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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

|      |  |                                                                                         
|----- |  | ----------------------------------------------------------------------------------------
|[X]   |  | Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934    
|     
|      |  | For the Fiscal Year ended June 30, 2002                                                 
|     
|[   ] |  | 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: 1-7134 1)

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 90066




(Address of Principal Executive Offices) (Zip Code)


Registrants Telephone Number, Including Area Code: (310) 827-2737

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

|                              |  |                                               
|----------------------------- |  | ----------------------------------------------
|                              |  | Name of Each Exchange on                      
|Title of Each Class           |  | 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 [X] No. [   ]

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 [   ] No [X.]

As of September 19, 2002, 6,537,699 shares of the Registrants Common
Stock were outstanding. Of these shares, 2,647,883 shares were held by persons
who may be deemed to be affiliates. The 3,889,816 shares held by non-affiliates
as of September 19, 2002 had an aggregate market value (based on the closing
price of these shares on the American Stock Exchange of $3.81 a share) of
$14,820,198. As of September 19, 2002, 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 Shareholders to be held on November 19, 2002 are
incorporated by reference into Part III of this Form 10-K.

(The Exhibit Index May Be Found at Page 26)





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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 DISCLOSURE ABOUT MARKET RISK.                           
|              | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.                                          
|              | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. 
|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. CONTROLS AND PROCEDURES CERTIFICATIONS.                                              
|PART IV      
|              | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:                     
|SIGNATURES   
|              |                                                                                                | CONSOLIDATED BALANCE SHEETS                    
|              |                                                                                                | CONSOLIDATED STATEMENTS OF INCOME              
|              |                                                                                                | CONSOLIDATED STATEMENTS OF CASH FLOW           
|              |                                                                                                | CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|              |                                                                                                | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     
|EXHIBIT 4.11 
|EXHIBIT 10.34
|EXHIBIT 10.35
|EXHIBIT 10.36
|EXHIBIT 10.37
|EXHIBIT 10.38
|EXHIBIT 22.1 
|EXHIBIT 23.1 
|EXHIBIT 99.2 



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PART I




ITEM 1. BUSINESS

Mercury Air Group, Inc., a Delaware Corporation, was organized in 1956
and provides a broad range of services to the aviation industry through four
principal operating units: fixed base operations, cargo operations, fuels
sales, and government contract services. Fixed base operations (FBOs)
include fuel sales, into-plane services, ground support services, aircraft
hangar and tie-down facilities and maintenance at certain locations for
commercial, private, general aviation and military aircraft. Cargo operations
consist of cargo handling, space logistics operations and general cargo sales
agent services. Fuel sales include the sale of fuel and delivery of fuel
primarily to domestic and international commercial airlines, business
aviation and air freight airlines. Government contract services consist of
aircraft refueling and fuel storage operations, base operating support (BOS)
services, air terminal and ground handling services and weather observation
and forecasting services performed principally for agencies of the United
States Government. Additionally, the Company had a fifth operating unit, RPA
Airline Automation Services, Inc. (RPA) which was sold on July 3, 2001 and
is shown as a discontinued operation. As a result, RPAs current and
historical operating results have been reclassified as a discontinued
operation. 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.

NARRATIVE DESCRIPTION OF THE BUSINESS

FIXED BASE OPERATIONS

Mercury currently provides Fixed Base Operations (FBO) services at 18
airports throughout the United States either directly through Mercury Air
Group, Inc. or through its wholly owned subsidiary Mercury Air Centers, Inc.
(Air Centers). At each FBO site, the Company: 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 and aircraft tie-down services, and 3.) at a few select FBO sites,
provides aircraft maintenance. At each FBO site, the Company maintains
administrative offices and provides office rent for its customers. The
Company owns and leases refueling vehicles and maintains fuel storage tanks
as required to support the fuels sales and into-plane fueling operations.
During the year ended June 30, 2002, the Company sold 36,025,000 gallons
through its aviation retail fuel sales operations. FBOs revenue for the year
ended June 30, 2002 declined 5.1% from the 2001 fiscal year to $94.4 million,
representing 24.6% of the Companys total revenue for the year. The FBO
property and facilities are leased from the respective airport authorities.

In June 2002, the Company sold its FBO operations at Bedford,
Massachusetts to Signature Flight Support Corp. for $15.5 million, resulting
in a pre-tax gain of $9.0 million. During the fiscal year ended June 30,
2002, the Bedford FBO had retail aviation fuel sales volume of 2,939,000
gallons, or 8.2% of the Companys FBO 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 FBO operations 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 assets of an FBO in Birmingham, Alabama at a cost of
approximately $6.6 million, which was funded through the Companys existing
senior credit facility. Also, the Company acquired the assets of an FBO
located in Tulsa, Oklahoma for $6.2 million which was also funded through the
Companys existing senior debt facility with payments in fiscal 2001 and
fiscal 2000. In fiscal 2000, the Company acquired FBO operations located in
Fort Wayne, Indiana, in South Carolina at the Charleston International
Airport and at the Johns Island Executive Airport.

In its continuing effort to improve the quality of service
the Company provides through its FBO network, the Company is currently
developing plans to: 1) build a new hangar at its Charleston, South Carolina
FBO; 2) relocate and upgrade its FBO facilities at Los Angeles International
Airport; 3) upgrade and expand its FBO operations in Santa Barbara,
California; and 4.) convert an existing hangar at the Ontario International
Airport to better accommodate private corporate aircraft. These projects are
scheduled to begin in fiscal 2003 pending approval from the respective
airport authorities and finalization of project funding.

The Company continuously assesses its FBO network to position the
Company to provide high quality and value added service to its customers.
The Company intends on continuing this practice with the assessment of
strategic facility acquisitions or dispositions and to enhance its position in
the market and through facility enhancements with the goal of upgrading and
standardizing the level and quality of service throughout the Companys FBO
network. These initiatives are undertaken with the intent of providing
satisfactory return to all stakeholders and to the extent permissible under
the Companys existing credit facilities.

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CARGO OPERATIONS

The Companys cargo operations are conducted through its wholly-owned
subsidiary, Mercury Air Cargo, Inc. (MAC), which provides the following
services: cargo handling, space logistics operations, and general cargo sales
agent services. MACs operations were adversely impacted in 2002 due to the
tragic events of September 11, 2001 and due to the general decline in
worldwide economic conditions. As a result, MACs revenue for the year ended
June 30, 2002 declined 10.3% from the 2001 fiscal year to $28.1 million,
representing 7.3% of the Companys total revenue for the year. The revenue
decline was due to both reduced volume and severe downward price pressures on
the services MAC provides. These factors resulted in a decline in MACs gross
margin in 2002 to $1.4 million, a reduction of $4.7 million from 2001. In
response, during the 4th quarter of 2002, MACs management implemented cost
reduction initiatives to improve the financial results, including across the
board salary reductions. These cost reduction initiatives, along with
improvement in the general air cargo business activity, resulted in improved
financial results towards the end of fiscal 2002 and into early fiscal 2003.
It is too early to determine whether these improved operational and financial
results will continue into the remainder of the year.

Cargo Handling

MAC provides domestic and international air cargo handling, air mail
handling and bonded warehousing. MAC is one of only 4 non-airline providers
of contractual cargo containerization and palletization for domestic and
international airlines and cargo airlines at the Los Angeles International
Airport (LAX). In 2002, the Cargo Handling operations comprised 79% of MACs
revenue.

MAC handles cargo at LAX, William B. Hartsfield International Airport
(ATL), Dorval International Airport (YUL), Mirabel International Airport
(YMX) and Lester B. Pearson International Airport (YYZ). In February 2001,
MAC entered into a ten-year lease for a 104,646 square foot warehouse and
operations area at ATL. At that time, MAC closed down its former warehouse at
ATL. In March 2002, MAC entered into a sub-lease agreement for its new
warehouse facility at ATL with Lufthansa Handling. This sub-lease agreement
allows MAC to continue to provide cargo handling at ATL utilizing Lufthansa
Handling as a sub-contract service provider for the operations.

In April 1998, MAC completed the construction and commenced operation of
a 174,000 square foot warehouse at LAX under a five-year lease which has
subsequently been extended to expire in 2006. MAC is currently the largest
independent cargo handling company at LAX. In mid-2002, MAC relocated its
office headquarters to the LAX facility.

MAC competes in the cargo handling business based on the quality and
timeliness of the service it provides along with a competitive pricing
structure.

Space Logistics Operations

MAC brokers cargo space on transcontinental 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. MAC has an established network of shipping
agents who assist in obtaining cargo for shipment on space purchased from
airlines, and who facilitate the delivery and collection of freight charges
for cargo shipped by MAC. In 2002, the space logistics revenue comprised 10%
of MACs revenue.

In April 2002, MAC entered into a one-year renewal of its contract with
South African Airways (SAA) to purchase all of SAAs cargo capacity on its
passenger flights from the United States to South Africa. MACs one-year
commitment for these routes is approximately $6.2 million. This allows MAC to
effectively arrange and schedule cargo shipments and optimize the return to
SAA and to its freight forwarders while providing a reasonable margin to MAC.

Unlike an air cargo airline which operates its own aircraft, MACs space
logistics business arranges for the purchase of cargo space on scheduled
flights or supplemental flights at negotiated rates. MAC is thereby able to
profit from the sale of air cargo space worldwide without the overhead cost
of owning and operating an aircraft. In some instances, MAC 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, MAC is able to secure air cargo space at rates lower
than an individual freight forwarder could arrange. MAC is then able to pass
on these lower rates to its customers and still realize a profit. MAC
recognizes as revenue the difference between the rate charged to its
customers for the space acquired and the cost of the air cargo space.

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General Sales Agent Services

MAC 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, MAC sells the transportation of cargo on client airlines flights,
using the client airlines own airway bills. MAC earns a commission from the
airlines for selling their cargo space. In 2002, the GSA business revenue
comprised 12% of MACs total revenue. As with its space logistics business,
the growth for MAC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, Mercury World Cargo is
able to enter into interline agreements with other airlines worldwide. Using
the Mercury World Cargo airway bill as the cargo transportation document and
the other airlines air cargo capacity, Mercury World Cargo is able to
provide a service for both freight forwarders and airlines. Effectively,
Mercury World Cargo provides a secondary brand to airlines that prefer not to
utilize their own brand for discounted freight. The fiscal year 2002 was the
start-up year for this business.

FUEL SALES

The Companys fuel sales operations are handled through MercFuel, Inc.
(MercFuel), 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 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s sales activities continue to provide a major revenue source
for the Company, representing 60.7% of the Companys total revenue for the
year ended June 30, 2002, a decrease from 66.6% of the Companys total
revenue in 2001. Sales volume in 2002 was 287.7 million gallons, a decline of
21.7 million gallons or 7.0% from 2001. The decline in sales volume was
partially due the tragic events of September 11, 2001.

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

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. Many of the major oil companies that provide fuel
supply to MercFuel have limited infrastructure to support the small to medium
sized and emerging 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 be able to obtain
directly from the major oil companies. With over 23 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
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.

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, resulting in high spot fuel prices. MercFuel provides a 24-hour
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

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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 streamlining its
customers fuel purchase process and reducing 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 or post letters of credit with their suppliers. MercFuel recognized
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 current market prices 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 commitments at set locations. MercFuels payment terms generally
range from 10 to 30 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 insure supply
availability, MercFuel carries 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.
MercFuel arranges to have fuel delivered directly to its customers aircraft
in an into-plane arrangement. 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.

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 available of fuel
supplied to MercFuel.

For the fiscal year ended June 30, 2002, MercFuels average cost of fuel
was 77 cents per gallon, a decrease of 23 cents per gallon, or 23% from 2001.
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.

GOVERNMENT CONTRACT SERVICES

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

Aircraft Refueling

Maytag provides aircraft refueling and related services at 14 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 2002 to March 2006. Refueling
contracts provide a firm-fixed price for specified services. 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.

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Air Terminal Services

Maytag provides air terminal and ground handling services to the United
States (U.S.) Government at 19 locations under seven contracts. Six
contracts cover three U.S. military bases in Alaska, Japan, and Korea, and
three international airports in Japan, Korea, and Kuwait. Maytag also has
one contract servicing international airports in Latin America. 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 2003 to September
2003. Maytags multi-site Latin America air terminal contract has options to
extend through September 2004. Air terminal contracts provide a firm-fixed
price for specified services. Air terminal and ground handling services
include the loading and unloading of passengers and cargo, transient alert,
and flight planning services.

Base Operating Support Services

Maytag provides base operating support (BOS) services at Niagara Falls,
NY, Westover, MA, Youngstown, OH and Willow Grove, PA Air Reserve Facilities
and Patrick Air Force Base on a subcontracted basis. Under the terms of the
subcontracts, Maytag provides, at a firm-fixed price, 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 2003 through
October 2003, with one to three pre-priced one-year options. The Company
believes the Government will exercise all options to extend the contracts.

Weather Data Services

Maytag provides weather observation and/or weather forecasting services
at 17 locations within the United States pursuant to ten contracts with the
United States Government and certain local governmental agencies. This
includes one weather observation and forecasting contract and nine 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 governments election. Weather Datas
existing observation contracts were extended for a one year period ending
September 30, 2002. The U.S. Air Force Academy observation and forecasting
contract has options to extend through January 2005.

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
observation 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.

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 a loss of approximately $0.5 million on
the sale of discontinued operations.

MAJOR CUSTOMERS AND FOREIGN CUSTOMERS

During fiscal 2002, EVA Airways Corporation accounted for approximately
13% of cargo operations revenue. Air Tran Airways and National Airlines,
Inc. represented approximately 25% and 21% of MercFuels revenue,
respectively, and 15% and 13% of consolidated revenue, respectively, for
fiscal 2002. During fiscal 2002, government contract services consisted
entirely of revenues from agencies of the United States Government. No other
customers accounted for over 10% of Mercurys consolidated revenue or 10% of
revenues for any of the four reporting units.

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 18%, 18% and 25%
of consolidated revenues for the years ended June 30, 2002, 2001 and 2000,
respectively.

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In May 1999, Mercury entered into a fuel management contract with
National Airlines, Inc., pursuant to which Mercury began selling fuel to
National Airlines, Inc. and managing their fuel requirement at all National
Airlines, Inc. locations. On December 6, 2000, National Airlines, Inc. filed
for bankruptcy protection. Mercury continues to sell fuel to National
Airlines, Inc. on a secured basis, under the auspices of the bankruptcy
court.

SEASONAL NATURE OF BUSINESS

Mercurys commercial fuel sales, FBOs 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 increased during summer months
due in part to additional commercial and charter flights. MACs cargo
business is lower during the months of January and February and increases
March through December. The cargo business is affected by the patterns of
international trade. Operations at military facilities are not seasonal.

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, the
division 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 air cargo handling business. Generally, FBOs have a minimum
of one competitor at each airport as well as 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, prior
relationship 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. Other than the $3.4 million spent
during the 1999 fiscal year to comply with certain federal mandates regarding
below ground fuel tanks, there have been no material capital expenditures nor
has there been a material negative impact on Mercurys earnings or
competitive position in performing such compliance and related remediation
work. 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. The Company has 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 at a cost of
approximately $78,000 and expects to incur maintenance cost for a period of
between six and 24 months of $4,500 per month. Mercury received notice from
the EPA on August 9, 2001 that the EPA expected Mercury to provide secondary
containment for mobile fuel trucks at its Fort Wayne, Indiana facility.
Mercury is working with the EPA, trade association, and the Airport to
resolve this issue. 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.

7



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##### Table of Contents



EMPLOYEES

As of August 31, 2002, Mercury employed 1,558 full-time and 339 part-time
persons in its following operating units: fuel sales, 40 full-time and
one part-time person; corporate, 38 full-time and two part-time persons;
cargo operations, 454 full-time and 47 part-time persons; FBOs 646
full-time and 46 part-time persons; and government services, 380
full-time and 243 part-time persons. Maytag has collective bargaining
agreements which effect approximately 143 employees in its weather and
base support operations. MAC has collective bargaining agreements which
affect approximately 54 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.

8



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##### Table of Contents






ITEM 2. PROPERTIES.

Listed below are the significant properties leased or owned by Mercury as of June 30, 2002

|                                                                         |  |          |  |            |  |                |  |                                                                      |  |                                                                                            |  |  |  | 
|------------------------------------------------------------------------ |  | -------- |  | ---------- |  | -------------- |  | -------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------ |  |  |  | 
|                                                                         |  | LEASED   |  | ANNUAL     |  | EXPIRATION     |  | ACTIVITY AT                                                          |  | FACILITY                                                                                   |  |  |  | 
|LOCATION                                                                 |  | OR OWNED |  | RENTAL     |  | OF LEASE       |  | FACILITY                                                             |  | DESCRIPTION                                                                                |  |  |  | 
|                                                                         |  |          |  |            |  |                |  |                                                                      |  |                                                                                            |  |  |  | 
|CORPORATE HEADQUARTERS                                                   |  |          |  |            |  |                |  |                                                                      |  |                                                                                           
|5456 McConnell
Los Angeles, California (3)                               |  | 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. offices                                                                      
|HARTSFIELD ATLANTA INTL
AIRPORT                                         |  |          |  |            |  |                |  |                                                                      |  |                                                                                           
|Cargo Building A
South Cargo Area                                      |  | Leased   |  | $924,000   |  | December
2010  |  | Landlord, cargo
handling warehouse
with offices                      |  | 60,597 sq. ft. of cargo warehouse
facility with 9,785 of office
space on 2.4 acres of land
|LOS ANGELES INTL AIRPORT                                                |  |          |  |            |  |                |  |                                                                      |  |                                                                                           
|6851 W. Imperial Highway,
Los Angeles, CA                                |  | Leased   |  | $754,000   |  | 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   |  | $2,242,000 |  | June
2006      |  | Cargo handling
warehouse with offices                                |  | 207,000 sq.ft. 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                                          |  |          |  |            |  |                |  |                                                                      |  |                                                                                           
|Concession 6
East Hurontario St. (2)                                     |  | Leased   |  | $121,800   |  | November
2010  |  | Cargo handling
warehouse with offices                                |  | 5,447 sq. ft. office space and
48,360 sq. ft. of warehouse space                          
|DORVAL INTL AIRPORT                                                     |  |          |  |            |  |                |  |                                                                      |  |                                                                                           
|800 Stuart Graham Blvd. South
Dorval, Quebec (3)                         |  | Leased   |  | $489,000   |  | 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   |  | $83,000    |  | November
2005  |  | 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
2008     |  | Landlord, service and
refueling of
commercial and private            |  | Offices and hangars on 14.4
acres                                                         
|2161 East Avion
Ontario, CA                                              |  | Leased   |  | $11,020    |  | December
2005  |  | Aircraft parking                                                     |  | 24,000 sq. ft. of hanger space                                                            
|1150 South Vineyard Avenue
Ontario, CA                                   |  | Leased   |  | $250,000   |  | Month-to-Month |  | Landlord, ramp,
parking, office and
hangar space                     |  | 32,400 sq. ft. of hangar, shop
area and office space. Site, ramp
and parking on 5.4 acres.
|BAKERSFIELD AIRPORT                                                      |  |          |  |            |  |                |  |                                                                      |  |                                                                                           
|1550 Skyway Drive
Bakersfield, CA (3)                                    |  | Leased   |  | $137,000   |  | May
2020       |  | Landlord, service and
refueling of
commercial and private
Aircraft   |  | Executive offices, terminal and
hangars on 6.14 acres                                     
|BURBANK-GLENDALE-PASADENA AIRPORT                                        |  |          |  |            |  |                |  |                                                                      |  |                                                                                           
|4301/4405/4407/4409/4411/4531
10660/10670/10700/10750
/10760/10800/10820 |  | Leased   |  | $1,745,000 |  | 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                                                              

9



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|                                                         |  |                             |  |          |  |                 |  |                                                                                  |  |                                                                            |  |  |  | 
|-------------------------------------------------------- |  | --------------------------- |  | -------- |  | --------------- |  | -------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------- |  |  |  | 
|                                                         |  | LEASED                      |  | ANNUAL   |  | EXPIRATION      |  | ACTIVITY AT                                                                      |  | FACILITY                                                                   |  |  |  | 
|LOCATION                                                 |  | OR OWNED                    |  | RENTAL   |  | OF LEASE        |  | FACILITY                                                                         |  | DESCRIPTION                                                                |  |  |  | 
|                                                         |  |                             |  |          |  |                 |  |                                                                                  |  |                                                                            |  |  |  | 
|6920 Vineland Ave. No.
Hollywood, CA                     |  | Leased                      |  | $164,000 |  | 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                      |  | $161,160 |  | August
2007     |  | Terminal, office, and
hangars                                                    |  | 148,000 sq. ft. of Offices,
hangars and parking area                      
|                                                        
|6070 Perimeter.
N. Charleston, SC                        |  | Leased                      |  | $11,680  |  | Month-to-month  |  | Building and hanger
space                                                        |  | Hangars, building, shop
facilities and parking areas                      
|                                                        
|Johns Island Airport
2700 Fort Trenholm
Johns Island, SC |  | Leased                      |  | $26,130  |  | May
2004        |  | Terminal, office, and
hanger space                                               |  | consisting of 6.6 acres 285,200
sq. feet on 6.54 acres                    
|                                                        
|SANTA BARBARA MUNICIPAL
AIRPORT                          |  |                             |  |          |  |                 |  |                                                                                  |  |                                                                           
|404 Moffet Road
Goleta, CA                               |  | Leased                      |  | $9,360   |  | 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                      |  | $56,000  |  | Month-to-month  |  | Building space                                                                   |  | 9,360 sq. ft of building space                                            
|                                                        
|204 Moffett Place
Goleta, CA                             |  | Leased                      |  | $28,920  |  | Month-to-month  |  | Building space and
parking spaces                                                |  | 10,370 sq. ft. office space and
10 parking spaces                         
|Building 121                                             |  |                             |  |          |  |                 |  |                                                                                  |  |                                                                           
|302 Moffet Place
Goleta, CA                              |  | Leased                      |  | $39,580  |  | Month-to-month  |  | Building space                                                                   |  | 3,120 sq. ft office space                                                 
|                                                        
|Building 122                                             |  |                             |  |          |  |                 |  |                                                                                  |  |                                                                           
|327 Firestone Rd.
Goleta, CA                             |  | Leased                      |  | $31,000  |  | June
2032       |  | Fuel Farm                                                                        |  |                                                                           
|                                                        
|FRESNO YOSEMITE INTL AIRPORT                            |  |                             |  |          |  |                 |  |                                                                                  |  |                                                                           
|5045 E. Anderson Avenue
Fresno, CA                       |  | Leased                      |  | $74,000  |  | April
2020      |  | Landlord, service and
refueling of
commercial and private
aircraft
aircraft      |  | 8.47 acres                                                                
|                                                        
|5045 E. Anderson Avenue
Fresno, CA                       |  | Leased                      |  | $67,000  |  | August
2006     |  | Terminal, office and
hangar facility                                             |  | Hangars and offices on 2.16 acres                                         
|                                                        
|5045 E. Anderson Avenue
Fresno, CA                       |  | Leased                      |  | $115,000 |  | May
2005        |  | Hangar and commercial
office space                                               |  | 22,000 sq. ft. 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 (3)                        |  | Leased                      |  | $238,000 |  | November
2006   |  | Landlord, service and
refueling of
commercial and private
aircraft.              |  | 164,288 sq.ft. of offices, hangars,
and land on 24.89 acres               
|RENO CANNON INTL AIRPORT                                |  |                             |  |          |  |                 |  |                                                                                  |  |                                                                           
|655 So. Rock Blvd. Reno, NV                              |  | Building
owned, land
leased |  | $13,000  |  | 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
|                                                        
|1500 Terminal Way
Reno, NV                               |  | Leased                      |  | $21,215  |  | August
2007     |  | Ground Support
Equipment Service Bay                                             |  | 1,247 sq. ft. of office space and
2,087 sq. ft. of warehouse              

