |             |   |          | 7,003,000   |         |   |   | 6,233,000   |       |   |   | 7,006,000  |      
|                    |          |                                |             |             |   |          |             |         |   |   |             |       |   |   |            |      
|Net loss            |          |                                | (482,000    | )           |   |          | (490,000    | )       |   |   | (954,000    | )     |   |   | (515,000   | )    
|                    |          |                                |             |             |   |          |             |         |   |   |             |       |   |   |            |      
|Net loss per share: |          |                                |             |             |   |          |             |         |   |   |             |       |   |   |            |      
|                    | Basic:   |                                | $           | (0.15       | ) |          | $           | (0.15   | ) |   | $           | (0.29 | ) |   | $          | (0.17 | )
|                    |          |                                |             |             |   |          |             |         |   |   |             |       |   |   |            |      
|                    | Diluted: |                                | $           | (0.15       | ) |          | $           | (0.15   | ) |   | $           | (0.29 | ) |   | $          | (0.17 | )
|                    |          |                                |             |             |   |          |             |         |   |   |             |       |   |   |            |      

|                                             |                                   |                             |             |             |      |          |            |         |       |   |            |       |       |   |            |       |      | 
|-------------------------------------------- | --------------------------------- | --------------------------- | ----------- | ----------- | ---- | -------- | ---------- | ------- | ----- | - | ---------- | ----- | ----- | - | ---------- | ----- | ---- | 
|                                             |                                   |                            
|                                             |                                   | 2002 (Restated, see Note 1)
|                                             |                                   |                            
|                                             |                                   | September 30                |             | December 31 |      | March 31 |            | June 30
|                                             |                                   |                             |             |             |      |          |            |        
|Sales and revenues                           |                                   | $                           | 103,752,000 |             |      | $        | 92,091,000 |         |       | $ | 87,918,000 |       |       | $ | 99,581,000 |      
|Gross margin                                 |                                   |                             | 7,724,000   |             |      |          | 7,804,000  |         |       |   | 6,515,000  |       |       |   | 5,770,000  |      
|Net income (loss) from continuing operations |                                   |                             | 840,000     |             |      |          | (31,000    | )       |       |   | (390,000   | )     |       |   | 4,268,000  |      
|Net income (loss)                            |                                   |                             | 798,000     |             |      |          | (31,000    | )       |       |   | (390,000   | )     |       |   | 4,140,000  |      
|Net income per share:                        |                                   |                             |             |             |      |          |            |         |       |   |            |       |       |   |            |      
|Basic:                                       |                                   |                             |             |             |      |          |            |         |       |   |            |       |       |   |            |      
|                                             | From continuing operations        |                             | $           | 0.26        |      |          | $          | (0.01   | )     |   | $          | (0.12 | )     |   | $          | 1.30  |     
|                                             | Loss from discontinued operations |                             |             | (0.01       | )    |          |            |         |       |   |            |       |       |   |            | (0.04 | )   
|                                             |                                   |                             |             |             |      |          |            |         |       |   |            |       |       |   |            |      
|                                             | Net income (loss)                 |                             | $           | 0.25        |      |          | $          | (0.01   | )     |   | $          | (0.12 | )     |   | $          | 1.26  |     
|                                             |                                   |                             |             |             |      |          |            |         |       |   |            |       |       |   |            |      
|Diluted:                                     |                                   |                             |             |             |      |          |            |         |       |   |            |       |       |   |            |      
|                                             | From continuing operations        |                             | $           | 0.26        |      |          | $          | (0.01   | )     |   | $          | (0.12 | )     |   | $          | 1.27  |     
|                                             | Loss from discontinued operations |                             |             | (0.01       | )    |          |            |         |       |   |            |       |       |   |            | (0.04 | )   
|                                             |                                   |                             |             |             |      |          |            |         |       |   |            |       |       |   |            |      
|                                             |                                   | Net income (loss)           |             | $           | 0.25 |          |            | $       | (0.01 | ) |            | $     | (0.12 | ) |            | $     | 1.23 | 
|                                             |                                   |                             |             |             |      |          |            |         |       |   |            |       |       |   |            |      