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|                                                                                           |  |          |  |          |  |                |  |                                                                    |  |                                                           |  |  |  | 
|------------------------------------------------------------------------------------------ |  | -------- |  | -------- |  | -------------- |  | ------------------------------------------------------------------ |  | --------------------------------------------------------- |  |  |  | 
|                                                                                           |  | LEASED   |  | ANNUAL   |  | EXPIRATION     |  | ACTIVITY AT                                                        |  | FACILITY                                                  |  |  |  | 
|LOCATION                                                                                   |  | OR OWNED |  | RENTAL   |  | OF LEASE       |  | FACILITY                                                           |  | DESCRIPTION                                               |  |  |  | 
|                                                                                           |  |          |  |          |  |                |  |                                                                    |  |                                                           |  |  |  | 
|ADDISON AIRPORT
4400 Glenn Curtiss Dr.
Dallas, TX (3)                                      |  | 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
(3)                                                      |  | Leased   |  | $52,000  |  | 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
(3)                                                      |  | Leased   |  | $8,000   |  | July
2021      |  | Landlord, service and
refueling of
commercial and private
aircraft |  | 12,600 sq. ft. of offices and
hangar space               
|                                                                                          
|4400 Glenn Curtis Dr.
Dallas, TX (3)                                                       |  | Leased   |  | $28,000  |  | Month-to-month |  | Fuel farm                                                          |  |                                                          
|                                                                                          
|CORPUS CHRISTI
355 Pinson Drive
Corpus Christi, TX (3)                                     |  | 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      
|                                                                                          
|NASHVILLE INTL
AIRPORT635 Hangar Lane
Nashville, TN                                       |  | Leased   |  | $247,000 |  | June
2012      |  | Landlord, service and
refueling of
commercial and private
aircraft |  | Office and hangars on 38.69 acres                        
|                                                                                          
|JACKSON INTL AIRPORT110 S. Hangar Drive
Jackson, MS (3)                                   |  | Leased   |  | $107,000 |  | 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
Tulsa, OK                                    |  | 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   |  | $22,000  |  | April
2019     |  | Landlord, service and
refueling of
commercial and private
Aircraft |  | Land consisting of 5.23 acres                            
|                                                                                          
|7500 E. Apache
Hangar 22 & 26
Tulsa, OK                                                    |  | Leased   |  | $62,000  |  | June
2011      |  | Landlord, service and
refueling of
commercial and private
Aircraft |  | Office and hangars on 5.23 acres                         
|                                                                                          
|7500 E. Apache
Hangar 18
Tulsa, OK                                                         |  | Leased   |  | $11,000  |  | 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
Hangar 37,41, 41A Building
28 |  | Leased   |  | $43,650  |  | December
2003  |  | 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
Hangar 40, 43                                    |  | Leased   |  | $66,700  |  | December
2003  |  | 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
Hangar 42                                        |  | Leased   |  | $54,900  |  | 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
Hangar 45                                        |  | Leased   |  | $40,400  |  | 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
Hangar D                                         |  | Leased   |  | $8,600   |  | August
2003    |  | Landlord, service and
refueling of
commercial and private
aircraft |  | Aircraft hangar space consisting
of 4,000 sq. ft.        

11



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|                                                              |  |          |  |          |  |                |  |                                                                    |  |                                                                  |  |  |  | 
|------------------------------------------------------------- |  | -------- |  | -------- |  | -------------- |  | ------------------------------------------------------------------ |  | ---------------------------------------------------------------- |  |  |  | 
|                                                              |  | LEASED   |  | ANNUAL   |  | EXPIRATION     |  | ACTIVITY AT                                                        |  | FACILITY                                                         |  |  |  | 
|LOCATION                                                      |  | OR OWNED |  | RENTAL   |  | OF LEASE       |  | FACILITY                                                           |  | DESCRIPTION                                                      |  |  |  | 
|                                                              |  |          |  |          |  |                |  |                                                                    |  |                                                                  |  |  |  | 
|Fort Wayne-Allen County
Airport Authority
T-Hangar            |  | Leased   |  | $2,100   |  | 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
Parcel No. 1,2, & 3 |  | Leased   |  | $21,400  |  | 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   |  | $100     |  | December
2005  |  | Landlord, service and
refueling of
commercial and private
aircraft |  | Fuel Farm Consisting of 57,000
sq. ft.                          
|BIRMINGHAM AIRPORT                                            |  |          |  |          |  |                |  |                                                                    |  |                                                                 
|Birmingham Airport
Parcel 1-6&9                               |  | Leased   |  | $140,400 |  | August
2021    |  | Landlord, service and
refueling of
commercial and private
aircraft |  | Office, hangar, storage, and ramp
space on 29.30 acres          
|Parcel G                                                    |  | Leased   |  |          |  | August
2021    |  | Fuel Farm                                                          |  |                                                                 



---

|(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 $298,000 at June 30, 2002
repayable with interest at 9% in equal monthly installments of
approximately $4,450, the last payment due May 2010.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Term date is subject to change upon completion of tenant improvements.                                                                                                                                                                                          
|   
|   
|   
|   
|(3) |  | The leasehold interest is subject to security interest granted to
Fleet National Bank f/k/a Bank Boston.                                                                                                                                                        

At most commercial airports where Mercury operates FBOs, Mercury maintains
its own fuel storage capabilities. Effective January 1, 2000, Mercury has
replaced, retrofit or closed most of its existing underground fuel storage
facilities in order to comply with applicable federal regulations. See
Business Environmental Matters and Managements Discussion and Analysis of
Financial Condition and Results of Operations Liquidity and Capital
Resources. The following table summarizes Mercurys existing fuel storage
facilities.

|                              |  |                              |  | 
|----------------------------- |  | ---------------------------- |  | 
|                              |  | Approximate                 
|                              |  | Capacity                    
|Location                      |  | (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 used as an alternative.                                 
|    
|    
|    
|    
|(2)  |  | Facility owned by a third-party.                                             
|    
|    
|    
|    
|(3)  |  | Presently use a third party tank form consortium, for balance of requirement.

12



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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.

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.
Mercury believes that this counterclaim is without merit, and accordingly, does not
believe this matter will have a significant impact on it financial position or
operating results.

On April 3, 2001 Mercury received notice of an action filed by Skylink
Express, Inc. in the Superior Court of Justice Ontario, Canada against Excel
Cargo, Inc. and others for damages to aircraft occurring on November 30, 1999
and January 10, 2000 at Mirabel International Airport Quebec for a total amount
of $2.5 million Canadian ($1.65 million U.S.) plus interest and fees. Mercury
does not believe the outcome of this claim will have a significant impact on
its financial position or operating results.

On November 30, 2001, the Company received notice of a counter-complaint
filed by UPS against the Company and a third party seeking indemnification and
reimbursement in the amount of $470,000 for the costs incurred as a result of a
fuel spill at the Ontario, California Airport. The Company has provided a
response to UPS denying such claim and on September 28, 2001, filed a lawsuit
seeking reimbursement for damages. Mercury does not believe the outcome of
this claim will have a significant impact on its financial position or
operating results.

On May 1, 2002, Mercury received a Notice of Violation (NOV) for its
Fort Wayne, Indiana facility alleging that Mercurys Spill Prevention, Control
and Countermeasure Plan (SPCC) does not meet certain federal regulatory
guidelines. Specifically, the EPA alleged that Mercurys SPCC failed to
provide for proper parking, secondary containment, and proper drainage of its
refueler trucks. The EPA has requested that Mercury submit a written response
to its allegations. The Company is in the process of responding to the EPA.
Mercury intends to fully comply with all EPA requirements.




ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.




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 closing sale prices per share of Common Stock

|                                 |  |      |      |     |  |   |      | 
|-------------------------------- |  | ---- | ---- | --- |  | - | ---- | 
|                                 |  | High |      | Low
|                                 |  |      |      |    
|FISCAL 2002:                     |  |      |      |     |  |   |      | 
|Quarter ended June 30, 2002      |  | $    | 4.60 |     |  | $ | 4.55 | 
|Quarter ended March 31, 2002     |  |      | 4.45 |     |  |   | 4.45 | 
|Quarter ended December 31, 2001  |  |      | 5.10 |     |  |   | 4.97 | 
|Quarter ended September 30, 2001 |  |      | 5.10 |     |  |   | 4.65 | 
|FISCAL 2001:                     |  |      |      |     |  |   |      | 
|Quarter ended June 30, 2001      |  | $    | 7.39 |     |  | $ | 5.37 | 
|Quarter ended March 31,2001      |  |      | 6.95 |     |  |   | 4.75 | 
|Quarter ended December 31, 2000  |  |      | 6.50 |     |  |   | 4.56 | 
|Quarter ended September 30, 2000 |  |      | 7.19 |     |  |   | 6.00 | 

As of September 18, 2001 there were approximately 333 holders of record.

13



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##### Table of Contents






ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data for each of the five
years ended June 30, 2002 have been derived from the audited consolidated
financial statements of Mercury. 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 Form 10-K.

|                                             |                                            |      |                                               |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |        | 
|-------------------------------------------- | ------------------------------------------ | ---- | --------------------------------------------- | ------ | - | ---- | ------- | ------ | - | ---- | ------- | ------ | - | - | ------- | ------ | - | - | ------- | ------ | 
|                                             |                                            |      | YEAR ENDED JUNE 30,                          
|                                             |                                            |      |                                              
|INCOME STATEMENT DATA                        |                                            | 2002 |                                               | 2001   |   | 2000 |         | 1999   |   | 1998
|                                             |                                            |      |                                               |        |   |      |         |        |   |     
|                                             |                                            |      | (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
|Sales and Revenues                           |                                            | $    | 383,342                                       |        |   | $    | 478,446 |        |   | $    | 334,333 |        |   | $ | 218,272 |        |   | $ | 238,490 |       
|Costs and Expenses                           |                                            |      | 355,070                                       |        |   |      | 444,181 |        |   |      | 300,596 |        |   |   | 187,052 |        |   |   | 210,562 |       
|                                             |                                            |      |                                               |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|                                             | Gross Margin                               |      |                                               | 28,272 |   |      |         | 34,265 |   |      |         | 33,737 |   |   |         | 31,220 |   |   |         | 27,928 | 
|Selling, General and Administrative Expenses |                                            |      | 11,518                                        |        |   |      | 7,929   |        |   |      | 7,223   |        |   |   | 7,118   |        |   |   | 6,161   |       
|Provision for Bad Debts                      |                                            |      | 1,358                                         |        |   |      | 3,425   |        |   |      | 5,408   |        |   |   | 1,721   |        |   |   | 1,971   |       
|Depreciation and Amortization                |                                            |      | 9,213                                         |        |   |      | 9,331   |        |   |      | 8,485   |        |   |   | 8,297   |        |   |   | 4,982   |       
|Loss Resulting from Bankruptcy of a Customer |                                            |      |                                              |        |   |      | 300     |        |   |      |        |        |   |   |        |        |   |   | 7,050   |       
|Gain on sale of facilities and property      |                                            |      | (8,929                                        | )      |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|Interest Expense                             |                                            |      | 5,710                                         |        |   |      | 7,184   |        |   |      | 6,293   |        |   |   | 4,379   |        |   |   | 3,540   |       
|Other (Income) Expense, net                  |                                            |      | 873                                           |        |   |      | (48     | )      |   |      | (133    | )      |   |   | (178    | )      |   |   | (589    | )     
|                                             |                                            |      |                                               |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|Income before Income Taxes                   |                                            |      | 8,529                                         |        |   |      | 6,144   |        |   |      | 6,461   |        |   |   | 9,883   |        |   |   | 4,813   |       
|Provision for Income Taxes                   |                                            |      | 3,326                                         |        |   |      | 2,397   |        |   |      | 2,520   |        |   |   | 3,854   |        |   |   | 1,877   |       
|                                             |                                            |      |                                               |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|Income from continuing operations            |                                            |      | 5,203                                         |        |   |      | 3,747   |        |   |      | 3,941   |        |   |   | 6,029   |        |   |   | 2,936   |       
|(Loss) income from discontinued operations   |                                            |      | (170                                          | )      |   |      | (858    | )      |   |      | (933    | )      |   |   | 393     |        |   |   | 91      |       
|Loss on sale of discontinued operations      |                                            |      |                                              |        |   |      | (477    | )      |   |      |        |        |   |   |        |        |   |   |        |       
|Extraordinary Item                           |                                            |      |                                              |        |   |      |        |        |   |      | (979    | )      |   |   | (483    | )      |   |   |        |       
|                                             |                                            |      |                                               |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|Net Income                                   |                                            | $    | 5,033                                         |        |   | $    | 2,412   |        |   | $    | 2,029   |        |   | $ | 5,939   |        |   | $ | 3,027   |       
|                                             |                                            |      |                                               |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|Net Income Per Share:                        |                                            |      |                                               |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|Basic:                                       |                                            |      |                                               |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|                                             | From continuing operations                 |      | $                                             | 0.79   |   |      | $       | 0.57   |   |      | $       | 0.60   |   |   | $       | 0.90   |   |   | $       | 0.42   | 
|                                             | (Loss) income from discontinued operations |      |                                               | (0.02  | ) |      |         | (0.13  | ) |      |         | (0.14  | ) |   |         | 0.06   |   |   |         |       | 
|                                             | Loss on sale of discontinued operations    |      |                                               |       |   |      |         | (0.07  | ) |      |         |       |   |   |         |       |   |   |         |       | 
|                                             | Extraordinary item                         |      |                                               |       |   |      |         |       |   |      |         | (0.15  | ) |   |         | (0.07  | ) |   |         |       | 
|                                             |                                            |      |                                               |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|                                             | Net income                                 |      | $                                             | 0.77   |   |      | $       | 0.37   |   |      | $       | 0.31   |   |   | $       | 0.89   |   |   | $       | 0.42   | 
|                                             |                                            |      |                                               |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|Diluted:                                     |                                            |      |                                               |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|                                             | From continuing operations                 |      | $                                             | 0.78   |   |      | $       | 0.56   |   |      | $       | 0.55   |   |   | $       | 0.69   |   |   | $       | 0.38   | 
|                                             | (Loss) income from discontinued operations |      |                                               | (0.03  | ) |      |         | (0.13  | ) |      |         | (0.12  | ) |   |         | 0.04   |   |   |         |       | 
|                                             | Loss on sale of discontinued operations    |      |                                               |       |   |      |         | (0.07  | ) |      |         |       |   |   |         |       |   |   |         |       | 
|                                             | Extraordinary item                         |      |                                               |       |   |      |         |       |   |      |         | (0.13  | ) |   |         | (0.05  | ) |   |         |       | 
|                                             |                                            |      |                                               |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|                                             | Net income                                 |      | $                                             | 0.75   |   |      | $       | 0.36   |   |      | $       | 0.30   |   |   | $       | 0.68   |   |   | $       | 0.38   | 
|                                             |                                            |      |                                               |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       

|                                                               |  |             |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|-------------------------------------------------------------- |  | ----------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                                               |  | AT JUNE 30,
|                                                               |  |            
|BALANCE SHEET DATA                                             |  | 2002        |         | 2001 |  | 2000 |         | 1999 |  | 1998
|                                                               |  |             |         |      |  |      |         |      |  |     
|Total Assets                                                   |  | $           | 134,686 |      |  | $    | 152,488 |      |  | $    | 135,131 |  |  | $ | 126,534 |  |  | $ | 111,118 | 
|Short-Term Debt (including current portion of
long- term debt) |  |             | 14,677  |      |  |      | 7,461   |      |  |      | 6,936   |  |  |   | 6,806   |  |  |   | 3,732   | 
|Long-Term Debt                                                 |  |             | 14,351  |      |  |      | 44,560  |      |  |      | 42,358  |  |  |   | 44,285  |  |  |   | 30,619  | 
|Subordinated Debt-current                                      |  |             | 23,179  |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Subordinated Debt                                              |  |             |        |      |  |      | 23,030  |      |  |      | 22,844  |  |  |   |        |  |  |   |        | 
|Convertible Subordinated Debentures                            |  |             |        |      |  |      |        |      |  |      |        |  |  |   | 19,852  |  |  |   | 28,090  | 
|Dividends per Common Share                                     |  |             |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   | .013    | 

14



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##### Table of Contents






ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

RESULTS OF OPERATIONS  FISCAL 2002, 2001 AND 2000

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,
|                             |                |   |                    
|                             |                |   | 2002                |       | 2001     |  | 2000  
|                             |                |   |                     |       |          |  |       
|                             |                |   |                     |       |          |  | % of   |     |          |   |        |       | % of     |  |      |     |   |   | % of 
|                             |                |   |                     |       |          |  | Total  |     |          |   |        |       | Total    |  |      |     |   |   | Total
|                             |                |   | Amount              |       | Revenues |  | Amount |     | Revenues |   | Amount |       | Revenues
|                             |                |   |                     |       |          |  |        |     |          |   |        |       |         
|                             |                |   | ($ in millions)    
|Revenues:                    |                |   |                     |       |          |  |        |     |          |   |        |       |          |  |      |     |   |   |       |       |  |  |      |    
|Fuel Sales                   |                | $ | 232.6               |       |          |  | 60.7   | %   |          | $ | 318.8  |       |          |  | 66.6 | %   |   | $ | 202.8 |       |  |  | 60.7 | %  
|FBOs                         |                |   | 94.4                |       |          |  | 24.6   |     |          |   | 99.5   |       |          |  | 20.8 |     |   |   | 73.7  |       |  |  | 22.0 |    
|Cargo Operations             |                |   | 28.1                |       |          |  | 7.3    |     |          |   | 31.3   |       |          |  | 6.6  |     |   |   | 32.5  |       |  |  | 9.7  |    
|Government Contract Services |                |   | 28.2                |       |          |  | 7.4    |     |          |   | 28.8   |       |          |  | 6.0  |     |   |   | 25.3  |       |  |  | 7.6  |    
|                             |                |   |                     |       |          |  |        |     |          |   |        |       |          |  |      |     |   |   |       |       |  |  |      |    
|                             | Total Revenues |   | $                   | 383.3 |          |  |        | 100 | %        |   | $      | 478.4 |          |  |      | 100 | % |   | $     | 334.3 |  |  |      | 100 | %
|                             |                |   |                     |       |          |  |        |     |          |   |        |       |          |  |      |     |   |   |       |       |  |  |      |    

|                             |                    |   |        |      |          |  |        |     |          |   |        |      |          |  |      |     |   |   |      |      |  |  |      |      |  
|---------------------------- | ------------------ | - | ------ | ---- | -------- |  | ------ | --- | -------- | - | ------ | ---- | -------- |  | ---- | --- | - | - | ---- | ---- |  |  | ---- | ---- | -
|                             |                    |   |        |      |          |  | % of   |     |          |   |        |      | % of     |  |      |     |   |   | % of
|                             |                    |   |        |      |          |  | Unit   |     |          |   |        |      | Unit     |  |      |     |   |   | Unit
|                             |                    |   | Amount |      | Revenues |  | Amount |     | Revenues |   | Amount |      | Revenues
|                             |                    |   |        |      |          |  |        |     |          |   |        |      |         
|Gross Margin (1):            |                    |   |        |      |          |  |        |     |          |   |        |      |          |  |      |     |   |   |      |      |  |  |      |     
|Fuel Sales                   |                    | $ | 6.6    |      |          |  | 2.8    | %   |          | $ | 7.4    |      |          |  | 2.3  | %   |   | $ | 7.9  |      |  |  | 3.9  | %   
|FBOs                         |                    |   | 13.5   |      |          |  | 14.3   |     |          |   | 15.0   |      |          |  | 15.1 |     |   |   | 11.5 |      |  |  | 15.6 |     
|Cargo Operations             |                    |   | 1.4    |      |          |  | 5.0    |     |          |   | 6.1    |      |          |  | 19.4 |     |   |   | 9.3  |      |  |  | 28.6 |     
|Government Contract Services |                    |   | 6.8    |      |          |  | 24.1   |     |          |   | 5.7    |      |          |  | 19.7 |     |   |   | 5.0  |      |  |  | 19.9 |     
|                             |                    |   |        |      |          |  |        |     |          |   |        |      |          |  |      |     |   |   |      |      |  |  |      |     
|                             | Total Gross Margin |   | $      | 28.3 |          |  |        | 7.4 | %        |   | $      | 34.2 |          |  |      | 7.2 | % |   | $    | 33.7 |  |  |      | 10.1 | %
|                             |                    |   |        |      |          |  |        |     |          |   |        |      |          |  |      |     |   |   |      |      |  |  |      |     

|                                                      |  |        |      |          |  |        |      |          |  |        |      |          |  |  |      |   |  |       |      |   |  |  |      |  
|----------------------------------------------------- |  | ------ | ---- | -------- |  | ------ | ---- | -------- |  | ------ | ---- | -------- |  |  | ---- | - |  | ----- | ---- | - |  |  | ---- | -
|                                                      |  |        |      |          |  | % of   |      |          |  |        |      | % of     |  |  |      |   |  | % of 
|                                                      |  |        |      |          |  | Total  |      |          |  |        |      | Total    |  |  |      |   |  | Total
|                                                      |  | Amount |      | Revenues |  | Amount |      | Revenues |  | Amount |      | Revenues
|                                                      |  |        |      |          |  |        |      |          |  |        |      |         
|Selling, General and
Administrative                   |  | $      | 11.5 |          |  |        | 3.0  | %        |  | $      | 7.9  |          |  |  | 1.7  | % |  | $     | 7.2  |   |  |  | 2.2  | %
|Provision for Bad Debts                               |  |        | 1.4  |          |  |        | 0.4  |          |  |        | 3.4  |          |  |  | 0.7  |   |  |       | 5.4  |   |  |  | 1.6  |  
|Depreciation and Amortization                         |  |        | 9.2  |          |  |        | 2.4  |          |  |        | 9.3  |          |  |  | 1.9  |   |  |       | 8.5  |   |  |  | 2.5  |  
|Interest Expense and Other                            |  |        | 6.6  |          |  |        | 1.7  |          |  |        | 7.5  |          |  |  | 1.6  |   |  |       | 6.2  |   |  |  | 1.8  |  
|(Gain) on sale of facilities &
property               |  |        | (8.9 | )        |  |        | (2.3 | )        |  |        |      |          |  |  |      |   |  |       |      |   |  |  |      |  
|                                                      |  |        |      |          |  |        |      |          |  |        |      |          |  |  |      |   |  |       |      |   |  |  |      |  
|Income from continuing operations
before Income Taxes |  |        | 8.5  |          |  |        | 2.2  |          |  |        | 6.1  |          |  |  | 1.3  |   |  |       | 6.4  |   |  |  | 1.9  |  
|Provision for Income Taxes                            |  |        | 3.3  |          |  |        | .8   |          |  |        | 2.4  |          |  |  | 0.5  |   |  |       | 2.5  |   |  |  | 0.8  |  
|                                                      |  |        |      |          |  |        |      |          |  |        |      |          |  |  |      |   |  |       |      |   |  |  |      |  
|Income from continuing operations                     |  |        | 5.2  |          |  |        | 1.4  |          |  |        | 3.7  |          |  |  | 0.8  |   |  |       | 3.9  |   |  |  | 1.2  |  
|(Loss) income from discontinued
operations            |  |        | (0.2 | )        |  |        | (0.1 | )        |  |        | (0.8 | )        |  |  | (0.2 | ) |  |       | (0.9 | ) |  |  | (0.3 | )
|Loss on sale of discontinued
Operations               |  |        |     |          |  |        |     |          |  |        | (0.5 | )        |  |  | (0.1 | ) |  |       |      |   |  |  |      |  
|Extraordinary Items                                   |  |        |     |          |  |        |     |          |  |        |     |          |  |  |     |   |  |       | (1.0 | ) |  |  | (0.3 | )
|                                                      |  |        |      |          |  |        |      |          |  |        |      |          |  |  |      |   |  |       |      |   |  |  |      |  
|Net Income                                            |  | $      | 5.0  |          |  |        | 1.3  | %        |  | $      | 2.4  |          |  |  | 0.5  | % |  | $     | 2.0  |   |  |  | 0.6  | %
|                                                      |  |        |      |          |  |        |      |          |  |        |      |          |  |  |      |   |  |       |      |   |  |  |      |  



---

|(1) |  | Gross Margin as used here and throughout Managements Discussion and
Analysis includes certain selling, general and administration 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, 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 20% 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
and due to the reduced business levels attributed to the aftermath of the
tragic events of September 11, 2001. Gross margin in FY 2002 was $28.3 million,
representing a decline of $5.9 million, or 17.3% from the Gross Margin realized
in FY 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 Cargo operations.

The Companys FBO business had revenue of $94.4 million in FY 2002, a
decrease of $5.1 million or 5.1% from the FY 2001 revenue level of $99.5
million. The revenue for FY 2002 was based on sales volume of 36.0 million
gallons compared to a sales volume in FY 2001 of 36.4 million gallons. The
average realized sales price in FY 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 FY 2001 of $1.819 per gallon and an average

15



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##### Table of Contents



sales margin of $0.717 per gallon. The sales volume decline in FY 2002 as
compared to FY 2001 of 378 thousand gallons, or 1.0%, was primarily due to
airport closures following September 11, 2001. It is estimated that the FBO
sales volume declined approximately 400 thousand gallons during general
aviation shutdown.

The FBO business generated gross margin of $13.5 million in FY 2002, a
decrease of $1.5 million or 10% from the gross margin of $15.0 million
generated in FY 2001. The lower gross margin is primarily attributed to the
lower sales volume and higher operating expenses.

In June, the Company sold its FBO operation at Bedford, Massachusetts to
Signature Flight Support Corp. resulting in a pre-tax gain of $9.0 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 the Companys government contract services business was
$28.2 million in FY 2002, a decrease of $0.6 million or 2.0% from the FY 2001
revenue level of $28.8 million. The major decrease in government contract
sales was the loss of revenue from the Yokota, Japan contract. This contract
represented 17% of revenues during the prior year. In addition revenue from
Weather Data Services contracts decreased during the current year. 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 Maytag fiscal 2002 revenues.

The government contract services business had gross margin of $6.8 million
in FY 2002, an increase of $1.1 million or 19.3% from the gross margin of $5.7
million realized in FY 2001. Despite the loss of $1.3 million in gross margin
from the Yokota contract, margins on other air terminal contract increased $1.5
million from the prior year, primarily due to the Kuwait contract. In
addition, base operating support contracts gross margin increased $1.0 million
from the prior year.

MercFuel, the Companys fuel sales business generated revenue in FY 2002
of $232.6 million, a decrease of $86.2 million or 27.0% from FY 2001 revenue of
$318.8 million. The decline in revenue was due to both the lower average sales
realization and lower volume. Fuel sales volume for FY 2002 was 287.7 million
gallons, a decrease of 21.7 million gallons from FY 2001. The average sales
price in 2002 was $0.809 per gallon, a decrease of 21.5% from FY 2001 average
sales price of $1.031 per gallon. The lower 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.

Despite the 27.0% decline in revenue, the fuel sales business had gross
margin of $6.6 million in FY 2002, a decline of $0.8 million from the 2001
gross margin of $7.4 million. The average sales margin of 3.8 cents per gallon
in 2002 was virtually unchanged from fiscal 2001.

Cargo operations had revenue of $28.1 million in FY 2002, a decrease of
$3.2 million or 10.3% from the FY 2001 revenue of $31.3 million. The Cargo
operations segment experienced revenue declines in all of its areas of
operations in 2002 as compared to 2001 as air cargo traffic declined as a
result of the worldwide economic slowdown and the aftermath of September 11,
2001.

The decline in revenue and general air cargo business activity resulted in
lower gross margin for the Air Cargo segment to $1.4 million in 2002, a
decrease of $4.7 million or 77.7% from last years gross margin of $6.1
million. The cargo handling business realized gross margin of $1.8 million in
2002, a decline of $2.6 million or 59% from last years gross margin of $4.4
million, as volume of activity declined and general surplus of storage capacity
in the marketplace resulted in pricing competition among cargo handlers. 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 2001 as carriers
reduced flights in response to declining air cargo traffic. The Company also
incurred start-up expenses of $0.4 million associated with its Mercury World
Cargo business in 2002 in addition to administrative expenses for cargo
operations of $1.6 million in fiscal 2002.

Bad debt expenses in 2002 totaled $1.4 million or 0.3% of total revenue.
This represents a reduction of $2.1 million of expense from 2001s bad debt
expense of $3.4 million which included $1.6 million associated with a legal
settlement with WPAI and $1.0 million associated with Tower Aviation both
related to alleged preferential treatment claims.

Selling, general and administration (G&A) expenses increased in 2002 to
$11.5 million, an increase of $3.6 million or 45.6% from the 2001 expense of
$7.9 million. The increase in Corporate and 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 of $1.0 million associated with
the formation and aborted 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 was made to abort the
spin-off after the September 11, 2001 incident.

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Depreciation and Amortization expense in 2002 was $9.2 million, a decrease
of $0.1 million from 2001. The lower depreciation expense is attributed to the
sale of the Companys corporate headquarters in 2002.

Interest expense for the 2002 fiscal year was $5.7 million, a decrease of
$1.5 million or 20.5% from the interest expense incurred in 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.

Fiscal Year Ended June 30, 2001 Compared to Fiscal Year Ended June 30, 2000

Revenue increased 43.1% to $478.4 million in fiscal 2001 from $334.3
million in fiscal 2000 due to higher fuel prices and higher volume of fuel
sold. Gross margin increased 1.5% to $34.9 million in fiscal 2001 from $34.4
million in fiscal 2000.

Revenue from fuel sales represented 66.6% of total revenue in fiscal 2001
compared to 60.7% of total revenue in fiscal 2000. Revenue from fuel sales
increased 57.1% to $318.8 million in fiscal 2001 from $202.8 million in fiscal
2000. The increase in revenue from fuel sales was due to an increase of 18% in
the average price of fuel sold and an increase of 33% in the volume of fuel
sold. Volume increased in the current year due to a significant new customer
added in September 2000. Gross margin from fuel sales decreased by 5.0% to
$7.4 million in fiscal 2001 from $7.9 million in fiscal 2000 due to higher
operating expenses primarily related to legal and professional fees associated
with customer bankruptcy litigation and costs associated with the proposed
distribution. Revenues and gross margin from fuel sales includes the activities
of Mercurys contract fueling business.

Revenue from FBOs increased in fiscal 2001 by 35.0% to $99.5 million from
$73.7 million in fiscal 2000. The increase in revenue in fiscal 2001 was
primarily due to the addition of FBOs in Birmingham, Alabama in September 2000
and Fort Wayne, Indiana in May 2000 in addition to higher fuel prices. Gross
margin increased 30.3% in fiscal 2001 to $15.0 million from $11.5 million in
fiscal 2000 based on higher revenues. Gross margin as a percentage of revenue
decreased in fiscal 2001 to 15.1% from 15.6% in fiscal 2000 primarily due to
higher fuel prices.

Revenue from Cargo operations decreased 3.5% in fiscal 2001 to $31.3
million from $32.5 million in fiscal 2000. The decrease was primarily
attributable to a reduction in space brokerage revenue, primarily related to
the Tower Air bankruptcy which occurred during the third quarter of fiscal
2000, and partially offset by higher handling revenue. Gross margin decreased
34.5% in fiscal 2001 to $6.1 million from $9.3 million in fiscal 2000,
primarily due to lower space brokerage revenue and higher cargo handling costs.

Revenue from government contract services increased 13.8% to $28.8 million
from $25.3 million in the year ago period. The increase in revenues from
government contract services was primarily due to the addition of new contracts
during the last twelve months and higher revenue from the Yokota, Japan
contract. Partially offsetting this were two refueling contracts lost and
lower Weather Observation and Forecasting revenue, based on a lower number of
contracts. Gross margin from government contract services in the current
period increased 12.7% to $5.7 million from $5.0 million in fiscal year 2000
due to higher revenues. A significant contract, Yokota, Japan, which provided
$5.1 million of revenue or 17.6% of Maytags total revenues during fiscal year
2001, terminated in September 2001 and was not renewed.

Selling general and administrative expenses in fiscal year 2001 increased
9.8% to $7.9 million from $7.2 million in the year ago period. The increase
was primarily due to higher professional fees primarily related to costs
incurred in litigation settlements and other legal fees.

Provision for bad debts decreased 36.7% in fiscal 2001 to $3.4 million
from $5.4 million in fiscal 2000 primarily due to the write off of Towers
receivable balance of $2.7 million in the year ago period (as a result of its
bankruptcy). The provision in the current year includes $1.6 million which is
attributable to a legal settlement with WPAI and $1.0 million which is
attributable to a legal settlement with Tower, both of which related to alleged
preference payments made to the Company prior to bankruptcy filings. These
amounts were partially offset by $1.0 million in bad debt recoveries related to
a former customer. Future periods may continue to be impacted by higher
reserve requirements.

Depreciation and amortization expense increased 10% to $9.3 million in
fiscal year 2001 from $8.5 million in fiscal year 2000. The increase is
primarily related to the Fort Wayne and Birmingham FBO acquisitions and various
capital expenditures during the past year.

Interest expense and other (net) increased 20.7% in fiscal 2001 to $7.5
million from $6.2 million in fiscal 2000 due to higher initial interest rates
and higher average outstanding borrowings. Additionally, the Company
wrote-off its investment in National Airlines due to the bankruptcy filing of
National Airlines in December 2000.

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Income tax expense approximated 39.0% of pretax income in both fiscal 2001
and fiscal 2000 reflecting the expected effective annual income tax rate.

On July 3, 2001 the Company sold RPA, its airline software services
subsidiary. As a result, RPAs historic operating results (and loss on sale)
have been classified as discontinued operations. In 2001, the loss on
discontinued operations consisted of operating losses of $0.8 million (net of
income tax benefit of $0.5 million) and loss on sale of $0.5 million (net of
income tax benefit of $0.3 million). For the year ended June 30, 2000, RPA
incurred operating losses of $0.9 million (net of income tax benefit of $0.6
million). For the year ended June 30, 1999, RPA had operating income of $0.4
million (net of income tax expense of $0.3 million).

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, 2002 was
$5.6 million, an increase of $1.8 million from June 30, 2001.

Net cash provided from operating activities in 2002 was $14.4 million, an
increase of $0.9 million from FY 2001. Net income and other operating
activities provided net cash of $6.9 million in 2002 with lower customer
accounts receivable providing $5.2 million of net cash. The reduction in
accounts receivable to $47.0 million was primarily due to lower receivables
associated with the Companys fuel sales business, which can be attributed to
lower average fuel prices. Lower inventories of $1.1 million and higher income
taxes payable of $3.8 million were partially offset by lower fuel oil payables
to result in the remaining net cash provided by operating activities. The
higher income taxes payable is the result of the gain on the sale of the
Bedford FBO during the 4th quarter of 2002 and the lower fuel oil payables is
due to lower fuel prices.

Net cash provided by
investing activities in 2002 was $10.9 million as
compared to funds used in investing in 2001 of $15.4 million. The net cash
generated in 2002 was primarily the result of the sale of the Companys FBO in
Bedford, Mass providing cash flow of $15.5 million and the sale of the
Companys Corporate headquarters resulting in cash generation of $2.6 million
partially offset by $4.5 million of general maintenance capital. In 2001, the
Company invested $10.4 million in business acquisitions and $6.5 million for
general maintenance capital. The increase in restricted cash in fiscal 2002
represents a set aside for federal and state income taxes to be paid in
conjunction with the gain resulting from the sale of the Bedford FBO or for the
reduction of outstanding principle on the senior secured debt.

In 2002, the Company
used $27.2 million in financing activities using the
cash provided by operating activities and the cash provided from investing
activities to reduce outstanding principle of long-term debt. The use of funds
for financing activities can be primarily summarized as net reduction of
long-term debt of $23.0 million, issuance of loans to key executives of $3.9
million used to purchase Mercurys common stock and repurchase of Company
stock of $0.3 million. The Companys long-term debt as of June 30, 2002,
including both current and non-current, was $52.2 million, a reduction of $22.8
million from June 30, 2001. The Company focused its efforts to reduce the
amount of debt outstanding by reducing debt with asset sales proceeds and
surplus cash from operating activities. The Company also provided funds to
certain key executives in 2002 in the amount of $3.9 million that was used by
the executives to acquire Company stock. These acquisitions were made by the
key executives under employment agreements and contain provisions for the loans
to be forgiven over a ten-year period under certain conditions. The Company
also acquired 59,200 shares of its common stock in a stock repurchase during
the third quarter of the fiscal year.

The Company also realized net cash from
Discontinued Operations of $3.6 million
resulting from the sale of its RPA business in FY 2002, primarily from the sale
of receivables and fixed assets relating to RPAs operations.

In September 1999, the Company issued in a private placement, $24.0
million Senior Subordinated 12% Note (the Note) due September 2006 with
detachable warrants to acquire 503,126 shares of the Companys common stock
originally exercisable at $6.50 per share for seven years and currently
exercisable at $5.50 per share. Proceeds of the Note were used primarily to
redeem $19.5 million of the Company 7.75% convertible subordinated debentures
due February 1, 2006 plus a redemption premium of 4% totaling $780 thousand,
pay accrued interest and pay expenses of the transaction. The Note balance is
net of warrants valued at $1.3 million less $528 thousand amortized as interest
expense through June 30, 2002.

In March 1999, the Company entered into an $80.0 million senior secured
credit facility with a consortium of four banks. As of June 30, 2002, this
facility includes up to $35 million of Revolving Credit (Revolving Credit), a
term loan with a balance of $4.1 million (Term Loan) and an acquisition
facility with a balance of $5.9 million (Acquisition Facility). As of June
30, 2002 the Revolving Credit facility had $3.0 million of principal
outstanding and $17.3 million utilized to issue stand-by letters of credit
leaving an unused Revolving Credit Line of $7.2 million. These facilities
mature in March 2004. The outstanding principal on the Term Loan is scheduled
to be paid in full by March 31, 2003. The outstanding principal on both the
Revolving Credit and Acquisition Facility are

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due in March 2004. Interest rates may vary depending upon the Companys
leverage ratio. Currently the interest rate is equal to the LIBOR rate plus
2.5% or the Banks base rate (which was 5.0% as of June 30, 2002).

Both the Senior Secured Credit Facility and the Note contain covenants
that, among other things, limit senior indebtedness, place restrictions on the
disposition of assets, limit unfunded capital expenditures as well as tests for
interest coverage, leverage ratio, fixed charge coverage, debt service, minimum
quarterly earnings and various cash flow targets. For the period ended June 30,
2002, the Company complied with all debt covenant requirements with the
exception of the limits on unfunded capital expenditures and meeting the
minimum quarterly earnings for the 2nd and 3rd quarters of FY 2002. The Company
is in discussions with its lenders associated with the Senior Secured Credit
Facility and the Note to obtain waivers for these debt covenants. As the
covenant waivers have not been finalized, the total principal outstanding
associated with the Senior Secured Credit Facility and the Note have been
classified on the Companys Consolidated Balance Sheet as Current portion of
long-term debt and senior subordinated Notes, current. Until such time as the
waivers are agreed to and executed, the lenders have the right to declare the
outstanding obligations associated with the Senior Secured Credit Facility and
the Note as immediately due and payable. Neither party has exercised this
right.

In addition to the continuing
discussions to obtain covenant waivers, the Company has contracted with a
financial advisor and is in discussions with other lenders to provide new
financing to replace the Senior Secured Credit Facility and the Note.
There can be no assurance that the Company could obtain the financing
necessary, which may result in the Company having inadequate
financial resources to meet this obligation should the lenders
exercise their right to accelerate the maturity dates. However, the
Company believes it will be able to secure new financing to replace the Senior
Secured Credit Facility and the Note if the lenders exercise their right to
accelerate the maturity dates.

The Company generally purchases fuel using credit terms which on average
are shorter than the credit terms the Company offers its fuel customers. 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, 2002 was $47.0
million. The Companys accounts receivable are primarily comprised of customer
trade receivables net of accumulated allowance for doubtful accounts of $1.58
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.

The Companys MercFuel operation accounted for approximately 61% of the
total Company revenue in fiscal 2002. For the year ended June 30, 2002, sales
to MercFuel customers make up approximately 54% 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, which may be less creditworthy than
larger, well-established and well-capitalized airlines. These customers are
more 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 more adversely impact these types of customers. To the extent
that Mercury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 Mercury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. Mercury has
incurred in the past and is likely to continue to incur losses as the result of
the business failure of a customer. Mercury 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.

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Accounts receivable days outstanding were 43 days and 45 days as of June
30, 2002 and 2001, respectively. Accounts receivable days outstanding have
historically been impacted by a high volume of fuel sales to customers with
extended payment terms. However, during fiscal 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 14% of the Companys
consolidated revenue for each of the years ended June 30, 2002 and 2001.
During the same periods, the Company also reduced the maximum amount of
available credit to National Airlines based on their volume of fuel purchased.
These factors have contributed to a fairly stable receivable collection
pattern.

The Companys most recent recurring capital expenditure requirements have
been related to the acquisition and maintenance of the Companys air center
facilities. In April 2000, the company acquired the assets of an FBO located in
Fort Wayne, Indiana for $3.9 million in cash which was funded under its
acquisition line. In October 1999, the Company acquired assets of an FBO in
Tulsa, Oklahoma for $2.4 million in cash which was funded under its acquisition
line. A second part to this closing occurred in July 2000 for $3.8 million
which was also funded under the companys acquisition line. In October 1999,
the company acquired certain FBO assets at Charleston International Airport and
Johns Island Executive Airport in South Carolina for $700,000 in cash funded
under its acquisition line. In September 2000, the company acquired the
Birmingham, Alabama FBO assets from Raytheon Aircraft Services for $6.6 million
in cash, which was funded from its acquisition line.

In fiscal 2000, the company completed construction of a new FBO facility
in Burbank, California at a cost of approximately of $11.2 million, of which
$1.8 million was incurred during fiscal 2000. During fiscal 2002, the company
completed the construction of a hangar at the Bedford air center at 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 2002 fiscal year. The Company spent approximately $1.8
million for the construction of a new hangar at the Jackson air center during
the 2002 fiscal year.

Other capital expenditure requirements include the purchase of refueling
and ground handling equipment for both commercial and government contract
services operations. During fiscal 2000 and 2001, respectively, the Company
spent approximately $2.7 million and $0.8 million to purchase refueling and
ground handling equipment for this business segment.

Absent a major prolonged surge in oil prices, currently unforeseen impact
resulting from the events of September 11, 2001, 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 7, 8 and 12 to the Consolidated Financial
Statements included as in Item 14 of this report.

Letters of Credit

As of June 30, 2002, the Company had outstanding letters of credit in the
amount of $17.3 million. These letters of credit are included as part of the
Companys Revolving Credit and reduce the amount of availability under the
Revolving Credit. A letter of credit in support of the tax exempt bond issued
by the California Economic Development Financing Authority (CEDFA) comprised
$15.2 million of the outstanding letters of credit as of June 30, 2002.

Lease Commitments

As of June 30, 2002, 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:

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|                       |      |                      |         |        | 
|---------------------- | ---- | -------------------- | ------- | ------ | 
|For the Fiscal Year    |      |                      |         |       
|Ending June 30,        |      | Thousands of dollars
|                       |      |                     
|                       | 2003 |                      | $       | 12,150 | 
|                       | 2004 |                      |         | 12,076 | 
|                       | 2005 |                      |         | 11,146 | 
|                       | 2006 |                      |         | 10,316 | 
|                       | 2007 |                      |         | 7,301  | 
|Thereafter             |      |                      | 65,432  |       
|                       |      |                      |         |       
|Total minimum payments |      | $                    | 118,421 |       
|                       |      |                      |         |       

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

Long Term Debt

As of June 30, 2002, the Company had long term debt and notes payable,
including the current portion of principal due, in the amount of $53,028
thousand. Please refer to Notes 7 and 8 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
are as follows:

|                       |      |                      |        |        | 
|---------------------- | ---- | -------------------- | ------ | ------ | 
|For the Fiscal Year    |      |                      |        |       
|Ending June 30,        |      | Thousands of dollars
|                       |      |                     
|                       | 2003 |                      | $      | 38,678 | 
|                       | 2004 |                      |        | 1,100  | 
|                       | 2005 |                      |        | 1,026  | 
|                       | 2006 |                      |        | 1,026  | 
|                       | 2007 |                      |        | 1,026  | 
|Thereafter             |      |                      | 10,172 |       
|                       |      |                      |        |       
|Total minimum payments |      | $                    | 53,028 |       
|                       |      |                      |        |       

This principal payment schedule assumes that the principal obligations
associated with the Companys Senior Secured Credit Facility and Note will be
repaid in FY 2003. As a result of the Companys noncompliance with certain
debt covenants for the period ended June 30, 2002, the lenders have the right
to provide the Company with written notice declaring the total principal and
interest obligations on the Senior Debt and the Note immediately due and
Payable. The Company and the lenders are in discussions to waive these debt
covenants for the period ended June 30, 2002. The Company has also contracted
with a financial advisor and is in discussions with prospective lenders to
secure new financing to replace the Senior Secured Credit Facility and the
Note. The lenders have not exercised their right to accelerate the maturity
dates of the Senior Secured Credit Facility and the Note.