F-33



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##### Table of Contents



|                                             |                                   |                                 |             |             |      |          |            |         |       |   |            |       |       |   |            |       |      | 
|-------------------------------------------- | --------------------------------- | ------------------------------- | ----------- | ----------- | ---- | -------- | ---------- | ------- | ----- | - | ---------- | ----- | ----- | - | ---------- | ----- | ---- | 
|                                             |                                   |                                
|                                             |                                   | 2002 (As reported, see Note 1 )
|                                             |                                   |                                
|                                             |                                   | September 30                    |             | December 31 |      | March 31 |            | June 30
|                                             |                                   |                                 |             |             |      |          |            |        
|Sales and revenues                           |                                   | $                               | 103,752,000 |             |      | $        | 92,091,000 |         |       | $ | 87,918,000 |       |       | $ | 99,581,000 |      
|Gross margin                                 |                                   |                                 | 7,724,000   |             |      |          | 7,804,000  |         |       |   | 6,515,000  |       |       |   | 6,229,000  |      
|Net income (loss) from continuing operations |                                   |                                 | 833,000     |             |      |          | (31,000    | )       |       |   | (380,000   | )     |       |   | 4,781,000  |      
|Net income (loss)                            |                                   |                                 | 791,000     |             |      |          | (31,000    | )       |       |   | (380,000   | )     |       |   | 4,653,000  |      
|Net income per share:                        |                                   |                                 |             |             |      |          |            |         |       |   |            |       |       |   |            |      
|Basic:                                       |                                   |                                 |             |             |      |          |            |         |       |   |            |       |       |   |            |      
|                                             | From continuing operations        |                                 | $           | 0.25        |      |          | $          | (0.01   | )     |   | $          | (0.12 | )     |   | $          | 1.47  |     
|                                             | Loss from discontinued operations |                                 |             | (0.01       | )    |          |            |         |       |   |            |       |       |   |            | (0.04 | )   
|                                             |                                   |                                 |             |             |      |          |            |         |       |   |            |       |       |   |            |      
|                                             | Net income (loss)                 |                                 | $           | 0.24        |      |          | $          | (0.01   | )     |   | $          | (0.12 | )     |   | $          | 1.43  |     
|                                             |                                   |                                 |             |             |      |          |            |         |       |   |            |       |       |   |            |      
|Diluted:                                     |                                   |                                 |             |             |      |          |            |         |       |   |            |       |       |   |            |      
|                                             | From continuing operations        |                                 | $           | 0.25        |      |          | $          | (0.01   | )     |   | $          | (0.12 | )     |   | $          | 1.44  |     
|                                             | Loss from discontinued operations |                                 |             | (0.01       | )    |          |            |         |       |   |            |       |       |   |            | (0.04 | )   
|                                             |                                   |                                 |             |             |      |          |            |         |       |   |            |       |       |   |            |      
|                                             |                                   | Net income (loss)               |             | $           | 0.24 |          |            | $       | (0.01 | ) |            | $     | (0.12 | ) |            | $     | 1.40 | 
|                                             |                                   |                                 |             |             |      |          |            |         |       |   |            |       |       |   |            |      

See Note 1 to the consolidated financial
statements regarding the restatement of the fiscal 2002
financial statements and each of the first three quarters of
fiscal 2003.

F-34



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##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES

SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS


Three Years Ended June 30, 2003


|               |                                    |                     |   |                  |  |            |   |                |  |  |   |            |   |  |   |           | 
|-------------- | ---------------------------------- | ------------------- | - | ---------------- |  | ---------- | - | -------------- |  |  | - | ---------- | - |  | - | --------- | 
|               |                                    | Balance at          |   | Charged to Costs |  | Deductions |   | Balance at End
|Classification |                                    | Beginning of Period |   | and Expenses     |  | (a)        |   | of Period     
|               |                                    |                     |   |                  |  |            |   |               
|2003           |                                    |                     |   |                  |  |            |   |                |  |  |   |            |   |  |   |          
|               | Allowance for doubtful accounts(b) |                     | $ | 1,583,000        |  |            | $ | 1,648,000      |  |  | $ | (716,000   | ) |  | $ | 2,515,000 | 
|               |                                    |                     |   |                  |  |            |   |                |  |  |   |            |   |  |   |          
|2002           |                                    |                     |   |                  |  |            |   |                |  |  |   |            |   |  |   |          
|               | Allowance for doubtful accounts    |                     | $ | 1,653,000        |  |            | $ | 1,358,000      |  |  | $ | (1,428,000 | ) |  | $ | 1,583,000 | 
|               |                                    |                     |   |                  |  |            |   |                |  |  |   |            |   |  |   |          
|2001           |                                    |                     |   |                  |  |            |   |                |  |  |   |            |   |  |   |          
|               | Allowance for doubtful accounts    |                     | $ | 2,291,000        |  |            | $ | 3,425,000      |  |  | $ | (4,063,000 | ) |  | $ | 1,653,000 | 
|               |                                    |                     |   |                  |  |            |   |                |  |  |   |            |   |  |   |          



---



|    |  |                                                                               
|--- |  | ------------------------------------------------------------------------------
|(a) |  | Accounts receivable that were written off.                                    
|   
|(b) |  | Inclusive of allowance for trade accounts
    receivable and notes receivable.

F-35