If the Principal payment schedule for the Senior Secured Credit Facility and
the Note is not accelerated by the lenders, the principal payment schedule
associated with the Companys long term debt and notes payable would be as
follows:

|                       |      |                      |        |        | 
|---------------------- | ---- | -------------------- | ------ | ------ | 
|For the Fiscal Year    |      |                      |        |       
|Ending June 30,        |      | Thousands of dollars
|                       |      |                     
|                       | 2003 |                      | $      | 5,800  | 
|                       | 2004 |                      |        | 9,978  | 
|                       | 2005 |                      |        | 1,026  | 
|                       | 2006 |                      |        | 1,026  | 
|                       | 2007 |                      |        | 25,026 | 
|Thereafter             |      |                      | 10,172 |       
|                       |      |                      |        |       
|Total minimum payments |      | $                    | 53,028 |       
|                       |      |                      |        |       

Employment Contracts

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

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The Company has an employment agreement with the Chairman of the Board
dated as of August 22, 2000 for a three year period with automatic one year
extensions at the end of each year until either party terminates the agreement
in writing prior to such renewal. Under the employment agreement, the Chairman
of the Boards annual compensation is $350,000 per year.

The Company entered into an amended and restated employment agreement with
its CEO dated as of May 22, 2002 for a term ending on November 15, 2004,
subject to automatic one-year extensions each successive November 15, unless
either party gives 30 days notice of non-renewal. The annual salary under the
agreement is $670,000. The CEO is also eligible for an annual bonus equal to:
(i) 25% of his base compensation to the extent that the Companys operating
income on a consolidated basis minus sales and general administrative expense
and depreciation (EBIT) for the most recently completed fiscal year exceeds the
average of EBIT for the prior three fiscal years; and (ii) 4.166% of the
amount by which EBIT for the most recently completed fiscal year exceeds the
average of EBIT for the prior three fiscal years. Under the agreement, the CEO
is eligible to participate in the 2002 Management Stock Purchase Plan, wherein
he can purchase up to 387,650 shares of the Companys common stock from CFK
Partners at a price of $7.50 per share, such purchase to be funded by the Company.
The CEO elected to participate in the 2002 Management Stock Purchase Plan, and
purchased 387,650 shares of the Companys common stock, thereunder. The CEOs
obligations to repay the Company are forgiven rateably over a 10-year period,
provided the CEO remains employed by the Company during such period. The CEO
shall have no obligation to repay the Company if he remains employed by the
Company after March 1, 2012.

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

The General Counsel has an employment agreement with the Company dated May
22, 2002 for a period of a term ending on May 22, 2005, subject to automatic
one-year extensions each successive May 22, unless either party gives 30 days
notice of non-renewal. Under the employment agreement, the General Counsels
annual compensation is $179,000. Under the agreement, the General Counsel is
eligible to participate in the 2002 Management Stock Purchase Plan, wherein the
General Counsel can purchase up to 31,896 shares of the Companys common stock
from CFK Partners for a price of $7.50 per share, such purchase to be funded by
the Company. The General Counsel elected to participated in the 2002
Management Stock Purchase Plan, and purchased 31,896 shares of the Companys
common stock. The General Counsels obligations to repay Mercury are forgiven
over a 10-year period, provided the General Counsel remains employed by the
Company during such period. The General Counsel shall have no obligation to
repay the Company if he remains employed by the Company after March 1, 2012.

In the event the General Counsels employment is terminated for cause, or
in the event of the death or disability of the General Counsel, all rights of
the General Counsel under the Agreement will cease. In the event the General
Counsels employment is terminated without cause, the Company will be obligated
to pay the General Counsel the lesser of one years base compensation or the
base compensation that would otherwise be paid to him over the remaining term
of the agreement, with a minimum of six (6) months base compensation.

The VP of Finance has an employment agreement with the Company dated May
22, 2002 for a period of a term ending on May 22, 2005, subject to automatic
one-year extensions each successive May 22, unless either party gives 30 days
notice of non-renewal. Under the employment agreement, the VP of Finances
annual compensation is $170,000. Under the agreement, the VP of Finance is
eligible to participate in the 2002 Management Stock Purchase, wherein he can
purchase up to 25,000 shares of the Companys common stock from CFK Partners
for a price of $7.50 per share, such purchase to be funded by the Company. The
VP of Finance elected to participate in the 2002 Management Stock Purchase
Plan, and purchased 25,000 shares of the Companys common stock. The VP of
Finances obligations to repay the Company are forgiven over a 10-year period,
provided the VP of Finance remains employed by the Company during such period.
The VP of Finance shall have no obligation to repay the Company if he remains
employed by the Company after March 1, 2012.

In the event the VP of Finances employment is terminated for cause, or in
the event of the death or disability of the VP of Finance, all rights of the VP
of Finance under the Agreement will cease. In the event the VP of Finances
employment is terminated without cause, the Company will be obligated to pay
the VP of Finance the lesser of one years base compensation or the base
compensation that would otherwise be paid to him over the remaining term of the
agreement, with a minimum of six (6) months base compensation.

As of June 30, 2002, the Companys future minimum payments for these and
other executive employment contracts, excluding discretionary and performance
based bonuses, are as follows:

22



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##### Table of Contents



|                       |  |                      |       | 
|---------------------- |  | -------------------- | ----- | 
|For the Fiscal Year    |  |                      |       | 
|Ending June 30,        |  | Thousands of dollars
|                       |  |                     
|2003                   |  | $                    | 1,688 | 
|2004                   |  |                      | 1,388 | 
|2005                   |  |                      | 927   | 
|2006                   |  |                      | 0     | 
|2007                   |  |                      | 0     | 
|Thereafter             |  |                      | 0     | 
|                       |  |                      |       | 
|Total minimum payments |  | $                    | 4,003 | 
|                       |  |                      |       | 

Purchase Commitments

Effective April 1, 2002, the Companys 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 $6.2
million.

Critical Accounting Policies and Estimates

The preparation of the consolidated financial statements in conformity
with the United States generally accepted accounting principles 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 judgements 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 judgements:

Allowance for Doubtful Accounts

The Company continuously monitors collections and payments from our
customers and maintains a provision for estimated credit losses based upon our
historical experience and any specific customer collection issues that we have
identified. Accounts receivables 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, 2002. However, the credit loss rate can be impacted by
adverse changes in the aviation industry, or changes in the liquidity or
financial position of our customers which would affect the collectibility of
our accounts receivable and our future operating results. If credit losses
exceed established allowances, our results of operation 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.

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. 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 is effective for
the Companys fiscal year ending June 30, 2003. SFAS No. 142 requires that
goodwill not be amortized, but be tested for impairment annually. In
accordance with this Statement, the Company is not required to complete the
transitional goodwill impairment test until December 31, 2002. The Company is
evaluating, but has not yet determined, whether the adoption of this statement
will result in an impairment of goodwill. Additionally, the Company is
evaluating, but has not determined the useful life of

23



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##### Table of Contents



certain other intangible assets under the new accounting pronouncements.
Goodwill amortization of $1.8 million recorded during the year ended June 30,
2002 will not be charged to the income statement in fiscal year 2003.

NEW ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, Business Combinations. SFAS No. 141 requires the purchase
method of accounting for business combinations initiated after June 30, 2001
and eliminates the pooling-of-interest method. The adoption of SFAS No. 141
did not have an impact on the Companys financial statements.

In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. The Company is required to adopt SFAS No. 142 on July 1, 2002, SFAS
No. 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential
future impairments of goodwill. SFAS. No. 142 also requires the Company to
complete a transitional goodwill impairment test six months from the date of
adoption. The Company has not yet determined what impact the adoption will
have on its financial statements.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supersedes FASB Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. This new statement also supersedes
certain aspects 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,
with regard to reporting the effects of a disposal of a segment of a business
and will require expected future operating losses from discontinued operations
to be reported in discontinued operations in the period incurred (rather than
as of the measurement date as presently required by APB Opinion No 30). In
addition, more dispositions may qualify for discontinued operations treatment.
The provisions of this statement are required to be applied on July 1, 2002.
The Company has not yet determined what effect this statement will have on its
financial statements.

In April 2002, the FASB issued SFAS No. 145, which rescinds SFAS No. 4,
Reporting Gains and Losses from Extinguishment of Debt, and also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. A
principal effect will be the prospective characterization of gains and losses
from debt extinguishments used as part of an entitys risk management strategy.
Under SFAS No. 4, all gains and losses from early extinguishment of debt were
required to be aggregated and, if material, classified as an extraordinary
item, net or related income tax effect. Under SFAS No. 145, most gains and
losses from extinguishment of debt will not be classified as extraordinary
items unless they meet the much narrower criteria in APB Opinion No. 30. SFAS
No. 145 may be adopted early, but is otherwise effective for fiscal years
beginning after May 15, 2002, and must be adopted with retroactive effect. The
Company believes that SFAS No. 145 will not have a material effect on the
Companys consolidated financial position or results of operations.

In June 2002, the FASB issued SFAS No.146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 requires that cost
associated with an exit or disposal activity be recognized when incurred as
opposed to an entitys commitment to an exit plan as previously allowed. The
provisions of SFAS No. 146 are effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged. The
Company believes that SFAS No.146 will not have a material effect on the
Companys consolidated financial position or results or operations.

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, Mercury, 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 Mercury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 Mercury 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 Mercurys Securities and Exchange Commission
filings and other public announcements.

24



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##### Table of Contents






ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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, 2002 by expected
maturity dates except for the Senior Credit Facility and the Senior
Subordinated Note and which reflects the lenders right to accelerate the
repayment of the outstanding obligations due to the Companys noncompliance
with certain debt covenants for the period ended June 30, 2002.
(See Notes 7 and 8). Weighted
average variable rates are based on rates in effect at June 30, 2002. These
rates should not be considered a predictor of actual future interest rates.

Expected Maturity Date

|                                  |  |         |            |         |  |         |           |         |  |         |           |            |  |       |           |            |  |   |           |   |  |   |            |   |  |   |            |   |  |   |            | 
|--------------------------------- |  | ------- | ---------- | ------- |  | ------- | --------- | ------- |  | ------- | --------- | ---------- |  | ----- | --------- | ---------- |  | - | --------- | - |  | - | ---------- | - |  | - | ---------- | - |  | - | ---------- | 
|                                  |  | June-03 |            | June-04 |  | June-05 |           | June-06 |  | June-07 |           | Thereafter |  | Total |           | Fair Value
|                                  |  |         |            |         |  |         |           |         |  |         |           |            |  |       |           |           
|Fixed Rate
Subordinated Note      |  | $       | 24,000,000 |         |  |         | 0         |         |  |         | 0         |            |  |       | 0         |            |  |   | 0         |   |  |   | 0          |   |  | $ | 24,000,000 |   |  | $ | 20,125,000 | 
|Average Interest Rate             |  |         | 12.0       | %       |  |         | 0         |         |  |         | 0         |            |  |       | 0         |            |  |   | 0         |   |  |   | 0          |   |  |   | 12.0       | % |  |   |            | 
|Fixed Rate Other Debt             |  | $       | 205,000    |         |  | $       | 100,000   |         |  | $       | 26,000    |            |  | $     | 26,000    |            |  | $ | 26,000    |   |  | $ | 173,000    |   |  | $ | 556,000    |   |  | $ | 556,000    | 
|Average Interest Rate             |  |         | 8.50       | %       |  |         | 8.58      | %       |  |         | 9.14      | %          |  |       | 9.14      | %          |  |   | 9.14      | % |  |   | 9.14       | % |  |   | 8.80       | % |  |   |            | 
|Variable Rate Tax Exempt Bonds(1) |  | $       | 1,000,000  |         |  | $       | 1,000,000 |         |  | $       | 1,000,000 |            |  | $     | 1,000,000 |            |  | $ | 1,000,000 |   |  | $ | 10,000,000 |   |  | $ | 15,000,000 |   |  | $ | 15,000,000 | 
|Average Interest Rate             |  |         | 1.61       | %       |  |         | 1.61      | %       |  |         | 1.61      | %          |  |       | 1.61      | %          |  |   | 1.61      | % |  |   | 1.61       | % |  |   | 1.61       | % |  |   |            | 
|Variable Rate Other Debt (2)      |  | $       | 12,968,000 |         |  |         | 0         |         |  |         | 0         |            |  |       | 0         |            |  |   | 0         |   |  |   | 0          |   |  | $ | 12,968,000 |   |  | $ | 12,968,000 | 
|Average Interest Rate             |  |         | 4.49       | %       |  |         | 0         |         |  |         | 0         |            |  |       | 0         |            |  |   | 0         |   |  |   | 0          |   |  |   | 4.49       | % |  |   |            | 



---

|(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.

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 14, pages F1 through F20 immediately following.




ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.




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 of the Companys Proxy Statement for the annual meeting scheduled
in November 2002 (the 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 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 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.

25



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##### Table of Contents






ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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




ITEM 14. CONTROLS AND PROCEDURES
CERTIFICATIONS.

Reference is made to
Controls and Procedures Certification immediately
following signature page hereof.




PART IV




ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:

(a) (1) Financial Statements

|                                                                                                              |  |  |     | 
|------------------------------------------------------------------------------------------------------------- |  |  | --- | 
|Independent Auditors Report                                                                                  |  |  | F-1 | 
|Consolidated Balance Sheets as of June 30, 2002 and 2001                                                      |  |  | F-2 | 
|Consolidated Statements of Income for each of the three years in the period ended June 30, 2002               |  |  | F-3 | 
|Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 2002           |  |  | F-4 | 
|Consolidated Statements of Stockholders Equity for each of the three years in the period ended June 30, 2002 |  |  | F-5 | 
|Notes to Consolidated Financial Statements for the three years ended June 30, 2002                            |  |  | F-6 | 

(a) (2) Supplemental Schedule for each of the three years in the period ended June 30, 2002:

|                                                |  |  |      | 
|----------------------------------------------- |  |  | ---- | 
|Schedule II  Valuation and Qualifying Accounts |  |  | F-20 | 

All other items are not included in this 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.

|        |  |                              
|------- |  | -----------------------------
|Item 14 |  | (a) Exhibits and Exhibit List
|        |  | (b) Reports on Form 8-K      

|        |  |                                                                                                                                                                                                                                                                                                                       
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                       
|No.     |  | Description                                                                                                                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                       
|2.1     |  | Agreement and Plan of Merger adopted January 9, 2001. (17)                                                                                                                                                                                                                                                            
|2.2     |  | Certificate of Merger. (17)                                                                                                                                                                                                                                                                                           
|3.1     |  | Bylaws of Company adopted January 9, 2001. (17)                                                                                                                                                                                                                                                                       
|3.2     |  | Certificate of Incorporation. (17)                                                                                                                                                                                                                                                                                    
|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     |  | Amended and Restated J.H. Whitney Mezzanine Fund , L.P. Warrant (19)                                                                                                                                                                                                                                                  
|4.9     |  | Waiver Agreement dated as of November 26, 2001 among Mercury Air
Group, Inc. and J.H. Whitney Mezzanine, L.P. (21)                                                                                                                                                                                                    

26



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##### Table of Contents



|        |  |                                                                                                                                                                                                                    
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                    
|No.     |  | Description                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                    
|4.10    |  | Waiver Agreement dated as of December 21, 2001 among Mercury Air Group, Inc. and J.H. Whitney Mezzanine, L.P. (21)                                                                                                 
|4.11    |  | Waiver Agreement dated as of June 26, 2002 among Mercury Air
Group, inc. and J.H. Whitney Mezzanine, L.P.                                                                                                          
|10.1    |  | Companys 1990 Long-Term Incentive Plan. (4)*                                                                                                                                                                      
|10.2    |  | Companys 1990 Directors Stock Option Plan. (1)*                                                                                                                                                                   
|10.3    |  | Lease for 6851 West Imperial Highway, Los Angeles, California. (3)                                                                                                                                                 
|10.4    |  | Memorandum Dated September 15, 1997 regarding Summary of Officer Life Insurance Policies with Benefits
Payable to Officers or Their Designated Beneficiaries. (8)*                                                 
|10.5    |  | Employment Agreement dated November 15, 1994 between the Company and Joseph Czyzyk. (9)*                                                                                                                           
|10.6    |  | Non-Qualified Stock Option Agreement dated March 21, 1996, by and between Frederick H. Kopko and
Mercury Air Group, Inc. (6) *                                                                                     
|10.7    |  | Companys 1998 Long-Term Incentive Plan. (10) *                                                                                                                                                                    
|10.8    |  | Companys 1998 Directors Stock Option Plan. (10) *                                                                                                                                                                 
|10.9    |  | Amendment to Employment Agreement by and between Mercury Air Group, Inc. and Joseph A. Czyzyk dated
October 15, 1998. (11) *                                                                                       
|10.10   |  | Amendment No. 2 to Employment Agreement by and between Mercury Air Group, Inc. and Joseph A. Czyzyk
dated April 12, 1999. (11) *                                                                                   
|10.11   |  | 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)
|10.12   |  | First Amendment to Revolving Credit and Term Loan Agreement dated as of September 10, 1999. (14)                                                                                                                   
|10.13   |  | Second Amendment to Revolving Credit and Term Loan Agreement dated as of March 31, 2000. (14)                                                                                                                      
|10.14   |  | Third Amendment, Waiver and Consent to Revolving Credit and Term Loan Agreement dated as of August 11,
2000. (14)                                                                                                  
|10.15   |  | The Companys 401(k) Plan consisting of CNA Trust Corporation. Regional Prototype Defined Contribution
Plan and Trust and Adoption Agreement. (14)*                                                                
|10.16   |  | Amendment No. 3 to Employment Agreement by and between Mercury Air Group, Inc. and Joseph A. Czyzyk
dated September 11, 2000. (15)*                                                                                
|10.17   |  | Employment Agreement dated July 31, 2000 between the Company and Dr. Philip J. Fagan. (15)*                                                                                                                        
|10.18   |  | Fourth Amendment to Revolving Credit and Term Loan Agreement dated as of November 14, 2000. (16)                                                                                                                   
|10.19   |  | Amendment No. 1 to Mercury Air Group, Inc. 1998 Long-Term Incentive Option Plan as of August 22, 2000.
(16)*                                                                                                       
|10.20   |  | Amendment No. 1 to Mercury Air Group, Inc. 1998 Directors Stock Option Plan as of August 22, 2000. (16)*                                                                                                           
|10.21   |  | Limited Waiver letter Agreement to Revolving Credit and Term Loan Agreement dated as of September 21,
2001. (18)                                                                                                   
|10.22   |  | Fifth Amendment to Revolving Credit and Term loan Agreement dated as of September 21, 2001. (18)                                                                                                                   
|10.23   |  | Limited Consent letter Agreement to Revolving Credit and Term Loan Agreement dated as of September 30,
2001. (19)                                                                                                  
|10.24   |  | 2001 Mercury Air Group, Inc. Stock Incentive Plan (20)                                                                                                                                                             
|10.25   |  | Limited waiver and Consent to Revolving Credit and Term Loan Agreement dated as of December 31, 2001.
(21)                                                                                                         
|10.26   |  | 2002 Management Stock Purchase Plan (22)                                                                                                                                                                           
|10.27   |  | Amended and Restated Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and Joseph
A, Czyzyk (22)*                                                                                            
|10.28   |  | Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and Wayne J. Lovett (22)*                                                                                                                  
|10.29   |  | Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and John Enticknap (22)*                                                                                                                   
|10.30   |  | Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and Mark Coleman (22)*                                                                                                                     
|10.31   |  | Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and Steven S. Antonoff (22)*                                                                                                               
|10.32   |  | Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and Robert Schlax (22)*                                                                                                                    

27



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|        |  |                                                                                                                                                                                                                                                            
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                            
|No.     |  | Description                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                            
|10.34   |  | Sale-Leaseback agreement made by and between CFK Realty Partners, LLC and Mercury air Group, Inc. dated
December 15, 2001.                                                                                                                                 
|10.35   |  | Amendment to Sale-Leaseback agreement made by and between CFK Realty Partners, LLC and Mercury Air
Group, Inc.                                                                                                                                             
|10.36   |  | Promissory Note by CFK Partners, LLC in favor of Mercury Air Group, Inc.                                                                                                                                                                                   
|10.37   |  | Limited Waiver and Consent to Revolving Credit and Term Loan Agreement dated as June 27,2002.                                                                                                                                                              
|10.38   |  | Amendment to No. 1 made to Amended and Restated Employment Agreement dated May 22, 2002 between Mercury
Air Group, Inc. and Joseph a. Czyzyk.*                                                                                                             
|22.1    |  | Subsidiaries of Registrant.                                                                                                                                                                                                                                
|23.1    |  | Consent of Deloitte & Touche, 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).
|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)                                                                                                     
|99.2    |  | Certification pursuant to 18 U.S.C. Section 1350, As adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.                                                                                                                                    



---

|*    |  | 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 Shareholders
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 Shareholders.                                         
|    
|    
|    
|    
|(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 is 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 Shareholders
and 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 incorporated herein by reference.   

28



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##### Table of Contents



|(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 is 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 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 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 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 is 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 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 Shareholders
and 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 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.                              

(b) Reports on Form 8-K:

A Form 8-K was filed on June 5, 2002 reporting on Item 5. of other Events
and regulation FD Disclosure.

A Form 8-K was filed on July 11, 2002 reporting on Item 2. of Acquisitions
or Disposition of Assets.

29



---



##### 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 September 06, 2002.

| |  |                         |  |                                                                              
| |  | ----------------------- |  | -----------------------------------------------------------------------------
| |  | 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: October 14, 2002
|                                                                               
|Principal Executive Officer and Director:                                       |  |                        
|                                                                               
|/s/ Joseph Czyzyk

Joseph Czyzyk
Chief Executive Officer and Director           |  | Dated: October 14, 2002
|                                                                               
|/s/ Robert Schlax

Robert Schlax
Vice President of Finance                      |  | Dated: October 14, 2002
|                                                                               
|Additional Directors:                                                           |  |                        
|                                                                               
|/s/ Frederick H. Kopko, Jr.

Frederick H. Kopko, Jr.
Director                   |  | Dated: October 14, 2002
|                                                                               
|/s/ Gary J. Feracota

Gary J. Feracota
Director                                 |  | Dated: October 14, 2002
|                                                                               
|/s/ Sergie Kouzmine

Sergie Kouzmine
Director                                   |  | Dated: October 14, 2002
|                                                                               
|/s/ Harold Bowling

Harold Bowling
Director                                     |  | Dated: October 14, 2002

30



---



##### Table of Contents



CONTROLS AND PROCEDURES CERTIFICATIONS

I, Joseph Czyzyk, certify that:



| | 1. |  | I have reviewed this Annual Report on Form 10-K of Mercury Air Group,
Inc.;                                                                                                                                                                                                                                             
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this annual 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, not misleading with respect to the period
covered by this annual report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;                   

October 14, 2002



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

I, Robert Schlax, certify that:



| | 1. |  | I have reviewed this Annual Report on Form 10-K of Mercury Air Group,
Inc.;                                                                                                                                                                                                                                             
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this annual 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, not misleading with respect to the period
covered by this annual report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;                   

October 14, 2002



| | /s/ Robert Schlax
Robert Schlax
Vice President of Finance
| | ---------------------------------------------------------

31



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

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

We have audited the accompanying consolidated balance sheets of Mercury Air
Group, Inc. and subsidiaries as of June 30, 2002 and 2001, and the related
consolidated statements of income, stockholders equity, and cash flows for
each of the three years in the period ended June 30, 2002. Our audits also
included the financial statement schedule listed in the Index at
Item 15. These
financial statements and the financial statement schedule are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements and the financial statement schedule
based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit 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. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Mercury Air Group, Inc. and
subsidiaries as of June 30, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2002, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.

Deloitte & Touche LLP

Los Angeles, California
October 11, 2002

F-1



---



##### Table of Contents






MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                            |                                                                                                                      |                                                                                                                                                |                      |                            |            |            |             |            |            |            |            | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | -------------------------- | ---------- | ---------- | ----------- | ---------- | ---------- | ---------- | ---------- | 
|                                                                                                                                                            |                                                                                                                      |                                                                                                                                                |                      |                            |            | JUNE 30,   |             | JUNE 30,  
|                                                                                                                                                            |                                                                                                                      |                                                                                                                                                |                      |                            |            | 2002       |             | 2001      
|                                                                                                                                                            |                                                                                                                      |                                                                                                                                                |                      |                            |            |            |             |           
|ASSETS                                                                                                                                                     
|CURRENT ASSETS:                                                                                                                                             |                                                                                                                      |                                                                                                                                                |                      |                            |            |            |             |           
|                                                                                                                                                            | Cash and cash equivalents                                                                                            |                                                                                                                                                | $                    | 5,554,000                  |            |            | $           | 3,886,000  |           
|                                                                                                                                                            | Restricted cash (Note 10)                                                                                            |                                                                                                                                                |                      | 3,780,000                  |            |            |             |            |           
|                                                                                                                                                            | Trade accounts receivable, net of allowance for doubtful accounts
of $1,583,000 at 6/30/02 and $1,653,000 at 6/30/01 |                                                                                                                                                |                      | 46,958,000                 |            |            |             | 53,530,000 |           
|                                                                                                                                                            | Inventories, principally aviation fuel                                                                               |                                                                                                                                                |                      | 2,985,000                  |            |            |             | 4,069,000  |           
|                                                                                                                                                            | Prepaid expenses and other current assets                                                                            |                                                                                                                                                |                      | 3,077,000                  |            |            |             | 2,882,000  |           
|                                                                                                                                                            | Notes receivable from affiliate (Note 13)                                                                            |                                                                                                                                                |                      | 1,400,000                  |            |            |             |            |           
|                                                                                                                                                            | Net assets of discontinued operations (Note 2)                                                                       |                                                                                                                                                |                      |                            |            |            |             | 4,338,000  |           
|                                                                                                                                                            |                                                                                                                      |                                                                                                                                                |                      |                            |            |            |             |           
|                                                                                                                                                            |                                                                                                                      |                                                                                                                                                | Total current assets |                            |            | 63,754,000 |             |            |            | 68,705,000 |           
|PROPERTY, EQUIPMENT AND LEASEHOLDS , net of
accumulated depreciation and amortization of $53,668,000 at 6/30/02
And $50,811,000 at 6/30/01 (Notes 3 and 10) |                                                                                                                      |                                                                                                                                                | 59,286,000           |                            |            |            | 73,133,000  |           
|NOTES RECEIVABLE                                                                                                                                            |                                                                                                                      |                                                                                                                                                | 2,158,000            |                            |            |            | 1,510,000   |           
|DEFERRED INCOME TAXES (Note 6)                                                                                                                              |                                                                                                                      |                                                                                                                                                | 770,000              |                            |            |            |             |           
|OTHER ASSETS, NET (Note 4)                                                                                                                                  |                                                                                                                      |                                                                                                                                                | 8,718,000            |                            |            |            | 9,140,000   |           
|                                                                                                                                                            |                                                                                                                      |                                                                                                                                                |                      |                            |            |            |             |           
|                                                                                                                                                            |                                                                                                                      | $                                                                                                                                              | 134,686,000          |                            |            | $          | 152,488,000 |           
|                                                                                                                                                            |                                                                                                                      |                                                                                                                                                |                      |                            |            |            |             |           
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                       
|CURRENT LIABILITIES:                                                                                                                                        |                                                                                                                      |                                                                                                                                                |                      |                            |            |            |             |           
|                                                                                                                                                            | Accounts payable                                                                                                     |                                                                                                                                                | $                    | 35,085,000                 |            |            | $           | 31,764,000 |           
|                                                                                                                                                            | Accrued expenses and other current liabilities (Note 5)                                                              |                                                                                                                                                |                      | 8,459,000                  |            |            |             | 10,357,000 |           
|                                                                                                                                                            | Current portion of long-term debt (Note 7)                                                                           |                                                                                                                                                |                      | 14,677,000                 |            |            |             | 7,461,000  |           
|                                                                                                                                                            | Senior Subordinated Note, current (Note 8)                                                                           |                                                                                                                                                |                      | 23,179,000                 |            |            |             |            |           
|                                                                                                                                                            |                                                                                                                      |                                                                                                                                                |                      |                            |            |            |             |           
|                                                                                                                                                            |                                                                                                                      |                                                                                                                                                |                      | Total current liabilities  |            |            | 81,400,000  |            |            |            | 49,582,000 | 
|LONG-TERM DEBT (Note 7)                                                                                                                                     |                                                                                                                      |                                                                                                                                                | 14,351,000           |                            |            |            | 44,560,000  |           
|DEFERRED GAIN (Note 13)                                                                                                                                     |                                                                                                                      |                                                                                                                                                | 2,146,000            |                            |            |            |             |           
|DEFERRED INCOME TAXES (Note 6)                                                                                                                              |                                                                                                                      |                                                                                                                                                |                      |                            |            |            | 380,000     |           
|DEFERRED RENT                                                                                                                                               |                                                                                                                      |                                                                                                                                                | 1,943,000            |                            |            |            | 1,354,000   |           
|SENIOR SUBORDINATED NOTE (Note 8)                                                                                                                           |                                                                                                                      |                                                                                                                                                |                      |                            |            |            | 23,030,000  |           
|COMMITMENTS AND CONTINGENCIES (Notes 12 and 13)                                                                                                             |                                                                                                                      |                                                                                                                                                |                      |                            |            |            |             |           
|STOCKHOLDERS EQUITY (Note 9):                                                                                                                              |                                                                                                                      |                                                                                                                                                |                      |                            |            |            |             |           
|                                                                                                                                                            |                                                                                                                      | Preferred Stock  $.01 par value; authorized 3,000,000 shares;
no shares outstanding                                                           |                      |                            |            |            |             |            |            |           
|                                                                                                                                                            |                                                                                                                      | Common Stock  $ .01 par value; authorized 18,000,000 shares;
Outstanding 6,541,699 shares at 6/30/02;
Outstanding 6,576,680 shares at 6/30/01 |                      |                            | 65,000     |            |             |            | 66,000     |           
|                                                                                                                                                            |                                                                                                                      | Additional paid-in capital                                                                                                                     |                      |                            | 21,419,000 |            |             |            | 21,442,000 |           
|                                                                                                                                                            |                                                                                                                      | Retained earnings                                                                                                                              |                      |                            | 17,751,000 |            |             |            | 12,835,000 |           
|                                                                                                                                                            |                                                                                                                      | Accumulated other comprehensive loss                                                                                                           |                      |                            | (316,000   | )          |             |            | (228,000   | )         
|                                                                                                                                                            |                                                                                                                      | Notes receivable from sale of stock (Note 9)                                                                                                   |                      |                            | (4,073,000 | )          |             |            | (533,000   | )         
|                                                                                                                                                            |                                                                                                                      |                                                                                                                                                |                      |                            |            |            |             |           
|                                                                                                                                                            |                                                                                                                      |                                                                                                                                                |                      | Total stockholders equity |            |            | 34,846,000  |            |            |            | 33,582,000 | 
|                                                                                                                                                            |                                                                                                                      |                                                                                                                                                |                      |                            |            |            |             |           
|                                                                                                                                                            |                                                                                                                      | $                                                                                                                                              | 134,686,000          |                            |            | $          | 152,488,000 |           
|                                                                                                                                                            |                                                                                                                      |                                                                                                                                                |                      |                            |            |            |             |           

See accompanying notes to consolidated financial statements.

F-2



---



##### Table of Contents






MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

|                                                                                           |                                                                                                                          |          |                                         |                                                        |   |                     |             |             |   |       |             |             |   |       |            | 
|------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------ | -------- | --------------------------------------- | ------------------------------------------------------ | - | ------------------- | ----------- | ----------- | - | ----- | ----------- | ----------- | - | ----- | ---------- | 
|                                                                                           |                                                                                                                          |          |                                         |                                                        |   | YEAR ENDED JUNE 30,
|                                                                                           |                                                                                                                          |          |                                         |                                                        |   |                    
|                                                                                           |                                                                                                                          |          |                                         |                                                        |   | 2002                |             | 2001        |   | 2000 
|                                                                                           |                                                                                                                          |          |                                         |                                                        |   |                     |             |             |   |      
|Sales and Revenues (Note 14):                                                              |                                                                                                                          |          |                                         |                                                        |   |                     |             |             |   |       |             |            
|                                                                                           | Sales                                                                                                                    |          | $                                       | 293,731,000                                            |   |                     | $           | 385,868,000 |   |       | $           | 254,474,000 |  
|                                                                                           | Service revenues                                                                                                         |          |                                         | 89,611,000                                             |   |                     |             | 92,578,000  |   |       |             | 79,859,000  |  
|                                                                                           |                                                                                                                          |          |                                         |                                                        |   |                     |             |             |   |       |             |            
|                                                                                           |                                                                                                                          |          | 383,342,000                             |                                                        |   |                     | 478,446,000 |             |   |       | 334,333,000 |            
|                                                                                           |                                                                                                                          |          |                                         |                                                        |   |                     |             |             |   |       |             |            
|Costs and Expenses:                                                                        |                                                                                                                          |          |                                         |                                                        |   |                     |             |             |   |       |             |            
|                                                                                           | Cost of sales                                                                                                            |          |                                         | 253,264,000                                            |   |                     |             | 347,456,000 |   |       |             | 223,053,000 |  
|                                                                                           | Operating expenses                                                                                                       |          |                                         | 101,806,000                                            |   |                     |             | 96,725,000  |   |       |             | 77,543,000  |  
|                                                                                           |                                                                                                                          |          |                                         |                                                        |   |                     |             |             |   |       |             |            
|                                                                                           |                                                                                                                          |          | 355,070,000                             |                                                        |   |                     | 444,181,000 |             |   |       | 300,596,000 |            
|                                                                                           |                                                                                                                          |          |                                         |                                                        |   |                     |             |             |   |       |             |            
|                                                                                           |                                                                                                                          |          |                                         | Gross Margin (Excluding depreciation
and amortization) |   |                     | 28,272,000  |             |   |       | 34,265,000  |             |   |       | 33,737,000 | 
|                                                                                           |                                                                                                                          |          |                                         |                                                        |   |                     |             |             |   |       |             |            
|Expenses (Income):                                                                         |                                                                                                                          |          |                                         |                                                        |   |                     |             |             |   |       |             |            
|                                                                                           | Selling,
general and administrative (Notes 9 and 13)                                                                     |          |                                         | 11,518,000                                             |   |                     |             | 7,929,000   |   |       |             | 7,223,000   |  
|                                                                                           | Provision for bad debts                                                                                                  |          |                                         | 1,358,000                                              |   |                     |             | 3,425,000   |   |       |             | 5,408,000   |  
|                                                                                           | Depreciation and amortization                                                                                            |          |                                         | 9,213,000                                              |   |                     |             | 9,331,000   |   |       |             | 8,485,000   |  
|                                                                                           | Interest expense (Notes 7 and 8)                                                                                         |          |                                         | 5,710,000                                              |   |                     |             | 7,184,000   |   |       |             | 6,293,000   |  
|                                                                                           | Gain on sale of facilities and property (Note 10)                                                                        |          |                                         | (8,929,000                                             | ) |                     |             |             |   |       |             |             |  
|                                                                                           | Expenses of stock offering (Note 11)                                                                                     |          |                                         | 985,000                                                |   |                     |             |             |   |       |             |             |  
|                                                                                           | Loss on investment                                                                                                       |          |                                         |                                                        |   |                     |             | 300,000     |   |       |             |             |  
|                                                                                           | Interest income                                                                                                          |          |                                         | (112,000                                               | ) |                     |             | (48,000     | ) |       |             | (133,000    | )
|                                                                                           |                                                                                                                          |          |                                         |                                                        |   |                     |             |             |   |       |             |            
|                                                                                           |                                                                                                                          |          | 19,743,000                              |                                                        |   |                     | 28,121,000  |             |   |       | 27,276,000  |            
|                                                                                           |                                                                                                                          |          |                                         |                                                        |   |                     |             |             |   |       |             |            
|Income from Continuing Operations Before Provision for
Income Taxes and Extraordinary Item |                                                                                                                          |          | 8,529,000                               |                                                        |   |                     | 6,144,000   |             |   |       | 6,461,000   |            
|Provision for Income Taxes (Note 6)                                                        |                                                                                                                          |          | 3,326,000                               |                                                        |   |                     | 2,397,000   |             |   |       | 2,520,000   |            
|                                                                                           |                                                                                                                          |          |                                         |                                                        |   |                     |             |             |   |       |             |            
|Income from Continuing Operations                                                          |                                                                                                                          |          | 5,203,000                               |                                                        |   |                     | 3,747,000   |             |   |       | 3,941,000   |            
|Discontinued Operations (Note 2):                                                          |                                                                                                                          |          |                                         |                                                        |   |                     |             |             |   |       |             |            
|                                                                                           | Loss from discontinued operations, net of income
tax benefit of $109,000 in 2002, $548,000 in 2001,
and $597,000 in 2000 |          |                                         | (170,000                                               | ) |                     |             | (858,000    | ) |       |             | (933,000    | )
|                                                                                           | Loss on sale of discontinued operations, net of
income tax
benefit of $305,000                                           |          |                                         |                                                        |   |                     |             | (477,000    | ) |       |             |             |  
|                                                                                           |                                                                                                                          |          |                                         |                                                        |   |                     |             |             |   |       |             |            
|Income before Extraordinary Item                                                           |                                                                                                                          |          | 5,033,000                               |                                                        |   |                     | 2,412,000   |             |   |       | 3,008,000   |            
|Extraordinary item less applicable income tax benefit of
$625,000 (Note 8)                 |                                                                                                                          |          |                                         |                                                        |   |                     |             |             |   |       | (979,000    | )          
|                                                                                           |                                                                                                                          |          |                                         |                                                        |   |                     |             |             |   |       |             |            
|Net Income                                                                                 |                                                                                                                          | $        | 5,033,000                               |                                                        |   | $                   | 2,412,000   |             |   | $     | 2,029,000   |            
|                                                                                           |                                                                                                                          |          |                                         |                                                        |   |                     |             |             |   |       |             |            
|Net Income Per Common Share (Note 15):                                                     |                                                                                                                          |          |                                         |                                                        |   |                     |             |             |   |       |             |            
|                                                                                           |                                                                                                                          | Basic:   |                                         |                                                        |   |                     |             |             |   |       |             |             |   |      
|                                                                                           |                                                                                                                          |          | From Continuing Operations              |                                                        | $ | 0.79                |             |             | $ | 0.57  |             |             | $ | 0.60  |           
|                                                                                           |                                                                                                                          |          | Loss from Discontinued Operations       |                                                        |   | (0.02               | )           |             |   | (0.13 | )           |             |   | (0.14 | )         
|                                                                                           |                                                                                                                          |          | Loss on sale of Discontinued Operations |                                                        |   |                     |             |             |   | (0.07 | )           |             |   |       |           
|                                                                                           |                                                                                                                          |          |                                         |                                                        |   |                     |             |             |   |       |             |            
|                                                                                           |                                                                                                                          |          | Income before Extraordinary Item        |                                                        |   | 0.77                |             |             |   | 0.37  |             |             |   | 0.46  |           
|                                                                                           |                                                                                                                          |          | Extraordinary Item                      |                                                        |   |                     |             |             |   |       |             |             |   | (0.15 | )         
|                                                                                           |                                                                                                                          |          |                                         |                                                        |   |                     |             |             |   |       |             |            
|                                                                                           |                                                                                                                          |          | Net Income                              |                                                        | $ | 0.77                |             |             | $ | 0.37  |             |             | $ | 0.31  |           
|                                                                                           |                                                                                                                          |          |                                         |                                                        |   |                     |             |             |   |       |             |            
|                                                                                           |                                                                                                                          | Diluted: |                                         |                                                        |   |                     |             |             |   |       |             |             |   |      
|                                                                                           |                                                                                                                          |          | From Continuing Operations              |                                                        | $ | 0.78                |             |             | $ | 0.56  |             |             | $ | 0.55  |           
|                                                                                           |                                                                                                                          |          | Loss from Discontinued Operations       |                                                        |   | (0.03               | )           |             |   | (0.13 | )           |             |   | (0.12 | )         
|                                                                                           |                                                                                                                          |          | Loss on sale of Discontinued Operations |                                                        |   |                     |             |             |   | (0.07 | )           |             |   |       |           
|                                                                                           |                                                                                                                          |          |                                         |                                                        |   |                     |             |             |   |       |             |            
|                                                                                           |                                                                                                                          |          | Income before Extraordinary Item        |                                                        |   | 0.75                |             |             |   | 0.36  |             |             |   | 0.43  |           
|                                                                                           |                                                                                                                          |          | Extraordinary Item                      |                                                        |   |                     |             |             |   |       |             |             |   | (0.13 | )         
|                                                                                           |                                                                                                                          |          |                                         |                                                        |   |                     |             |             |   |       |             |            
|                                                                                           |                                                                                                                          |          | Net Income                              |                                                        | $ | 0.75                |             |             | $ | 0.36  |             |             | $ | 0.30  |           
|                                                                                           |                                                                                                                          |          |                                         |                                                        |   |                     |             |             |   |       |             |            

See accompanying notes to consolidated financial statements.

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##### Table of Contents






MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW

|                                                                                |                                                            |                                                                                                          |                                                                |                                                     |           |            |             |             |   |             |             |             |         |            |             |  
|------------------------------------------------------------------------------- | ---------------------------------------------------------- | -------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------- | --------------------------------------------------- | --------- | ---------- | ----------- | ----------- | - | ----------- | ----------- | ----------- | ------- | ---------- | ----------- | -
|                                                                                |                                                            |                                                                                                          |                                                                |                                                     |           | 2002       |             | 2001        |   | 2000       
|                                                                                |                                                            |                                                                                                          |                                                                |                                                     |           |            |             |             |   |            
|CASH FLOWS FROM OPERATING ACTIVITIES:                                           |                                                            |                                                                                                          |                                                                |                                                     |           |            |             |             |   |             |             |            
|                                                                                | Net income                                                 |                                                                                                          | $                                                              | 5,033,000                                           |           |            | $           | 2,412,000   |   |             | $           | 2,029,000   |        
|                                                                                | Less: Loss from discontinued operations                    |                                                                                                          |                                                                | (170,000                                            | )         |            |             | (1,335,000  | ) |             |             | (933,000    | )      
|                                                                                |                                                            |                                                                                                          |                                                                |                                                     |           |            |             |             |   |             |             |            
|                                                                                | Income from continuing operations                          |                                                                                                          |                                                                | 5,203,000                                           |           |            |             | 3,747,000   |   |             |             | 2,962,000   |        
|                                                                                | Non-cash component of extraordinary charge                 |                                                                                                          |                                                                |                                                     |           |            |             |             |   |             |             | 824,000     |        
|                                                                                | Adjustments to derive cash flow from operating activities: |                                                                                                          |                                                                |                                                     |           |            |             |             |   |             |             |             |        
|                                                                                |                                                            |                                                                                                          | Gain of sale of facilities and properties                      |                                                     |           | (8,929,000 | )           |             |   |             |             |             |         |            |            
|                                                                                |                                                            |                                                                                                          | Bad debt expense                                               |                                                     |           | 1,358,000  |             |             |   | 3,425,000   |             |             |         | 5,408,000  |            
|                                                                                |                                                            |                                                                                                          | Depreciation and amortization                                  |                                                     |           | 9,213,000  |             |             |   | 9,331,000   |             |             |         | 8,485,000  |            
|                                                                                |                                                            |                                                                                                          | Deferred income taxes                                          |                                                     |           | (1,150,000 | )           |             |   | 270,000     |             |             |         | (113,000   | )          
|                                                                                |                                                            |                                                                                                          | Deferred rent                                                  |                                                     |           | 589,000    |             |             |   | 677,000     |             |             |         | 677,000    |            
|                                                                                |                                                            |                                                                                                          | Compensation expense related to remeasurement of stock options |                                                     |           | 87,000     |             |             |   |             |             |             |         | 64,000     |            
|                                                                                |                                                            |                                                                                                          | Expense related to discount of executive stock purchase        |                                                     |           | 394,000    |             |             |   |             |             |             |         |            |            
|                                                                                |                                                            |                                                                                                          | Amortization
of senior subordinated note discount              |                                                     |           | 192,000    |             |             |   | 186,000     |             |             |         | 150,000    |            
|                                                                                |                                                            |                                                                                                          | Amortization of deferred gain                                  |                                                     |           | (39,000    | )           |             |   |             |             |             |         |            |            
|                                                                                | Changes in operating assets and liabilities:               |                                                                                                          |                                                                |                                                     |           |            |             |             |   |             |             |             |        
|                                                                                |                                                            |                                                                                                          | Trade accounts receivable                                      |                                                     |           | 5,214,000  |             |             |   | (14,050,000 | )           |             |         | (3,940,000 | )          
|                                                                                |                                                            |                                                                                                          | Inventories                                                    |                                                     |           | 1,084,000  |             |             |   | (641,000    | )           |             |         | (1,536,000 | )          
|                                                                                |                                                            |                                                                                                          | Prepaid expenses and other current assets                      |                                                     |           | (195,000   | )           |             |   | 22,000      |             |             |         | 565,000    |            
|                                                                                |                                                            |                                                                                                          | Accounts payable                                               |                                                     |           | 3,321,000  |             |             |   | 5,924,000   |             |             |         | 3,623,000  |            
|                                                                                |                                                            |                                                                                                          | Accrued expenses and other current liabilities                 |                                                     |           | (1,898,000 | )           |             |   | 4,656,000   |             |             |         | 192,000    |            
|                                                                                |                                                            |                                                                                                          |                                                                |                                                     |           |            |             |             |   |             |             |            
|                                                                                |                                                            |                                                                                                          |                                                                | Net cash provided by operating activities           |           |            | 14,444,000  |             |   |             | 13,547,000  |             |         |            | 17,361,000  |  
|                                                                                |                                                            |                                                                                                          |                                                                |                                                     |           |            |             |             |   |             |             |            
|CASH FLOWS FROM INVESTING ACTIVITIES:                                           |                                                            |                                                                                                          |                                                                |                                                     |           |            |             |             |   |             |             |            
|                                                                                | Restricted cash                                            |                                                                                                          |                                                                | (3,780,000                                          | )         |            |             |             |   |             |             | 785,000     |        
|                                                                                | (Increase) Decrease in other assets                        |                                                                                                          |                                                                | (437,000                                            | )         |            |             | 1,499,000   |   |             |             | (1,533,000  | )      
|                                                                                | Increase in notes receivable                               |                                                                                                          |                                                                | (78,000                                             | )         |            |             |             |   |             |             |             |        
|                                                                                | Acquisition of businesses                                  |                                                                                                          |                                                                |                                                     |           |            |             | (10,400,000 | ) |             |             | (7,000,000  | )      
|                                                                                | Proceeds from sale of facilities and property              |                                                                                                          |                                                                | 19,707,000                                          |           |            |             |             |   |             |             |             |        
|                                                                                | Additions to property, equipment and leaseholds            |                                                                                                          |                                                                | (4,500,000                                          | )         |            |             | (6,471,000  | ) |             |             | (10,626,000 | )      
|                                                                                |                                                            |                                                                                                          |                                                                |                                                     |           |            |             |             |   |             |             |            
|                                                                                |                                                            |                                                                                                          |                                                                | Net cash provided by (used in) investing activities |           |            | 10,912,000  |             |   |             | (15,372,000 | )           |         |            | (18,374,000 | )
|                                                                                |                                                            |                                                                                                          |                                                                |                                                     |           |            |             |             |   |             |             |            
|CASH FLOWS FROM FINANCING ACTIVITIES:                                           |                                                            |                                                                                                          |                                                                |                                                     |           |            |             |             |   |             |             |            
|                                                                                | Proceeds from long-term debt                               |                                                                                                          |                                                                | 17,750,000                                          |           |            |             | 11,969,000  |   |             |             | 10,648,000  |        
|                                                                                | Reduction of long-term debt                                |                                                                                                          |                                                                | (40,743,000                                         | )         |            |             | (9,242,000  | ) |             |             | (12,445,000 | )      
|                                                                                | Capitalized loan fee                                       |                                                                                                          |                                                                |                                                     |           |            |             |             |   |             |             | (1,802,000  | )      
|                                                                                | Payment
received from notes receivable  officers          |                                                                                                          |                                                                |                                                     |           |            |             | 75,000      |   |             |             | 54,000      |        
|                                                                                | Repurchase of stock for executive plan                     |                                                                                                          |                                                                | (3,934,000                                          | )         |            |             |             |   |             |             |             |        
|                                                                                | Reduction of convertible subordinated debentures           |                                                                                                          |                                                                |                                                     |           |            |             |             |   |             |             | (19,534,000 | )      
|                                                                                | Repurchase of common stock                                 |                                                                                                          |                                                                | (311,000                                            | )         |            |             |             |   |             |             | (1,856,000  | )      
|                                                                                | Proceeds from senior subordinated note                     |                                                                                                          |                                                                |                                                     |           |            |             |             |   |             |             | 24,000,000  |        
|                                                                                | Proceeds from issuance of common stock                     |                                                                                                          |                                                                | 40,000                                              |           |            |             | 430,000     |   |             |             |             |        
|                                                                                |                                                            |                                                                                                          |                                                                |                                                     |           |            |             |             |   |             |             |            
|                                                                                |                                                            |                                                                                                          |                                                                | Net cash (used in) provided by financing activities |           |            | (27,198,000 | )           |   |             | 3,232,000   |             |         |            | (935,000    | )
|                                                                                |                                                            |                                                                                                          |                                                                |                                                     |           |            |             |             |   |             |             |            
|Effect of exchange rate changes on cash                                         |                                                            |                                                                                                          | (88,000                                                        | )                                                   |           |            |             |             |   |             |             |            
|NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS FROM CONTINUING OPERATIONS |                                                            |                                                                                                          | (1,930,000                                                     | )                                                   |           |            | 1,407,000   |             |   |             | (1,948,000  | )          
|                                                                                | Net cash provided by (used in) Discontinued Operations     |                                                                                                          |                                                                | 3,598,000                                           |           |            |             | 398,000     |   |             |             | (461,000    | )      
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                  |                                                            |                                                                                                          | 3,886,000                                                      |                                                     |           |            | 2,081,000   |             |   |             | 4,490,000   |            
|                                                                                |                                                            |                                                                                                          |                                                                |                                                     |           |            |             |             |   |             |             |            
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                        |                                                            | $                                                                                                        | 5,554,000                                                      |                                                     |           | $          | 3,886,000   |             |   | $           | 2,081,000   |            
|                                                                                |                                                            |                                                                                                          |                                                                |                                                     |           |            |             |             |   |             |             |            
|CASH PAID DURING THE PERIOD:                                                    |                                                            |                                                                                                          |                                                                |                                                     |           |            |             |             |   |             |             |            
|                                                                                | Interest                                                   |                                                                                                          | $                                                              | 5,666,000                                           |           |            | $           | 7,306,000   |   |             | $           | 6,821,000   |        
|                                                                                | Income taxes paid                                          |                                                                                                          | $                                                              | 470,000                                             |           |            | $           | 3,000       |   |             | $           | 2,309,000   |        
|SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:           |                                                            |                                                                                                          |                                                                |                                                     |           |            |             |             |   |             |             |            
|                                                                                |                                                            | Issuance of 22,565 shares in fiscal 2000
relating to the acquisition
of assets of Weather Data (Note 10) |                                                                |                                                     |           |            |             |             |   |             |             | $           | 158,000 |           
|                                                                                |                                                            | Conversion of 318 debentures into 43,590 shares of common stock                                          |                                                                |                                                     |           |            |             |             |   |             |             | $           | 318,000 |           
|                                                                                |                                                            | Note receivable from affiliate due to the sale of property (Note 13)                                     |                                                                | $                                                   | 1,400,000 |            |             |             |   |             |             |             |         |           
|                                                                                |                                                            | Adjustment of warrants of 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
YEARS ENDED JUNE 30, 2002, 2001 AND 2000

|                       |                                                                                     |  |              |          |            |   |         |        |          |   |            |           |            |   |               |            |               |   |            |            |   |   |          |         |   |   |           |           |  
|---------------------- | ----------------------------------------------------------------------------------- |  | ------------ | -------- | ---------- | - | ------- | ------ | -------- | - | ---------- | --------- | ---------- | - | ------------- | ---------- | ------------- | - | ---------- | ---------- | - | - | -------- | ------- | - | - | --------- | --------- | -
|                       |                                                                                     |  | COMMON STOCK |          |            |   |         |        |          |   |            |           |            |   |               |            | ACCUMULATED   |   |            |            |  
|                       |                                                                                     |  |              |          | ADDITIONAL |   |         |        |          |   | NOTES      |           | OTHER      |   |               |            |              
|                       |                                                                                     |  | NUMBER OF    |          |            |   |         |        | PAID-IN  |   | RETAINED   |           | RECEIVABLE |   | COMPREHENSIVE |            | COMPREHENSIVE
|                       |                                                                                     |  | SHARES       |          | AMOUNT     |   | CAPITAL |        | EARNINGS |   | OFFICERS   |           | (LOSS)     |   | INCOME       
|                       |                                                                                     |  |              |          |            |   |         |        |          |   |            |           |            |   |              
|BALANCE, JUNE 30, 1999 |                                                                                     |  | 6,641,175    |          |            | $ | 66,000  |        |          | $ | 19,873,000 |           |            | $ | 9,543,000     |            |               | $ | (662,000   | )          |   | $ | (237,000 | )       |   | $ | 5,941,000 |          
|                       | Net income                                                                          |  |              |          |            |   |         |        |          |   |            |           |            |   |               | 2,029,000  |               |   |            |            |   |   |          |         |   |   |           | 2,029,000 |  
|                       | Repurchase of common stock                                                          |  |              | (234,375 | )          |   |         | (2,000 | )        |   |            | (705,000  | )          |   |               | (1,149,000 | )             |   |            |            |   |   |          |         |   |   |           |           |  
|                       | Reduction of note receivable from sale of stock                                     |  |              |          |            |   |         |        |          |   |            |           |            |   |               |            |               |   |            | 54,000     |   |   |          |         |   |   |           |           |  
|                       | Foreign currency adjustment                                                         |  |              |          |            |   |         |        |          |   |            |           |            |   |               |            |               |   |            |            |   |   |          | 9,000   |   |   |           | 9,000     |  
|                       | Common stock issued on conversion of debentures                                     |  |              | 43,590   |            |   |         |        |          |   |            | 318,000   |            |   |               |            |               |   |            |            |   |   |          |         |   |   |           |           |  
|                       | Common stock issued in acquisition                                                  |  |              | 22,565   |            |   |         |        |          |   |            | 158,000   |            |   |               |            |               |   |            |            |   |   |          |         |   |   |           |           |  
|                       | Warrants issued in connection with Senior
Subordinated Note                         |  |              |          |            |   |         |        |          |   |            | 1,306,000 |            |   |               |            |               |   |            |            |   |   |          |         |   |   |           |           |  
|                       | Value of remeasured stock options                                                   |  |              |          |            |   |         |        |          |   |            | 64,000    |            |   |               |            |               |   |            |            |   |   |          |         |   |   |           |           |  
|                       |                                                                                     |  |              |          |            |   |         |        |          |   |            |           |            |   |               |            |               |   |            |            |   |   |          |         |   |   |           |          
|BALANCE, JUNE 30, 2000 |                                                                                     |  | 6,472,955    |          |            |   | 64,000  |        |          |   | 21,014,000 |           |            |   | 10,423,000    |            |               |   | (608,000   | )          |   |   | (228,000 | )       |   |   | 2,038,000 |          
|                       | Net income                                                                          |  |              |          |            |   |         |        |          |   |            |           |            |   |               | 2,412,000  |               |   |            |            |   |   |          |         |   |   |           | 2,412,000 |  
|                       | Common stock issued on exercise of options                                          |  |              | 103,725  |            |   |         | 2,000  |          |   |            | 428,000   |            |   |               |            |               |   |            |            |   |   |          |         |   |   |           |           |  
|                       | Reduction of note receivable from sale of stock                                     |  |              |          |            |   |         |        |          |   |            |           |            |   |               |            |               |   |            | 75,000     |   |   |          |         |   |   |           |           |  
|                       |                                                                                     |  |              |          |            |   |         |        |          |   |            |           |            |   |               |            |               |   |            |            |   |   |          |         |   |   |           |          
|BALANCE, JUNE 30, 2001 |                                                                                     |  | 6,576,680    |          |            |   | 66,000  |        |          |   | 21,442,000 |           |            |   | 12,835,000    |            |               |   | (533,000   | )          |   |   | (228,000 | )       |   |   | 2,412,000 |          
|                       | Net income                                                                          |  |              |          |            |   |         |        |          |   |            |           |            |   |               | 5,033,000  |               |   |            |            |   |   |          |         |   |   |           | 5,033,000 |  
|                       | Foreign currency adjustment                                                         |  |              |          |            |   |         |        |          |   |            |           |            |   |               |            |               |   |            |            |   |   |          | (88,000 | ) |   |           | (88,000   | )
|                       | Common stock issued on exercise of options                                          |  |              | 24,219   |            |   |         |        |          |   |            | 40,000    |            |   |               |            |               |   |            |            |   |   |          |         |   |   |           |           |  
|                       | Note
receivable from Sale of Stock (Note 9)                                         |  |              |          |            |   |         |        |          |   |            |           |            |   |               |            |               |   |            | (3,934,000 | ) |   |          |         |   |   |           |           |  
|                       | Value of remeasured stock options                                                   |  |              |          |            |   |         |        |          |   |            | 87,000    |            |   |               |            |               |   |            |            |   |   |          |         |   |   |           |           |  
|                       | Repurchase of common stock                                                          |  |              | (59,200  | )          |   |         | (1,000 | )        |   |            | (193,000  | )          |   |               | (117,000   | )             |   |            |            |   |   |          |         |   |   |           |           |  
|                       | Reduction
of note receivable from sale of stock                                     |  |              |          |            |   |         |        |          |   |            |           |            |   |               |            |               |   |            | 394,000    |   |   |          |         |   |   |           |           |  
|                       | Revaluation of warrants issued in connection
with Senior Subordinated Note (Note 8) |  |              |          |            |   |         |        |          |   |            | 43,000    |            |   |               |            |               |   |            |            |   |   |          |         |   |   |           |           |  
|                       |                                                                                     |  |              |          |            |   |         |        |          |   |            |           |            |   |               |            |               |   |            |            |   |   |          |         |   |   |           |          
|BALANCE, JUNE 30, 2002 |                                                                                     |  | 6,541,699    |          |            | $ | 65,000  |        |          | $ | 21,419,000 |           |            | $ | 17,751,000    |            |               | $ | (4,073,000 | )          |   | $ | (316,000 | )       |   | $ | 4,945,000 |          
|                       |                                                                                     |  |              |          |            |   |         |        |          |   |            |           |            |   |               |            |               |   |            |            |   |   |          |         |   |   |           |          

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##### Table of Contents






MERCURY AIR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE YEARS ENDED JUNE 30, 2002

NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BUSINESS

Mercury Air Group, Inc., (the Company), a Delaware corporation, provides
a broad range of services to the aviation industry through four principal
operating units: fuel sales, cargo operations, fixed base operations and
government contract services. Fuel sales include the sale of fuel and delivery
of fuel primarily to domestic and international commercial airlines, business
aviation and air freight airlines. Cargo operations consist of cargo handling,
space logistics operations and general cargo sales agent services. Fixed base
operations (FBOs) include fuel sales, into-plane services, ground support
services, aircraft hangar and tie-down facilities and maintenance at certain
locations for commercial, private, general aviation and military aircraft.
Government contract services consist of aircraft refueling and fuel storage
operations, base operating support (BOS) services, air terminal and ground
handling services and weather observation and forecasting services performed
principally for agencies of the United States government. Additionally, the
Company had a fifth operating unit, RPA Airline Automation Services, Inc.
(RPA) which was sold on July 3, 2001 and is classified as a discontinued
operation (See Note 2).

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Mercury Air
Group, Inc. and its 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 current tax obligations or for current debt service
(See Note 10).

INVENTORIES

Inventory is stated at the lower of aggregate cost (first-in, first-out
method) 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.

COST IN EXCESS OF NET ASSETS ACQUIRED

Cost in excess of net assets acquired is being amortized using the
straight-line method over estimated lives ranging from ten to forty years. The
Company assesses recoverability on a periodic basis. Factors included in
evaluating recoverability include historical earnings and projected future
earnings of the related operations.

DEFERRED RENT

Rent expense is amortized
over a straight line basis over the life of the lease. Deferred rent
represents excess of rent computed on a straight line basis over
amount of accumulative cash payments.

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##### Table of Contents



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 the weighted average rate in effect during
the year. The aggregate effect of translating the financial statements of the
foreign subsidiaries is included in other comprehensive income. Foreign
exchange gains (losses) were not significant during the years presented.

REVENUE RECOGNITION

Revenues are recognized upon delivery of product or completion of service.
The Companys contracts with the U.S. Government are subject to profit
renegotiation. To date the Company has not been required to adjust profits
arising out of U.S. Government contracts.

INCOME TAXES

Deferred income tax assets and liabilities are recognized based on
differences between the financial statement and income tax bases of assets and
liabilities using presently enacted income tax rates.

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 book
values of the Companys variable interest rate debt instruments are considered to approximate their
fair values because the interest rates of these instruments are based on
current rates offered to the Company. The Company estimates the fair
value on the $24 million 12% Senior Subordinate Note as of
June 30, 2002 to be $20 million.

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. Measurement of
an impairment loss is based on the estimated fair value of the asset.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with generally
accepted accounting principles 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

In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations. SFAS No. 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interest method. The adoption of SFAS No. 141 did not have an
impact on the Companys financial statements.

In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. The Company is required to adopt SFAS No. 142 on July 1, 2002. SFAS
No. 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential
future impairments of goodwill. SFAS No. 142 also requires the Company to
complete a transitional goodwill impairment test six months from the date of
adoption. The Company has not yet determined what impact the adoption will
have on its financial statements.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supersedes FASB Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. This new statement also supersedes
certain aspects 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,
with regard to reporting the effects of a disposal of a segment of a business
and will require expected future operating

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losses from discontinued operations to be reported in discontinued
operations in the period incurred (rather than as of the measurement date as
presently required by APB Opinion No. 30). In addition, more dispositions may
qualify for discontinued operations treatment. The provisions of this
statement are required to be applied on July 1, 2002. The Company has not yet
determined what effect this statement will have on its financial statements.

In April 2002, the FASB issued SFAS No. 145, which rescinds SFAS No. 4,
Reporting Gains and Losses from Extinguishment of Debt, and also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. A
principal effect will be the prospective characterization of gains and losses
from debt extinguishments used as part of an entitys risk management strategy.
Under SFAS No. 4, all gains and losses from early extinguishment of debt were
required to be aggregated and, if material, classified as an extraordinary
item, net or related income tax effect. Under SFAS No. 145, most gains and
losses from extinguishment of debt will not be classified as extraordinary
items unless they meet the much narrower criteria in APB Opinion No. 30. SFAS
No. 145 may be adopted early, but is otherwise effective for fiscal years
beginning after May 15, 2002, and must be adopted with retroactive effect. The
Company believes that SFAS No. 145 will not have a material effect on the
Companys consolidated financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 requires that cost associated
with an exit or disposal activity be recognized when incurred as opposed to an
entitys commitment to an exit plan as previously allowed. The provisions of
SFAS No. 146 are effective for exit or disposal activities that are initiated
after December 31, 2002, with early application encouraged. The Company
believes that SFAS No. 146 will not have a material effect on the Companys
consolidated financial position or results or operations.

RECLASSIFICATIONS

Certain reclassifications were made to prior year statements to conform to
the June 30, 2002 presentation.

RISKS AND UNCERTAINTIES

As of June 30, 2002, the Company was in noncompliance with the maximum
unfunded capital expenditures covenant and the minimum quarterly net earnings
covenant included in the Senior Secured Credit Facility and the Senior
Subordinated Note agreement. The Company is in discussions with the lenders
associated with these debt instruments to obtain waivers from these covenants.
Until the waivers have been accepted and executed, the lenders have the right
to provide written notice to the Company and declare the outstanding obligation
associated with these debt instruments to be immediately due and payable. The
lenders have not exercised this right. In addition to being engaged in continuing
discussions with the lenders to obtain waivers for these covenants, the Company
has also engaged a financial advisor and is in discussions with other lenders
to provide new financing to replace the Senior Secured Credit Facility and the
Note. There can be no assurance that the Company could obtain the
financing necessary, which may result in the Company having
inadequate financial resources to meet this obligation. However, the Company believes that it will be able to secure new financing to
replace the Senior Secured Credit Facility and the Note if the lenders exercise
their right to accelerate the maturity dates. (See Notes 7 and 8).

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 a single industry, aviation, 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 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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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. The net
operating results, net assets and net cash flows of this business have been
reported as Discontinued Operations in the accompanying consolidated
financial statements.

Pursuant to the agreement to which the sale was made, 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 a 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 termination costs of
former RPA employees. At June 30, 2002, the
Company no longer retained any significant assets or liabilities related to
RPA. Summarized financial information for the discontinued operations is as
follows:

|                         |  |                            |          |      |  |      |            |   |  |   |            |  
|------------------------ |  | -------------------------- | -------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                         |  | FISCAL YEAR ENDED JUNE 30,
|                         |  |                           
|                         |  | 2002                       |          | 2001 |  | 2000
|                         |  |                            |          |      |  |     
|Service revenues         |  |                            |          |      |  | $    | 4,224,000  |   |  | $ | 4,409,000  |  
|Operating expense        |  |                            |          |      |  |      | 4,334,000  |   |  |   | 5,710,000  |  
|                         |  |                            |          |      |  |      |            |   |  |   |            |  
|Gross loss               |  |                            |          |      |  |      | (110,000   | ) |  |   | (1,301,000 | )
|                         |  |                            |          |      |  |      |            |   |  |   |            |  
|Other Expense            |  | $                          | 279,000  |      |  |      | 1,296,000  |   |  |   | 229,000    |  
|                         |  |                            |          |      |  |      |            |   |  |   |            |  
|Loss before income taxes |  |                            | (279,000 | )    |  |      | (1,406,000 | ) |  |   | (1,530,000 | )
|Income tax benefit       |  |                            | (109,000 | )    |  |      | (548,000   | ) |  |   | (597,000   | )
|                         |  |                            |          |      |  |      |            |   |  |   |            |  
|Net loss                 |  | $                          | (170,000 | )    |  | $    | (858,000   | ) |  | $ | (933,000   | )
|                         |  |                            |          |      |  |      |            |   |  |   |            |  

|                                      |  |          |           | 
|------------------------------------- |  | -------- | --------- | 
|                                      |  | June 30,
|                                      |  | 2001    
|                                      |  |         
|Current Assets                        |  | $        | 4,324,000 | 
|Total Assets                          |  |          | 5,292,000 | 
|Current and Total Liabilities         |  |          | 954,000   | 
|Net assets of discontinued operations |  |          | 4,338,000 | 

NOTE 3  PROPERTY, EQUIPMENT AND LEASEHOLDS:

Property, equipment and leaseholds consist of the following:

|                                               |  |          |             |      |  |   |             |  
|---------------------------------------------- |  | -------- | ----------- | ---- |  | - | ----------- | -
|                                               |  | JUNE, 30
|                                               |  |         
|                                               |  | 2002     |             | 2001
|                                               |  |          |             |     
|Land, buildings and leasehold improvements     |  | $        | 83,018,000  |      |  | $ | 86,691,000  |  
|Equipment, furniture and fixtures              |  |          | 29,668,000  |      |  |   | 32,096,000  |  
|Construction in progress                       |  |          | 268,000     |      |  |   | 5,157,000   |  
|                                               |  |          |             |      |  |   |             |  
|                                               |  |          | 112,954,000 |      |  |   | 123,944,000 |  
|Less accumulated depreciation and amortization |  |          | (53,668,000 | )    |  |   | (50,811,000 | )
|                                               |  |          |             |      |  |   |             |  
|                                               |  | $        | 59,286,000  |      |  | $ | 73,133,000  |  
|                                               |  |          |             |      |  |   |             |  

NOTE 4  OTHER ASSETS:

Other assets consists of the following:

|                                     |  |          |           |      |  |   |           | 
|------------------------------------ |  | -------- | --------- | ---- |  | - | --------- | 
|                                     |  | JUNE, 30
|                                     |  |         
|                                     |  | 2002     |           | 2001
|                                     |  |          |           |     
|Goodwill  net                       |  | $        | 4,764,000 |      |  | $ | 5,191,000 | 
|Capitalized loan fees  net (Note 7) |  |          | 2,142,000 |      |  |   | 2,233,000 | 
|Internally developed software        |  |          | 754,000   |      |  |   |           | 
|Covenants not to compete  net       |  |          | 233,000   |      |  |   | 383,000   | 
|Other                                |  |          | 825,000   |      |  |   | 1,333,000 | 
|                                     |  |          |           |      |  |   |           | 
|                                     |  | $        | 8,718,000 |      |  | $ | 9,140,000 | 
|                                     |  |          |           |      |  |   |           | 

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Goodwill and covenants not to compete have resulted from various
acquisitions and are being amortized using the straight-line method over
periods ranging from five to forty years. Accumulated amortization related to
goodwill was $2,291,000 and $1,865,000 at June 30,
2002 and 2001, respectively. Accumulated amortization related to covenants not
to compete was $767,000 and $617,000 at June 30, 2002 and 2001, respectively.

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

NOTE 5  ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:

Accrued expenses and other current liabilities consist of the following:

|                   |  |          |           |      |  |   |            | 
|------------------ |  | -------- | --------- | ---- |  | - | ---------- | 
|                   |  | JUNE
30,
|                   |  |         
|                   |  | 2002     |           | 2001
|                   |  |          |           |     
|Salaries and wages |  | $        | 2,825,000 |      |  | $ | 2,977,000  | 
|Other              |  |          | 5,634,000 |      |  |   | 7,380,000  | 
|                   |  |          |           |      |  |   |            | 
|                   |  | $        | 8,459,000 |      |  | $ | 10,357,000 | 
|                   |  |          |           |      |  |   |            | 

NOTE 6  INCOME TAXES:

The provision for taxes on income consists of the following:

|                            |  |                     |            |      |  |      |           |   |  |   |           |  
|--------------------------- |  | ------------------- | ---------- | ---- |  | ---- | --------- | - |  | - | --------- | -
|                            |  | YEAR ENDED JUNE 30,
|                            |  |                    
|                            |  | 2002                |            | 2001 |  | 2000
|                            |  |                     |            |      |  |     
|Federal, current            |  | $                   | 4,090,000  |      |  | $    | 1,855,000 |   |  | $ | 2,235,000 |  
|State, current              |  |                     | 386,000    |      |  |      | 272,000   |   |  |   | 398,000   |  
|                            |  |                     |            |      |  |      |           |   |  |   |           |  
|                            |  |                     | 4,476,000  |      |  |      | 2,127,000 |   |  |   | 2,633,000 |  
|Deferred, primarily federal |  |                     | (1,150,000 | )    |  |      | 270,000   |   |  |   | (113,000  | )
|                            |  |                     |            |      |  |      |           |   |  |   |           |  
|Provision                   |  |                     | 3,326,000  |      |  |      | 2,397,000 |   |  |   | 2,520,000 |  
|Discontinued operations     |  |                     | (109,000   | )    |  |      | (853,000  | ) |  |   | (597,000  | )
|Extraordinary item          |  |                     |           |      |  |      |          |   |  |   | (625,000  | )
|                            |  |                     |            |      |  |      |           |   |  |   |           |  
|Net Provision               |  | $                   | 3,217,000  |      |  | $    | 1,544,000 |   |  | $ | 1,298,000 |  
|                            |  |                     |            |      |  |      |           |   |  |   |           |  

Major components of deferred income tax (assets) and liabilities were as
follows:

|                                |  |                     |          |      |  |   |           |  
|------------------------------- |  | ------------------- | -------- | ---- |  | - | --------- | -
|                                |  | YEAR ENDED JUNE 30,
|                                |  |                    
|                                |  | 2002                |          | 2001
|                                |  |                     |          |     
|Depreciation/amortization       |  | $                   | 401,000  |      |  | $ | 1,437,000 |  
|Prepaid expenses                |  |                     | 559,000  |      |  |   | 695,000   |  
|State income taxes              |  |                     | (135,000 | )    |  |   | (90,000   | )
|Allowance for doubtful accounts |  |                     | (582,000 | )    |  |   | (645,000  | )
|Deferred rent                   |  |                     | (714,000 | )    |  |   | (528,000  | )
|Installment sale deferral       |  |                     | (423,000 | )    |  |   |          |  
|Capital loss                    |  |                     |         |      |  |   | (642,000  | )
|Other                           |  |                     | 124,000  |      |  |   | 153,000   |  
|                                |  |                     |          |      |  |   |           |  
|                                |  | $                   | (770,000 | )    |  | $ | 380,000   |  
|                                |  |                     |          |      |  |   |           |  

The reconciliation of the federal statutory rate to the Companys
effective tax rate on income is summarized as follows:

|                                                      |  |                     |      |      |  |      |      |   |  |  |      |  
|----------------------------------------------------- |  | ------------------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                                      |  | YEAR ENDED JUNE 30,
|                                                      |  |                    
|                                                      |  | 2002                |      | 2001 |  | 2000
|                                                      |  |                     |      |      |  |     
|Computed expected income tax rate                   |  |                     | 34.0 | %    |  |      | 34.0 | % |  |  | 34.0 | %
|State income taxes, net of
Federal income tax benefit |  |                     | 5.0  |      |  |      | 5.0  |   |  |  | 5.0  |  
|                                                      |  |                     |      |      |  |      |      |   |  |  |      |  
|Effective income tax rate                             |  |                     | 39.0 | %    |  |      | 39.0 | % |  |  | 39.0 | %
|                                                      |  |                     |      |      |  |      |      |   |  |  |      |  

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NOTE 7  LONG-TERM:

Long-term debt consists of the following:

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |          |            |      |  |   |            | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | ---------- | ---- |  | - | ---------- | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | JUNE 30,
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | 2002     |            | 2001
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |          |            |     
|Notes payable to banks                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | $        | 12,968,000 |      |  | $ | 33,404,000 | 
|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 payments 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,
2002 was 1.2%. 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 1.9% of
the principal. |  |          | 15,000,000 |      |  |   | 16,000,000 | 
|Notes payable to trustees for bankrupt airlines                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |          | 504,000    |      |  |   | 1,529,000  | 
|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.                                                                                                                                                                                                                                                                                                                                                                                       |  |          | 298,000    |      |  |   | 323,000    | 
|Mortgage payable to a financial institution in aggregate monthly principal installments of
$9,750 plus interest at 7.5%. Mortgage was paid in full with the sale of the building in
January 2002.                                                                                                                                                                                                                                                                                                                                                                                  |  |          |            |      |  |   | 332,000    | 
|Convertible subordinated debentures payable to seller of Excel Cargo in monthly
installments of $13,810 including interest at 8.5%, collateralized by property acquired,
maturing in September 2003.                                                                                                                                                                                                                                                                                                                                                                               |  |          | 208,000    |      |  |   | 350,000    | 
|Other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |          | 50,000     |      |  |   | 83,000     | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |          |            |      |  |   |            | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |          | 29,028,000 |      |  |   | 52,021,000 | 
|Less current portion of long term debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |          | 14,677,000 |      |  |   | 7,461,000  | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |          |            |      |  |   |            | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | $        | 14,351,000 |      |  | $ | 44,560,000 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |          |            |      |  |   |            | 

Notes Payable to banks consists principally of a credit Facility (the
Credit Facility) which provides for a term loan (the Term Loan), an
acquisition line (the Acquisition Line) and a revolving line of credit (the
Revolver). The Credit Facility expires in March 2004. Borrowings under the
Term Loan were $4.1 million and $15.3 million at June 30, 2002 and 2001,
respectively. Principal payments are payable in quarterly installments of $1.4
million as of June 30, 2002. Outstanding borrowings under the Acquisition Line
were $5.9 million and $18.1 million at June 30, 2002 and 2001, respectively.
Principal is due in March 2004. The Revolver permits borrowings of up to $35.0
million. As of June 30, 2002 the Revolving Credit facility had
$3.0 million of principal outstanding and $17.3 million
utilized to issue stand-by letters of credit leaving an unused
Revolving Credit line of $7.2 million. There were no outstanding borrowings under the Revolver at June 30,
2001. Interest for the Term Loan and the Acquisition Line accrues at LIBOR+
2.50% (4.34% based on 30 day LIBOR rates in effect at June 30, 2002). The
Revolver accrues interest at a base rate of 5% at June 30, 2002.

Certain debt agreements contain provisions that require the maintenance of
certain financial ratios, minimum tangible net worth (as defined), minimum
profitability levels, maximum leverage and minimum debt service coverage and
quick ratios and limitations on annual capital expenditures. Additionally, the
Company is prohibited from paying dividends in excess of $400,000 per fiscal
year.

The Company is
currently in discussions with the credit facility lenders to obtain debt
covenant waivers regarding the maximum unfunded capital expenditure for the
fiscal year ended June 30, 2002 and the minimum quarterly net earnings for the
2nd and 3rd quarters of fiscal year 2002. Until these covenant waivers are
agreed to and executed, the credit facility lenders have 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. The credit facility lenders have not executed this right. As such, the entire amount of principal
outstanding of the credit facility as of June 30, 2002 has been classified as current portion of long
term debt.

Notes payable to trustees for bankrupt airlines results from settlements
with two bankrupt airlines. On March 16, 2001, the bankruptcy court approved a
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, of which six have
been paid to date with the unpaid balance secured by a letter of credit. The
Company recorded a charge to bad debt expense equal to the present

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value of
the payments, $1.6 million in fiscal 2001. The outstanding balance was $0.5
million at June 30, 2002. In February 2001, the Company received notice of a
complaint filed by the Chapter 7 Trustee for Tower Airlines in regard to a
preference action. In July 2001, the Company settled this matter for $1.0
million which was fully paid as of June 30, 2002.

Long-term debt payable, excluding Senior Subordinated Notes (Note 8) subsequent
to June 30, 2002 is as follows:

|           |      |   |            |            | 
|---------- | ---- | - | ---------- | ---------- | 
|           | 2003 |   | $          | 14,677,000 | 
|           | 2004 |   |            | 1,100,000  | 
|           | 2005 |   |            | 1,026,000  | 
|           | 2006 |   |            | 1,026,000  | 
|           | 2007 |   |            | 1,026,000  | 
|Thereafter |      |   | 10,173,000 |           
|           |      |   |            |           
|           |      | $ | 29,028,000 |           
|           |      |   |            |           

NOTE 8  SENIOR SUBORDINATED NOTE/EXTRAORDINARY ITEM:

On September 10, 1999, the Company issued, in a private placement, $24.0
million Senior Subordinated 12% Note (the Note) due 2006 with detachable
warrants to acquire 503,126 shares of the Companys common stock originally
exercisable at $6.50 per share for seven years. On November 16, 2001, the
agreement was amended to reduce the exercise price of the warrants to $5.50 per
share resulting in an increase in the value of the warrants. The Note agreement
contains covenants that, among other matters, limit senior indebtedness, the
disposition of assets and unfunded capital expenditures. The covenants also
include ratio tests for interest coverage, leverage, fixed charge coverage and
debt service. On November 16, 2001 and effective September 30, 2001, the
Company received a waiver pertaining to the interest coverage test and the
agreement was amended by reducing the ongoing interest coverage test.

The Company is currently in discussions with the lender to obtain a debt
covenant waiver regarding the maximum unfunded capital expenditures for the
fiscal year ended June 30, 2002. Until this waiver is agreed to and executed,
the lender has the right to provide the Company with written notice declaring
the principal and accrued interest associated with the Senior Subordinated
Notes to be immediately due and payable. The lender has not executed this
right. As such, the entire amount of principal outstanding as of June 30, 2002
has been classified as Senior Subordinated Note, current.

Proceeds of the Note were used to redeem the remaining $19.5 million of
the Companys 7 3/4% convertible subordinated debentures due February 1, 2006
at 104% of the principal amount plus accrued interest and pay expenses of the
transaction as follows:

|                                                                                         |  |   |            |  
|---------------------------------------------------------------------------------------- |  | - | ---------- | -
|Principal balance of Debentures redeemed                                                 |  | $ | 19,509,000 |  
|Redemption premium of 4%                                                                 |  |   | 780,000    |  
|Accrued Interest                                                                         |  |   | 164,000    |  
|Placement fees, legal fees and other expenses of transaction
capitalized as other assets |  |   | 1,750,000  |  
|Cash received                                                                            |  |   | 1,797,000  |  
|                                                                                         |  |   |            |  
|Proceeds                                                                                 |  | $ | 24,000,000 |  
|Valuation of warrants credited to additional paid-in-capital                             |  |   | (1,349,000 | )
|Warrants amortized as interest expense through June 30, 2002                             |  |   | 528,000    |  
|                                                                                         |  |   |            |  
|Senior Subordinated Note                                                                 |  | $ | 23,179,000 |  
|                                                                                         |  |   |            |  

As a result of this transaction the Company recorded an extraordinary
charge of $979,000 in fiscal 2000 (net of a $625,000 income tax benefit). The
extraordinary charge consists of the redemption premium of $780,000 plus the
write off of capitalized fees of $824,000.

NOTE 9  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
1,813,000 shares related to the Incentive Plans and 587,000 shares related to
the Directors Plans. The Company has also reserved 7,000 shares for special
option grants made outside the plans. Options granted pursuant to the plans and
special grants are generally

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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 Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Had compensation cost for stock options been calculated using the fair value
provisions of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation, the Companys net income and earnings per share
would have approximated the pro forma amounts indicated in the following table:

|                                         |  |      |           |      |  |      |           |  |  |   |           | 
|---------------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                         |  | 2002 |           | 2001 |  | 2000
|                                         |  |      |           |      |  |     
|Net
income  as reported                 |  | $    | 5,033,000 |      |  | $    | 2,412,000 |  |  | $ | 2,029,000 | 
|Net
income  pro forma                   |  |      | 4,795,000 |      |  |      | 2,209,000 |  |  |   | 1,877,000 | 
|Basic
earnings per share  as reported   |  |      | .77       |      |  |      | .37       |  |  |   | .31       | 
|Basic earnings per share  pro forma     |  |      | .73       |      |  |      | .34       |  |  |   | .29       | 
|Diluted
earnings per share  as reported |  |      | .75       |      |  |      | .36       |  |  |   | .30       | 
|Diluted
earnings per share  pro forma   |  |      | .72       |      |  |      | .33       |  |  |   | .27       | 

The weighted average fair value of options granted in 2002, 2001 and 2000
is estimated as $2.26, $2.60 and $3.45 respectively, on the date of grant using
the Black-Scholes option pricing model using the following weighted average
assumptions.

|                        |  |         |      |         |  |         |      |   |  |  |      |  
|----------------------- |  | ------- | ---- | ------- |  | ------- | ---- | - |  |  | ---- | -
|                        |  | 2002    |      | 2001    |  | 2000   
|                        |  |         |      |         |  |        
|Expected life           |  | 5 years |      | 5 years |  | 5 years
|Expected volatility     |  |         | 45   | %       |  |         | 43   | % |  |  | 38   | %
|Risk free interest rate |  |         | 1.90 | %       |  |         | 4.90 | % |  |  | 6.19 | %
|Dividend yield          |  |         | 0    | %       |  |         | 0    | % |  |  | 0    | %

A summary of stock option activity is as follows:

|                          |  |               |       |           |  |                |         |              |  |               |      |         |  |  |         |   |  |   |       |  |  |  |         |  
|------------------------- |  | ------------- | ----- | --------- |  | -------------- | ------- | ------------ |  | ------------- | ---- | ------- |  |  | ------- | - |  | - | ----- |  |  |  | ------- | -
|                          |  | WEIGHTED      |       | LONG-TERM |  | WEIGHTED       |         | DIRECTOR'S   |  | WEIGHTED      |      | SPECIAL
|                          |  | AVERAGE       |       | INCENTIVE |  | AVERAGE OPTION |         | STOCK OPTION |  | AVERAGE       |      | OPTION 
|                          |  | OPTION PRICES |       | PLANS     |  | PRICES         |         | PLANS        |  | OPTION PRICES |      | GRANTS 
|                          |  |               |       |           |  |                |         |              |  |               |      |        
|Outstanding June 30, 1999 |  | $             | 5.25  |           |  |                | 370,133 |              |  | $             | 4.53 |         |  |  | 317,625 |   |  | $ | 2.43  |  |  |  | 151,500 |  
|Granted                   |  |               | 8.125 |           |  |                | 65,300  |              |  |               | 7.75 |         |  |  | 40,000  |   |  |   |      |  |  |  |        |  
|Exercised                 |  |               |      |           |  |                |        |              |  |               |     |         |  |  |        |   |  |   |      |  |  |  |        |  
|Cancelled                 |  |               | 7.87  |           |  |                | (20,303 | )            |  |               |     |         |  |  |         |   |  |   |      |  |  |  |        |  
|                          |  |               |       |           |  |                |         |              |  |               |      |         |  |  |         |   |  |   |       |  |  |  |         |  
|Outstanding June 30, 2000 |  |               | 5.60  |           |  |                | 415,130 |              |  |               | 4.89 |         |  |  | 357,625 |   |  |   | 2.43  |  |  |  | 151,500 |  
|Granted                   |  |               | 6.125 |           |  |                | 46,400  |              |  |               | 5.73 |         |  |  | 90,000  |   |  |   |       |  |  |  |         |  
|Exercised                 |  |               |       |           |  |                |         |              |  |               | 5.36 |         |  |  | (45,375 | ) |  |   | 3.20  |  |  |  | (58,350 | )
|Repurchased               |  |               |       |           |  |                |         |              |  |               |      |         |  |  |         |   |  |   | 1.542 |  |  |  | (86,275 | )
|                          |  |               |       |           |  |                |         |              |  |               |      |         |  |  |         |   |  |   |       |  |  |  |         |  
|Cancelled                 |  |               | 7.60  |           |  |                | (13,000 | )            |  |               | 7.13 |         |  |  | (35,125 | ) |  |   |       |  |  |  |         |  
|                          |  |               |       |           |  |                |         |              |  |               |      |         |  |  |         |   |  |   |       |  |  |  |         |  
|Outstanding June 30, 2001 |  |               | 5.59  |           |  |                | 448,530 |              |  |               | 4.82 |         |  |  | 367,125 |   |  |   | 7.18  |  |  |  | 6,875   |  
|Granted                   |  |               | 5.45  |           |  |                | 500,000 |              |  |               | 6.61 |         |  |  | 10,000  |   |  |   |       |  |  |  |         |  
|Exercised                 |  |               | 1.63  |           |  |                | (24,450 | )            |  |               |      |         |  |  |         |   |  |   |       |  |  |  |         |  
|Cancelled                 |  |               | 7.94  |           |  |                | (39,300 | )            |  |               |      |         |  |  | (15,125 | ) |  |   | 1.49  |  |  |  |         |  
|                          |  |               |       |           |  |                |         |              |  |               |      |         |  |  |         |   |  |   |       |  |  |  |         |  
|Outstanding
June 30, 2002 |  | $             | 5.53  |           |  |                | 884,780 |              |  | $             | 4.87 |         |  |  | 362,000 |   |  | $ | 5.01  |  |  |  | 6,875   |  
|                          |  |               |       |           |  |                |         |              |  |               |      |         |  |  |         |   |  |   |       |  |  |  |         |  

A summary of information about stock options issued and outstanding
pursuant to the Incentive Plan, Directors Plan and special option grants at
June 30, 2002 is as follows:

|               |  |                     |           |                     |  |          |      |             |  |                  |      |  |  |  |         |  |  |   |      | 
|-------------- |  | ------------------- | --------- | ------------------- |  | -------- | ---- | ----------- |  | ---------------- | ---- |  |  |  | ------- |  |  | - | ---- | 
|               |  | OPTIONS OUTSTANDING |           | OPTIONS EXERCISABLE |  |          |      |            
|               |  |                     |           |                     |  |          |      |            
|               |  |                     |           |                     |  |          |      |             |  | WEIGHTED         |      |  |  |  |         |  |  |  
|               |  | SHARES              |           | WEIGHTED            |  | AVERAGE  |      | SHARES      |  | WEIGHTED        
|EXERCISE       |  | OUTSTANDING AT      |           | AVERAGE CONTRACTUAL |  | EXERCISE |      | EXERCISABLE |  | AVERAGE EXERCISE
|PRICE RANGE    |  | 6/30/02             |           | REMAINING LIFE      |  | PRICE    |      | AT 6/30/02  |  | PRICE           
|               |  |                     |           |                     |  |          |      |             |  |                 
|$1.236
- 2.436 |  |                     | 179,522   |                     |  |          | 0.70 |             |  | $                | 1.74 |  |  |  | 179,522 |  |  | $ | 1.74 | 
|3.669
- 5.750  |  |                     | 726,375   |                     |  |          | 8.10 |             |  |                  | 5.55 |  |  |  | 236,375 |  |  |   | 5.48 | 
|6.090
- 7.182  |  |                     | 219,958   |                     |  |          | 4.70 |             |  |                  | 6.50 |  |  |  | 219,958 |  |  |   | 6.50 | 
|7.75
- 8.4375  |  |                     | 127,800   |                     |  |          | 6.60 |             |  |                  | 8.06 |  |  |  | 127,800 |  |  |   | 8.06 | 
|               |  |                     |           |                     |  |          |      |             |  |                  |      |  |  |  |         |  |  |   |      | 
|               |  |                     | 1,253,655 |                     |  |          |      |             |  | $                | 5.27 |  |  |  | 763,655 |  |  | $ | 5.34 | 
|               |  |                     |           |                     |  |          |      |             |  |                  |      |  |  |  |         |  |  |   |      | 

The Company had shares exercisable under the various options plans of
680,111 and 786,086 at June 30, 2001 and June 30, 2000, respectively, at a
weighted average exercise price of $5.14 and $4.32, respectively.

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In March 2000, the Board of Directors extended the termination date of
options for 38,875 shares held by an officer and a Director. This resulted in
compensation expense of $64,000.

During fiscal 2002, the Company extended the termination dates of options for
33,250 shares held by an officer and a Director, resulting in an expense of
$87,000.

During fiscal 1996, the Company sold 137,500 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 are due in fiscal year 2006. As of June 30, 2002,
$533,000 remained outstanding.

In May 2002, the
Company loaned certain officers a total of $3.9 million to
purchase shares in the Companys stock from CFK Partners (see
note 13) at a price of $7.50 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 Companys executives are collateralized by the related
common stock. During the quarter ended June 30, 2002, the
Company recorded a compensation charge for the Non-Recourse loans of
$356,000, representing the difference between the purchase price of
the shares ($7.50) and the trading price ($4.90) times the number of
shares purchased. The loans to the executives (including the Full
Recourse Note), were made pursuant to employment agreements and
contain provisions to be forgiven over a ten-year period.
Compensation expense will be charged annually as the loans are
forgiven.

NOTE 10  ACQUISITIONS AND DIVESTITURES:

The Company acquired various businesses during fiscal years 2001 and 2000.
All such acquisitions have been accounted for under the purchase method of
accounting. Pro forma disclosure has not been provided as the aggregate annual
purchases have not been material. In fiscal year 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 $9.0 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 hangers, buildings and leaseholds at
its Tulsa, Oklahoma FBO and paid $3.8 million cash which was borrowed from its
acquisition line.

Fiscal 2000

On April 21, 2000, the Company acquired certain assets of an FBO located
in Fort Wayne, Indiana for $3.9 million in cash. The Company utilized borrowing
available under its acquisition line to fund the purchase. The purchase price
was allocated primarily to Property, Equipment and Leaseholds with an amount
also allocated to inventories.

On October 22, 1999, the Company acquired certain assets of Air Tulsa,
Inc., an FBO located in Tulsa, Oklahoma. Assets acquired included refueling
equipment and tank farms utilized in the FBO business, as well as inventories,
prepaid expenses and a sublease. The agreement also includes a non-compete with
the seller. Total consideration was $2.4 million which the Company initially
paid in cash and which was subsequently funded by borrowings available under
its acquisition line. The agreement included a second closing
to occur within eighteen months to include the purchase of hangars,
buildings and the leasehold for additional cash consideration of $3.8 million.
This transaction was completed in July 2000 and was also financed with the
Companys acquisition line.

On October 5, 1999, the Company acquired certain FBO assets for $700,000
in cash related to its leasehold at Charleston International Airport and
includes the leasehold at Johns Island Executive Airport.

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NOTE 11  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
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 in the quarter ended
December 31, 2001.

NOTE 12  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 the fiscal years 2002, 2001 and 2000 was $12,547,000, $10,133,000 and
$8,640,000, respectively, which is net of sublease income of approximately
$183,000 during fiscal year 2002 and $332,000 for fiscal year 2001 and 2000.
The minimum annual rentals on all noncancellable operating leases having a term
of more than one year at June 30, 2002 are as follows:

|           |                                |   |            |             | 
|---------- | ------------------------------ | - | ---------- | ----------- | 
|2003       |                                | $ | 12,150,000 |            
|2004       |                                |   | 12,076,000 |            
|2005       |                                |   | 11,146,000 |            
|2006       |                                |   | 10,316,000 |            
|2007       |                                |   | 7,301,000  |            
|Thereafter |                                |   | 65,432,000 |            
|           |                                |   |            |            
|           | Total minimum payment required |   | $          | 118,421,000 | 
|           |                                |   |            |            

EMPLOYMENT CONTRACTS

As of June 30, 2002, the Company had employment contracts with key
executives. The Companys minimum payments for these key employment contracts,
excluding discretionary and performance bonuses, are as follow:

|     |                        |   |           |           | 
|---- | ---------------------- | - | --------- | --------- | 
|2003 |                        | $ | 1,688,000 |          
|2004 |                        |   | 1,388,000 |          
|2005 |                        |   | 927,000   |          
|     |                        |   |           |          
|     | Total minimum payments |   | $         | 4,003,000 | 
|     |                        |   |           |          

PURCHASE COMMITMENTS

On April 1, 2002, MAC unit 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.

LITIGATION

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.
Mercury believes that this counterclaim is without merit, and accordingly, does not
believe this matter will have a significant impact on it financial position or
operating results.

On April 3, 2001 Mercury received notice of an action filed by Skylink
Express, Inc. in the Superior Court of Justice Ontario, Canada against Excel
Cargo, Inc. and others for damages to aircraft occurring on November 30, 1999
and January 10, 2000 at Mirabel International Airport Quebec for a total amount
of $2.5 million Canadian ($1.65 million U.S.) plus interest and fees. Mercury
does not believe the outcome of this claim will have a significant impact on
its financial position or operating results.

On November 30, 2001, the Company received notice of a counter-complaint
filed by UPS against the Company and a third party seeking indemnification and
reimbursement in the amount of $470,000 for the costs incurred as a result of a
fuel spill at the Ontario,

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California Airport. The Company has provided a
response to UPS denying such claim and on September 28, 2001, filed a lawsuit
seeking reimbursement for damages. Mercury does not believe the outcome of
this claim will have a significant impact on its financial position or
operating results.

On May 1, 2002, Mercury received a Notice of Violation (NOV) for its
Fort Wayne, Indiana facility alleging that Mercurys Spill Prevention, Control
and Countermeasure Plan (SPCC) does not meet certain federal regulatory
guidelines. Specifically, the EPA alleged that Mercurys SPCC failed to
provide for proper parking, secondary containment, and proper drainage of its
refueler trucks. The EPA has requested that Mercury submit a written response
to its allegations. The Company is in the process of responding to the EPA.
Mercury intends to fully comply with all EPA requirements.

NOTE 13  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 shares.

In January 2002, the Company sold land and a building which comprise its
corporate headquarters to CFK Partners, LLC (CFK Partners) for $4.2 million,
consisting of $2.8 million cash and a note receivable of $1.4 million. The
note receivable accrues interest at 5% and is due on December 31, 2002,
however, CFK Partners has options to extend the note through December 31, 2004.
Concurrently, the Company also entered into a ten-year lease for the property.
The lease payments currently approximate $37,000 per month. The excess of the
sales price over the net book value of the property of $2.2 million was recorded
as a deferred gain. Of this gain, $0.8 million (the amount of cash received in
excess of net book value) is being amortized as an offset to rent expense over
the ten year term of the lease agreement. The remaining deferred gain will be
amortized over the remaining term of the lease beginning at such time as it
meets the criteria for gain recognition.

The Company paid
$785,000, $317,000, and $85,000 during fiscal years 2002, 2001 and 2000, respectively, to McBreen & Kopko related
to legal services. Frederick H. Kopko, Jr., a partner of McBreen & Kopko, is a
member of the Companys board of directors. In addition, Mr. Kopko is a
partner in CFK Partners, the Companys largest shareholder.

The Company and its Chairman each own a 50% interest in an LLC that owns
and operates a corporate airplane. The Company contributed capital to the LLC
of $112,500 in fiscal 2002 and $137,000 in fiscal 2001. Amounts paid to the
LLC by the Company for the use of the airplane were insignificant in both
years. The Company is a guarantor on a note payable to a financial institution
which funded the purchase of the aircraft. The principal balance of the note as
of June 30, 2002 was $0.9 million.

NOTE 14  MAJOR CUSTOMERS AND FOREIGN CUSTOMERS:

AirTran Airways represented approximately 15%, 14%, and 11% of
consolidated revenues for fiscal 2002, 2001, and 2000 respectively and
National Airlines, Inc. represented approximately 13%, 14%, and 0% of
consolidated revenues for fiscal 2002, 2001, and 2000 respectively. Government
contract services consists of revenues from agencies of the United States
government. Revenue from this segment represented approximately 7%, 6%, and 8%
of the Companys consolidated revenues for fiscal 2002, 2001, and 2000,
respectively. No other customers accounted for over 10% of Mercury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 18%, 18% and 25% of consolidated
revenues for the years ended June 30, 2002, 2001,and 2000, respectively.

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NOTE 15  EARNINGS PER SHARE:

Basic earnings per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the period.

Diluted earnings per share is computed by dividing net income 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.

|                                                                                             |  |                                         |           |               |          |               |           |               |          |       |           |         |          |       |           |   |          |   |           |   |          |   |           |   |          |  
|-------------------------------------------------------------------------------------------- |  | --------------------------------------- | --------- | ------------- | -------- | ------------- | --------- | ------------- | -------- | ----- | --------- | ------- | -------- | ----- | --------- | - | -------- | - | --------- | - | -------- | - | --------- | - | -------- | -
|                                                                                             |  |                                         |           | FISCAL YEAR   |          | FISCAL YEAR   |           | FISCAL YEAR  
|                                                                                             |  |                                         |           | JUNE 30, 2002 |          | JUNE 30, 2001 |           | JUNE 30, 2000
|                                                                                             |  |                                         |           |               |          |               |           |              
|                                                                                             |  |                                         |           | DILUTED       |          | BASIC         |           | DILUTED       |          | BASIC |           | DILUTED |          | BASIC
|                                                                                             |  |                                         |           |               |          |               |           |               |          |       |           |         |          |       |           |   |          |   |           |   |          |   |           |  
|Weighted average number of common
shares outstanding during the period                       |  |                                         | 6,565,000 |               |          |               | 6,565,000 |               |          |       | 6,531,000 |         |          |       | 6,531,000 |   |          |   | 6,565,000 |   |          |   | 6,565,000 |  
|Common stock equivalents resulting
from The assumed exercise of stock
options                |  |                                         | 121,000   |               |          |               |           |               |          |       | 176,000   |         |          |       |           |   |          |   | 344,000   |   |          |   |           |  
|Common shares resulting from the
assumed conversion of debentures                            |  |                                         | 24,000    |               |          |               |           |               |          |       | 40,000    |         |          |       |           |   |          |   | 590,000   |   |          |   |           |  
|                                                                                             |  |                                         |           |               |          |               |           |               |          |       |           |         |          |       |           |   |          |   |           |   |          |   |           |  
|Weighted average number of common
and common equivalent shares
outstanding during the period |  |                                         | 6,710,000 |               |          |               | 6,565,000 |               |          |       | 6,747,000 |         |          |       | 6,531,000 |   |          |   | 7,499,000 |   |          |   | 6,565,000 |  
|                                                                                             |  |                                         |           |               |          |               |           |               |          |       |           |         |          |       |           |   |          |   |           |   |          |   |           |  
|Net income from continuing operations
before extraordinary item                              |  | $                                       | 5,203,000 |               |          | $             | 5,203,000 |               |          | $     | 3,747,000 |         |          | $     | 3,747,000 |   |          | $ | 3,941,000 |   |          | $ | 3,941,000 |  
|Add: Interest expense, net of tax, on
convertible debentures                                 |  |                                         | 15,000    |               |          |               |           |               |          |       | 20,000    |         |          |       |           |   |          |   | 185,000   |   |          |   |           |  
|                                                                                             |  |                                         |           |               |          |               |           |               |          |       |           |         |          |       |           |   |          |   |           |   |          |   |           |  
|Adjusted income from continuing
operations                                                   |  |                                         | 5,218,000 |               |          |               | 5,203,000 |               |          |       | 3,767,000 |         |          |       | 3,747,000 |   |          |   | 4,126,000 |   |          |   | 3,941,000 |  
|Discontinued Operations:                                                                     |  |                                         |           |               |          |               |           |               |          |       |           |         |          |       |           |   |          |   |           |   |          |   |           |  
|                                                                                             |  | Loss from discontinued
operations       |           |               | (170,000 | )             |           |               | (170,000 | )     |           |         | (858,000 | )     |           |   | (858,000 | ) |           |   | (933,000 | ) |           |   | (933,000 | )
|                                                                                             |  | Loss on sale of
discontinued operations |           |               |          |               |           |               |          |       |           |         | (477,000 | )     |           |   | (477,000 | ) |           |   |          |   |           |   |          |  
|Extraordinary item                                                                           |  |                                         |           |               |          |               |           |               |          |       |           |         |          |       |           |   |          |   | (979,000  | ) |          |   | (979,000  | )
|                                                                                             |  |                                         |           |               |          |               |           |               |          |       |           |         |          |       |           |   |          |   |           |   |          |   |           |  
|Adjusted net income                                                                          |  | $                                       | 5,048,000 |               |          | $             | 5,033,000 |               |          | $     | 2,432,000 |         |          | $     | 2,412,000 |   |          | $ | 2,214,000 |   |          | $ | 2,029,000 |  
|Common stock and common share
Equivalents                                                    |  |                                         | 6,710,000 |               |          |               | 6,565,000 |               |          |       | 6,747,000 |         |          |       | 6,531,000 |   |          |   | 7,499,000 |   |          |   | 6,565,000 |  
|Earnings (Loss) per share:                                                                   |  |                                         |           |               |          |               |           |               |          |       |           |         |          |       |           |   |          |   |           |   |          |   |           |  
|From continuing operations                                                                   |  | $                                       | 0.78      |               |          | $             | 0.79      |               |          | $     | 0.56      |         |          | $     | 0.57      |   |          | $ | 0.55      |   |          | $ | 0.60      |  
|Loss from discontinued
operations                                                            |  |                                         | (0.03     | )             |          |               | (0.02     | )             |          |       | (0.13     | )       |          |       | (0.13     | ) |          |   | (0.12     | ) |          |   | (0.14     | )
|Loss on sale of discontinued
operations                                                      |  |                                         |           |               |          |               |           |               |          |       | (0.07     | )       |          |       | (0.07     | ) |          |   |           |   |          |   |           |  
|                                                                                             |  |                                         |           |               |          |               |           |               |          |       |           |         |          |       |           |   |          |   |           |   |          |   |           |  
|Income before extraordinary item                                                             |  |                                         | 0.75      |               |          |               | 0.77      |               |          |       | 0.36      |         |          |       | 0.37      |   |          |   | 0.43      |   |          |   | 0.46      |  
|Extraordinary Item                                                                           |  |                                         |           |               |          |               |           |               |          |       |           |         |          |       |           |   |          |   | (0.13     | ) |          |   | (0.15     | )
|                                                                                             |  |                                         |           |               |          |               |           |               |          |       |           |         |          |       |           |   |          |   |           |   |          |   |           |  
|Net Income                                                                                   |  | $                                       | 0.75      |               |          | $             | 0.77      |               |          | $     | 0.36      |         |          | $     | 0.37      |   |          | $ | 0.30      |   |          | $ | 0.31      |  
|                                                                                             |  |                                         |           |               |          |               |           |               |          |       |           |         |          |       |           |   |          |   |           |   |          |   |           |  

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##### Table of Contents



NOTE 16  QUARTERLY FINANCIAL DATA (UNAUDITED):

|                                         |          |                                   |             |   |              |   |             |   |          |   |            |   |       |   |            |   |       |   | 
|---------------------------------------- | -------- | --------------------------------- | ----------- | - | ------------ | - | ----------- | - | -------- | - | ---------- | - | ----- | - | ---------- | - | ----- | - | 
|                                         |          |                                   |             |   | 2002        
|                                         |          |                                   |             |   |             
|                                         |          |                                   |             |   | 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  |  
|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        |             | $ | 0.13         |   |             | $ | 0.00     |   |            | $ | (0.06 | ) |            | $ | 0.73  |  
|                                         |          | Loss
from discontinued operations |             |   | (0.01        | ) |             |   |         |   |            |   |      |   |            |   | (0.02 | )
|                                         |          |                                   |             |   |              |   |             |   |          |   |            |   |       |   |            |  
|                                         |          | Net income                        |             | $ | 0.12         |   |             | $ | 0.00     |   |            | $ | (0.06 | ) |            | $ | 0.71  |  
|                                         |          |                                   |             |   |              |   |             |   |          |   |            |   |       |   |            |  
|                                         | Diluted: |                                   |             |   |              |   |             |   |          |   |            |   |       |   |            |   |      
|                                         |          | From continuing operations        |             | $ | 0.12         |   |             | $ | 0.00     |   |            | $ | (0.06 | ) |            | $ | 0.72  |  
|                                         |          | Loss from discontinued operations |             |   | (0.01        | ) |             |   |         |   |            |   |      |   |            |   | (0.02 | )
|                                         |          |                                   |             |   |              |   |             |   |          |   |            |   |       |   |            |  
|                                         |          | Net income                        |             | $ | 0.11         |   |             | $ | 0.00     |   |            | $ | (0.06 | ) |            | $ | 0.70  |  
|                                         |          |                                   |             |   |              |   |             |   |          |   |            |   |       |   |            |  

|                                  |          |                                            |             |   |              |   |             |   |          |   |             |   |       |   |             |   |       |   | 
|--------------------------------- | -------- | ------------------------------------------ | ----------- | - | ------------ | - | ----------- | - | -------- | - | ----------- | - | ----- | - | ----------- | - | ----- | - | 
|                                  |          |                                            |             |   | 2001        
|                                  |          |                                            |             |   |             
|                                  |          |                                            |             |   | SEPTEMBER 30 |   | DECEMBER 31 |   | MARCH 31 |   | JUNE 30    
|                                  |          |                                            |             |   |              |   |             |   |          |   |            
|Sales and Revenues                |          | $                                          | 111,395,000 |   |              | $ | 134,093,000 |   |          | $ | 113,902,000 |   |       | $ | 119,056,000 |  
|Gross Margin                      |          |                                            | 8,857,000   |   |              |   | 10,281,000  |   |          |   | 7,501,000   |   |       |   | 7,626,000   |  
|Income from Continuing Operations |          |                                            | 1,107,000   |   |              |   | 1,705,000   |   |          |   | 368,000     |   |       |   | 567,000     |  
|Net Income (Loss)                 |          |                                            | 1,156,000   |   |              |   | 1,782,000   |   |          |   | 299,000     |   |       |   | (825,000    | )
|Net Income per Share:             |          |                                            |             |   |              |   |             |   |          |   |             |   |       |   |             |  
|                                  | Basic:   |                                            |             |   |              |   |             |   |          |   |             |   |       |   |             |   |      
|                                  |          | From continuing operations                 |             | $ | 0.17         |   |             | $ | 0.26     |   |             | $ | 0.06  |   |             | $ | 0.09  |  
|                                  |          | Income (loss) from discontinued operations |             |   | 0.01         |   |             |   | 0.01     |   |             |   | (0.01 | ) |             |   | (0.14 | )
|                                  |          | Loss on sale on discontinued operations    |             |   |             |   |             |   |         |   |             |   |      |   |             |   | (0.07 | )
|                                  |          |                                            |             |   |              |   |             |   |          |   |             |   |       |   |             |  
|                                  |          | Net Income (Loss)                          |             | $ | 0.18         |   |             | $ | 0.27     |   |             | $ | 0.05  |   |             | $ | (0.13 | )
|                                  |          |                                            |             |   |              |   |             |   |          |   |             |   |       |   |             |  
|                                  | Diluted: |                                            |             |   |              |   |             |   |          |   |             |   |       |   |             |   |      
|                                  |          | From continuing operations                 |             | $ | 0.16         |   |             | $ | 0.25     |   |             | $ | 0.06  |   |             | $ | 0.08  |  
|                                  |          | Income (loss) from discontinued operations |             |   | 0.01         |   |             |   | 0.02     |   |             |   | (0.01 | ) |             |   | (0.13 | )
|                                  |          | Loss on sale of discontinued operations    |             |   |             |   |             |   |         |   |             |   |      |   |             |   | (0.07 | )
|                                  |          |                                            |             |   |              |   |             |   |          |   |             |   |       |   |             |  
|                                  |          | Net income (Loss)                          |             | $ | 0.17         |   |             | $ | 0.27     |   |             | $ | 0.05  |   |             | $ | (0.12 | )
|                                  |          |                                            |             |   |              |   |             |   |          |   |             |   |       |   |             |   |      

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##### Table of Contents



NOTE 17  SEGMENT REPORTING:

The Company operates and reports its activities through four principal
units: 1) Fuel Sales, 2) Fixed Based Operations, 3) Cargo Operations 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 a discontinued operations. The segment data included below has
been restated to exclude amounts related to the RPA business unit.

|                              |  |       |         |            |  |            |        |          |  |             |        |       |  |            |        |           |  |   |        |  |  |   |         | 
|----------------------------- |  | ----- | ------- | ---------- |  | ---------- | ------ | -------- |  | ----------- | ------ | ----- |  | ---------- | ------ | --------- |  | - | ------ |  |  | - | ------- | 
|                              |  |       |         |            |  |            |        |          |  |             |        |       |  | Government |        | Corporate |  |   |        | 
|                              |  | Fuel  |         | Fixed Base |  | Cargo      |        | Contract |  | or          |        |       |  |           
|(Dollars in Thousands)        |  | Sales |         | Operations |  | Operations |        | Services |  | unallocated |        | Total
|                              |  |       |         |            |  |            |        |          |  |             |        |      
|2002                          |  |       |         |            |  |            |        |          |  |             |        |       |  |            |        |           |  |   |        |  |  |   |         | 
|Revenues                      |  | $     | 232,573 |            |  | $          | 94,417 |          |  |             | 28,124 |       |  | $          | 28,228 |           |  |   |        |  |  | $ | 383,342 | 
|Gross Margin                  |  |       | 6,581   |            |  |            | 13,545 |          |  |             | 1,357  |       |  |            | 6,789  |           |  |   |        |  |  |   | 28,272  | 
|Depreciation and Amortization |  |       | 63      |            |  |            | 5,780  |          |  |             | 2,292  |       |  |            | 715    |           |  |   | $363   |  |  |   | 9,213   | 
|Capital expenditures          |  |       | 30      |            |  |            | 3,954  |          |  |             | 332    |       |  |            | 122    |           |  |   | 62     |  |  |   | 4,500   | 
|Segment Assets                |  |       | 27,183  |            |  |            | 60,479 |          |  |             | 16,159 |       |  |            | 12,995 |           |  |   | 17,870 |  |  |   | 134,686 | 
|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 | 
|2000                          |  |       |         |            |  |            |        |          |  |             |        |       |  |            |        |           |  |   |        |  |  |   |         | 
|Revenues                      |  | $     | 202,906 |            |  | $          | 73,666 |          |  | $           | 32,474 |       |  | $          | 25,287 |           |  |   |        |  |  | $ | 334,333 | 
|Gross Margin                  |  |       | 7,884   |            |  |            | 11,522 |          |  |             | 9,300  |       |  |            | 5,031  |           |  |   |        |  |  |   | 33,737  | 
|Depreciation and Amortization |  |       | 58      |            |  |            | 4,292  |          |  |             | 2,585  |       |  |            | 827    |           |  | $ | 723    |  |  |   | 8,485   | 
|Capital expenditures          |  |       | 92      |            |  |            | 8,796  |          |  |             | 756    |       |  |            | 965    |           |  |   | 17     |  |  |   | 10,626  | 
|Segment Assets                |  |       | 28,421  |            |  |            | 31,248 |          |  |             | 32,293 |       |  |            | 9,391  |           |  |   | 17,707 |  |  |   | 129,060 | 

Gross margin is used as the measure of profit and loss for segment
reporting purposes as it 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 Fuel Sales. Bad debt
expense for Fuel Sales was approximately $994,000, $3,025,000 and $5,000,000;
total bad debt expense was $1,358,000, $3,425,000 and $5,408,000 in fiscal
2002, 2001 and 2000, respectively.

F-19



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##### Table of Contents



MERCURY AIR GROUP, INC. AND SUBSIDIARIES

SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS

THREE YEARS ENDED JUNE 30, 2002

|                                |      |                     |            |              |                  |     |            |           |                |   |            |   |  |   |           |  | 
|------------------------------- | ---- | ------------------- | ---------- | ------------ | ---------------- | --- | ---------- | --------- | -------------- | - | ---------- | - |  | - | --------- |  | 
|                                |      |                     | BALANCE AT |              | CHARGED TO COSTS |     | DEDUCTIONS |           | BALANCE AT END
|CLASSIFICATION                  |      | BEGINNING OF PERIOD |            | AND EXPENSES |                  | (a) |            | OF PERIOD
|                                |      |                     |            |              |                  |     |            |          
|                                | 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 | 
|                                |      |                     |            |              |                  |     |            |           |                |   |            |   |  |   |           | 
|                                | 2000 |                     |            |              |                  |     |            |           |                |   |            |   |  |   |           |  | 
|Allowance for doubtful accounts |      | $                   | 1,665,000  |              |                  | $   | 5,408,000  |           |                | $ | (4,782,000 | ) |  | $ | 2,291,000 | 
|                                |      |                     |            |              |                  |     |            |           |                |   |            |   |  |   |           | 



---

|(a) |  | Accounts receivable write-off
|--- |  | -----------------------------

F-20